Monday, July 13, 2009

The Sorry State of Mark Thoma

Mark Thoma is a responsible economist. But look at how muddled his thoughts are on basic issues of money:
Setting aside the particulars of the California case and whether or not the IOUs are actually functioning as money - that's debatable - very, very generally, the federal government has a budget constraint just like everyone else, well sort of like everyone else anyway -- most of us can't levy taxes or print money. Federal government finances must satisfy

G - T = ΔM + ΔB,

where Δ means "change in," G is government spending, T is taxes, M is the money supply, and B is bonds.
There is nothing debatable about whether California's IOUs are "money" -- if they can extinguish tax obligations they are money, if they can't, the aren't. No debate.

There is debate about Thoma's terrible model. He claims that the deficit (G-T) must be financed by printing money, or by selling bonds. But suppose the Government ran on overdraft? No financing needed. Or suppose the change in money (ΔM) was saved. No inflation impact then. The point is that the Government need issue no bonds (ΔB=0) and all the money can simply flow to net private sector savings, thus sterilizing any inflationary impact. In fact, G - T always equals the change in net private sector savings (for good or ill) if you don't see much difference between money sitting in an FDIC insured bank account, and money sitting in a US Govt backed Treasury account.


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