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#21:333 Deficit owls
21 Fiscal Policy in Sovereign Nations
333
Timbabwe in the late 1990s and early 2000s to justify their assertion regarding hyperinflation. We acknowledge
that in the absence of appropriate oversight, a government can maintain an excessive rate of expenditure
which leads to rising inflation. But we show that the two popular examples of hyperinflation - the Weimar
Republic and Zimbabwe - were the result of increasing aggregate supply constraints rather than being driven
by excessive fiscal deficits.
Functional Finance versus Sound Finance
21.2
The fiscal constraint and the views of deficit hawks, doves, and owls
Following the Global Financial Crisis (GFC), many developed economies experienced a rise in their fiscal
deficit-to-GDP ratios due to the operation of automatic stabilisers following the collapse of non-governmental
expenditure. Discretionary fiscal stimulus packages also increased the fiscal deficits
These fiscal deficits translated into rising debt-to -GDP ratios. Since 2009 multinational agencies including the
OECD and IMF have preached the principles of sound finance through the adoption of austerity measures. These
are policies of cutting government expenditure and/or raising taxes that are required to reduce the fiscal deficit
in the misguided belief that governments should balance their fiscal positions
This represents the typical orthodox position on fiscal policy, with the government fiscal constraint viewed
as an analogue to the household budget constraint derived from neoclassical microeconomic theory. The inter-
pretation of the so-called constraint on government net spending is based on the premise that the government
has three sources of finance for its spending, as shown on the right-hand side of the following identity:
G+ iB T+ ΔΒ + ΔΜ,
(21.1)
where G stands for government spending: iB are the interest payments on existing public debt; T is tax revenue,
AB is new borrowing based on selling government bonds, and AM, is new base money creation. This relationship
was introduced in Chapter 20 where it linked the acquisition or loss of net financial assets of the domestic private
sector to the government sectoral balance in a closed economy.
According to the mainstream interpretation of the government fiscal constraint, if the government runs a
fiscal deficit (spends more than it receives in tax revenue), then it will have to borrow (AB) by selling public debt
and/or create additional base money (AM). Thus, the government fiscal constraint is alleged to represent an
ex ante constraint on government spending. In other words, if the fiscal outcome was known in advance, then
Equation (21.1) would be a guide to how it could be financed
Few economists argue that government must or even should continuously achieve fiscal balance, although
there are occasionally some politicians and other extremists who want to legislate such a requirement.
We can distinguish three different perspectives as to the appropriate fiscal strategy: (a) deficit hawks
(b) deficit doves and (c) deficit owls. Category (c) was added by MMT economist Stephanie Kelton from UMKC
in the USA.
Deficit hawks recommend that government strives to achieve fiscal balance or even surplus, even though
most recognise that it is hard to exactly match revenues and expenditures over the course of a year. Hence devi-
ations from fiscal balance will occur, but govern ment should always respond to such imbalances. Thus, if a deficit
occurs in one year, government should try to run a surplus in the following year to offset it by cutting spending
and/or raising taxes
Deficit doves believe government should aim to achieve fiscal balance over the course of an economic cycle,
but should run deficits in recessions and offsetting surpluses in expansions. Hence, a government should be
willing to use its fiscal capacity as a countercyclical policy tool to offset swings of private sector spending. For
example, deficit doves argued for deficits to stimulate the slumping economies of the major Western nations
during the GFC. In their view, the time to move towards fiscal balance would come only after a robust recovery
had gotten underway and tax revenues had started to increase.
Deficit owls take an entirely different position, based on functional finance principles. For them, the fiscal
outcome for a sovereign government is not a useful target for policymaking. It is not functional in the sense of
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ECONOMIC POLICY IN AN OPEN ECONOMY
providing policy guidance. Rather, policy ought to target important economic goals such as full employment,
price stability, poverty alleviation, reduced income inequality, financial stability, environmental sustainability, and
the overall standard of living.
Why is the deficit owl the only perspective that is consistent with MMT?
As we know from previous chapters, the sovereign government spends by issuing currency, which today is mostly
through electronic entries on balance sheets. Taxes lead to debits of those entries. Logically, the spending must
precede the taxing since accounts cannot be debited before they are credited.
MMT sees the government fiscal outcome as an ex post identity. At the end of a year, it will certainly be true
that government spending over the year is equal to tax revenues plus net bonds issued plus net base money
issued, as shown in Equation (21.1). In this sense, the equation becomes a simple accounting identity that must
hold by definition, but it has no further merit.
Equally importantly, MMT does not see tax revenue (T), new base money creation (AM), and new borrowing
based on selling government bonds (AB) as alternative methods of financing government spending. Instead, it
sees them as different parts of the process of conducting fiscal policy, as described in Chapter 20, and illustrated
by the numerical example.
Spending begins with crediting private bank accounts with central bank reserves. The payment of taxes leads
to private bank accounts being debited. Then, if government spending is greater than taxes, there is a net crediting
of reserve accounts at the central bank (AM, >0)
Normally the reserves created will be greater than what banks need to hold, whether or not there are legal
reserve requirements. Banks with excess reserves at the central bank will try to lend them in the interbank over-
night lending market. However, when the overall banking system has excess reserves, there will be no demand for
them. No individual bank can solve the problem of a system-wide excess of reserves. There must be a system-wide
solution.
We understand from earlier chapters that an excess supply of reserves, in the absence of a support rate paid by
the central bank, will cause the overnight interbank lending rate to fall. Once it has fallen below the target range,
the central bank will respond by selling bonds (that is, via an open market sale). However, in normal periods central
banks have a limited supply of government bonds; they can only sell bonds that they have previously bought.
So, in the presence of fiscal deficits, the central bank would need the treasury to create and sell more bonds
in the primary issue market. Central banks and treasuries coordinate their operations to ensure that fiscal oper-
ations have minimal undesired impacts on banking system reserves. Hence bonds will be issued more or less in
step with fiscal deficits in order to drain from the banking system excess reserves that would normally result from
spending in excess of tax receipts.
At the end of the year, we would find that government spending less taxes will be equal to the change in base
money, that is, the change to banking system reserves plus the change to private sector holding of cash, and in
addition, the change to non-government holding of govern ment bonds.
As noted, in normal times, the growth of banking system desired and/or required reserves is quite small.
The growth of cash held by the non-government sector is likewise fairly small, and linked more or less closely to
growth of national income. Thus, the deficit is usually approximately equal to the additional sales of government
bonds (AB).
On the other hand, let us assume that a sovereign government spent by crediting banks with reserves but
chose to leave excess reserves in the banking system (that is, it did not sell bonds). This could happen it, for
example, govern ment adopted a zero interest rate target; in that case excess reserves would drive the overnight
interbank lending rate toward zero and the govern ment would not need to do anything further. We would then
see that G+ iB - T= AM,. But the difference between this case and the more usual case discussed above, where
G-T is approximately AB, has nothing to do with the way government chose to 'finance' its spending
In both cases, the government spent by crediting bank accounts. The different outcome is due to the choice
between draining excess reserves or leaving excess reserves in the system. That decision depends on whether gov-
ernment wants to target a positive overnight interest rate, or a zero overnight interest rate.
21 Fiscal Policy in Sovereign Nations
335
Most economists see the choice as a monetary policy decision, and not a fiscal policy decision. In the post-GFC
period the level of bank reserves significantly increased in a number of developed economies, including Japan, the
USA, and the UK. This reflected rising risk aversion among banks in these countries, and also the desire of their
central banks to both maintain a low overnight rate and also flatten the yield curve (reduce longer-run interest
rates) via quantitative easing (which we discuss in more detail in Chapter 23)
We conclude that the government fiscal constraint is neither a constraint nor does it present alternative ways
of financing government spending. Rather it is an ex post accounting identity whose outcome is determined by
decisions made by households, firms, financial institutions, the central bank, and even foreigner investors.
Households, firms, and foreigner investors decide how much cash they want to hold. Banks (and the central
bank through required reserve ratios in the USA) determine the level of reserves that they hold.
The central bank decides whether the overnight rate target will be above zero.
All of those decisions go into determining the split between AB and AM,
That is not an ex ante decision of treasury to either borrow or print money. Indeed, treasury cannot decide
ex ante what the fiscal outcome will be (fiscal balance, deficit, or surplus) since that depends on tax revenue gen-
erated over the course of the upcoming year, plus any unplanned spending linked to unforeseen events and the
impact of automatic stabilisers.
Equation (21.1) is thus useless for planning purposes, and has no explanatory power ex post in terms of explaining
the composition of its right-hand side.
Functional finance
In the 1940s, American economist Abba Lerner wrote two important articles which still resonate today. One
proclaimed that "money is a creature of the state" (Lerner, 1947: 313). Obviously, that is also the position of MMT
as outlined in this textbook: the state chooses a money of account, imposes liabilities in that unit, and issues cur-
rency denominated in the same unit that is accepted in payment of taxes. All of this was understood by Lerner
In his article on functional finance, he calls it the new fiscal theory. He says that like any new theory it seems
extremely simple and it is that simplicity that makes people suspicious. Lerner wrote (1943: 39): "The central idea
is that government fiscal policy, its spending and taxing, its borrowing and repayment of loans, its issue of new
money, and its withdrawal of money, shall all be undertaken with an eye only to the results of these actions on the
economy and not to any established traditional doctrine about what is sound or unsound."
He went on to outline two principles of functional finance:
1. "The first financial responsibility of the government (since nobody else can undertake that responsibility) is
to keep the total rate of spending in the country on goods and services neither greater nor less than that rate
which at the current prices would buy all the goods that it is possible to produce" (Lerner, 1943: 39). When
spending is too high, the govern ment is to reduce spending and raise taxes; when spending is too low, the
government should increase spending and lower taxes
2. "An interesting corollary is that taxing is never to be undertaken merely because the govern ment needs to
make money payments ... Taxation should therefore be imposed only when it is desirable that the taxpayers
shall have less money to spend." (Lerner, 1943: 40)
f the government is not to use taxes to 'make money payments, then how are these to be made? According to
Lerner, the government should not turn to borrowing for the purposes of spending because: "The second law of
Functional Finance is that the government should borrow money only if it is desirable that the public should have
less money and more government bonds" (Lerner, 1943: 40).
In other words, the purpose of taxes and bonds is not to finance spending, as each serves a different pur-
pose (taxes remove excessive private income while bonds offer an interest earning alternative to money).
Instead, the government should meet its needs "by printing new money" (Lerner, 1943: 41) whenever the first
and second principles of functional finance dictate that neither taxes nor bond sales are required. That is, as
21主権国における財政政策
335
ほとんどのエコノミストは、選択を財政政策決定ではなく、金融政策決定と見なしています。ポストGFCで
日本を含む多くの先進国では、銀行の準備高が大幅に増加した。
アメリカ、そしてイギリス。これは、これらの国々の銀行の間でリスク回避が高まっていることを反映しています。
中央銀行は両方とも低い翌日物金利を維持し、また利回り曲線を平らにする（長期金利を減らす）
（量的緩和による）（これについては第23章で詳しく論じる）
我々は、政府の財政的制約は制約でもなく、代替的な方法を提示するものでもないと結論する。
政府支出の資金調達の。そうではなく、結果が以下によって決定される事後会計IDです。
世帯、企業、金融機関、中央銀行、さらには外国人投資家による決定。
世帯、企業、そして外国人投資家は、どれだけの現金を保有したいかを決めます。銀行（そして中央
米国での必要準備金比率を通じた銀行は）彼らが保持する準備金のレベルを決定します。
中央銀行は、翌日物レートの目標がゼロを超えるかどうかを決定します。
これらすべての決定は、ABとAMの間の分割を決定することに入ります。
これは、お金を借りたり印刷したりするための事前の財務判断ではありません。確かに、財務省は決定することはできません
財政上の結果がどうなるか（財政収支、赤字、または黒字）は、税収の源泉に左右される
翌年の間に予定されていた費用に加えて、予期しない出来事や
自動安定剤の影響
したがって、式（21.1）は計画の目的には無用であり、説明の観点から説明的な事後の説明力はありません。
その右側の構成
機能金融
1940年代に、アメリカのエコノミスト、Abba Lernerは2つの重要な記事を書きました。 1
"お金は国家の生き物である"と宣言した（Lerner、1947：313）。明らかに、それはまたMMTの位置です
この教科書に概説されているように、州は勘定金を選択し、その単位に負債を課し、そして現在の
税金の支払いで認められているのと同じ単位で表示される賃貸料。これすべてはLernerによって理解されました
機能金融に関する彼の記事で、彼はそれを新しい財政理論と呼んでいます。彼は、他の新しい理論と同じようにそれはそうであると言う
非常に単純で、それが人々を疑わしくさせるのはその単純さです。ラーナーは書いた（1943：39）： "中心的な考え
それは政府の財政政策、その支出と課税、その借入とローンの返済、その新しい問題
金銭、およびその金の引き出しは、これらの行動の結果にのみ注目して行われるものとします。
健全であるかどうかについての確立された伝統的な教義にではなく経済。
彼は続けて、機能金融の2つの原則を概説しました。
「政府の最初の財政的責任（他に誰もその責任を引き受けることはできないので）は
その国の財・サービスに対する支出の総額を、その額を超えないようにすること。
これは、現在の価格で、生産することが可能であるすべての商品を買うことになるでしょう」（Lerner、1943：39）。
支出が高すぎる、政府は支出を削減し、増税することです。支出が少なすぎると、
政府は支出を増やし税金を下げるべきだ
2.「興味深い推論は、政府が必要としているからといって課税が行われることは決してないということです。
お金の支払いをする...したがって、納税者が納税者に支払うことが望ましい場合にのみ、課税を課すべきです。
より少ないお金を使うべきだ」（ラーナー、1943：40）
政府が「お金を払うために税金を使うのではない」のなら、どのようにしてこれらは行われるのでしょうか。による
ラーナー、政府は支出を目的として借りることに頼るべきではない。
ファンクショナルファイナンスとは、政府が国民に資金を提供することが望ましい場合にのみ、資金を借りるべきであるということです。
より少ないお金そしてより多くの国債 "（Lerner、1943：40）。
言い換えれば、税金と債券の目的は支出に資金を供給することではありません。
ポーズをとる（税は過剰な個人所得を取り除き、債券はお金に代わる利益を生み出す）。
そうではなく、政府は、最初に「新しいお金を印刷することによって」そのニーズを満たすべきである（Lerner、1943：41）。
そして機能金融の第二の原則は、税金も債券販売も要求されないと定めている。つまり、
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ECONOMIC POLICY IN AN OPEN ECONOMY
discussed above, the choice over whether to leave base money (mostly reserves) in the system, or to drain it
through bond sales, depends on what we normally call
summary, Lerner argued (1943: 41)
monetary policy decision (interest rate policy)
Functional Finance rejects completely the traditional doctrines of sound finance' and the principle of trying to
balance the budget over a solar year or any other arbitrary period. In their place it prescribes: first, the adjust-
ment of total spending (by everybody in the economy, including the government) in order to eliminate both
unemployment and inflation, using government spending when total spending is too low and taxation when
total spending is too high; second, the adjustment of public holdings of money and of government bonds. hu
government borrowing or debt repayment, in order to achieve the rate of interest which results in the most
desirable level of investment;
out the first two parts of the program.
third, the printing, hoarding or destruction of money as needed for carrying
He concluded that functional finance "is applicable to any society in which money is used as an important ele-
ment in the economic mechanism" (Lerner, 1943: 50).
In this textbook, we want to narrow the application of functional finance somewhat to the sovereign govern-
ment, which
consistent with the views Lerner advanced in his other great article, published in 1947. In that
piece, Lerner insisted that: "[W]hatever may have been the history of gold, at the present time, in a normally well-
working economy, money is a creature of the state. Its general acceptability, which is its all-important attribute.
stands or falls by its acceptability by the state" (1947: 313)
Just how does the state demonstrate acceptability? For Lerner:
The modern state can make anything it chooses generally acceptable as money... It is true that a simple declar
ation that such and such is money will not do, even if backed by the most convincing constitutional evidence of
the state's absolute sovereignty. But if the state is willing to accept the proposed money in payment of taxes and
other obligations to itself the trick is done. Everyone who has obligations to the state will be willing to accept
the pieces of paper with which he can settle the obligations, and all other people will be willing to accept these
pieces of paper because they know that the taxpayers, etc, will accept them in turn. (Lerner, 1947: 313)
This seems to be a clear exposition of what we now call the MMT, taxes drive sovereign currency view. Even if it
has not always been the case, it surely is now true and obvious that the state chooses and enforces the money of
account when it denominates the tax liability in that money of account, and defines what will serve as 'money
when it decides what will be accepted at tax offices. The 'money' is widely accepted not because of sovereignty
alone, not (simply) because of legal tender laws, and not because it might have (or have had) gold backing, but
because the state has the power to impose and enforce tax liabilities and because it has the right to define 'that
which is necessary to pay taxes.
There can be no doubt that all modern states do have these rights. As Lerner said "Cigarette money and for-
eign money can come into wide use only when the normal money and the economy in general is in a state of
chaos" (Lerner, 1947: 313)
One might only add that when the state is in crisis, loses legitimacy, and loses its power to impose and enforce
tax liabilities, 'normal money' will be in a 'state of chaos, leading, for example, to the use of foreign currencies in
private domestic transactions. In all other cases, it is state money which is used, and state money that the state
accepts in payment of taxes.
Fiscal Policy Debates: Crowding Out and (Hyper)Inflation
21.3
Crowding out?
Many pundits wrongly believe that when national governments issue treasury debt. it can crowd out private
borrowing and hence spending. The basic premise is that there is a limited supply of private sector saving for
which government borrowing and private sector borrowing compete. If government tries to borrow more by
posted by yoji at 11:24 午後
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