Wednesday, June 8, 2011

More on why a growing government debt always accompanies a growth in GDP

My previous post generated healthy and serious discussion over at SA. Here are a few more related points that arose from my discussions there (Naturally, this post again 100% leaning towards MMT).

When GDP is growing while government debt is going down, it might be that private sector is increasing debt. If private sector debt isn't growing either, then the country is likely incurring trade surplus, therefore, their savings are being funded by some other country's government spending or private sector debt.

In any case, the question to always ask is where is the money to grow the GDP coming from. It has to come from someplace. Always, someone has to be spending more than saving, for there to be more spending going on in the aggregate economy. This statement is alluding to to the macro where all money has to come from somewhere. If funds are borrowed from someone who is already wealthy, his wealth must have come from somewhere. Someone spent money that gave him wealth in the first place.

1) A commenter said "People sold us things because we had to buy things to continue our existence."

Where do you get the money you use to buy your stuff. And where did the guy who gave you the money get his money? Where did all this money going around the economy come from? Somebody is willing to spend to buy someone else's service. Where did that first buyer's wealth come from? If he's Bill Gates, he earned it selling software. Now where did the people who bought his software get their money from? Surely, a hundred years ago, there wasn't enough money going around the economy to pay for all the software that Bill Gates and co. have sold us, and are still selling us. Where is all this new money coming from? Who is creating this? A hundred years ago, there was just enough money going around as needed, give or take, a few million people going hungry. Now, we have billions of people, and trillions of money circulating around the world economy.

If you say from banks giving credit, you are almost there. But given that banks do not lend to anyone they don't think will pay them back, where does the bank think their borrowers will get their repayment money from? Don't they get afraid that money will eventually run out, and ALL their borrowers will default? How is it that the economy, after growing into the trillions, still hasn't melted down completely? If all this new money is debt-based, isn't it inevitable that we get back to the size of the world economy 200 years ago, or some point when most people and businesses did not have debt?

Yes, this growing money base is backed by a growing productivity base, but the demand for this productivity base can disappear all of a sudden. If most of the financing for this growing productivity base was debt, a key sector withdrawing its demand can cascade to more demand disappearing from its proximate sectors as well. Don't you think a rising government spending should accompany a rising private debt so at least some of that debt has an adequate backing of stable demand? In the demand-deficient economy, government should spend it on people who will readily turn around and buy services from others in the economy. This means government buying services from the individuals who would have otherwise had no income because of those hoarding their income.

2) A commenter said "Those skills and talents were leveraged by our employer in conjunction with the skills and talents of other employees to produce profitable product for which there was a demand."

Again, if all the money your employer paid you came from his credit line, or the credit of his customers, don't you think everything would eventually come crashing down? Don't you think at least some of that demand for your company (which probably did not exist 100 years ago) is due to new spending that did not actually result from someone getting into debt?

3) commenter said: "Wealth is created by human labor and innovation, not debt.Let's say I start growing crops. I work my butt off for hours a day every day. After a few months, I have enough crops grown that I can feed my family. Who went into debt for that? Nobody. Was wealth created? Yes, I created enough wealth to feed a family for a year."

Let's say you grew crops. You fed your family. Is that wealth for you? Yes. Did it grow the GDP? No, You did not sell it to anyone, so no one is counting that. But if you sell that to someone in exchange for money, that person probably borrowed it. If he didn't, then someone who paid his income probably did. Or probably government originally spent that money into existence.

This is not an ideological position, but a practical one. For those who think otherwise, I have a real world question. Given that all of us need to save to pay down our debts, how does anybody get to sell anything in our current economic arrangement? Remember that the basis of all business is to make money. And the basis of all jobs is to support a business' objectives. Given that all of us are trying to be net sellers and avoid being net buyers, since as a commenter said "we postpone gratification and avoid borrowing", how does anyone of us still earn what we need to, and as he also said "satisfy our needs and the needs of those who are hurting around us"?


The Arthurian said...

Wow. My initial reaction was that you are harping on the obvious. But I read the SA comments. It isn't so obvious, I guess.

People seem to think that work creates money. It doesn't. Work creates output. The government creates money.

The private sector can create money only by creating debt, by borrowing. By this process, the individual can end up debt free and full of money, but the economy as a whole cannot. To think that it can is fallacy of composition.

Good post.

Rogue Economist said...

I know, Art. But then it's by these comments that we get a chance to refine and make clearer our points.

But the comments get even more bizarre here:
SA on this follow up post

Detroit Dan said...

Well said again, Rogue. And I also appreciate Art's comment.

Rogue, I read the Seeking Alpha comments (first batch only so far) and commend you for your patience there...

Rogue Economist said...

Thanks Dan.

Hans said...

The real question to be ax, is whether the government in general, produces anything of value?

Moreover, by the suggestion of the this title all that is needed is spending and debt from a waste producing entity and we have a growing and prosperous society...

Furthermore, this would mean the eradication of recessions, would it not?

How would the $6.6 billion dollars in cash that went missing in Iraq, be figured in the MMTers balance sheet?

I know that one of the holey tenets of MMT is its simplicity but with such a complex issue as the national economy, the burden of proof befalls theologians...

The Arthurian said...

Hans --
"the holey tenets of MMT"

"The real question ... is whether the government in general, produces anything of value?"

Sure: The government produces money.

Not sayin they're doing a good job of it...


Rogue Economist said...

Hans, I have 3 questions to ask to check whether something is worth government spending on:

1. Does this create productive jobs for those who would be otherwise unemployed?
2. Will the newly hired workers have meaningful income that they can spend back in the economy?
3. Is the output of the jobs adding to capacity of goods/services demanded?

If it generates income for the unemployed, aggregate demand will go up. If it adds to demanded capacity, there will be no inflation. If the output is demanded by people, there will be no wastage.

Iraq fails test 1 and 3. It doesn't add to productive capacity, and its output is not demand by the people.