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MMT and Government Accounting

Thanks for all your work debunking MMT. It took me a long time to learn and then unlearn everything they say. One thing that still confuses me a little bit is the accounting of government "net financial assets". In your recent article you said that Kelton was confused to treat the government it is outside of the private sector. Can you explain in more detail why that's wrong from an accounting perspective?

MMT makes a mess out of this stuff. They claim to be accounting experts, but they totally botch the idea of "net saving". I cover the accounting in some detail in Myth #2 here.

We should be very clear about this - govt bonds are not net financial assets in the aggregate. They are net financial assets for the private sector. But the private sector is necessarily liable for the government sector.

Think of it like this. Say you and your neighbor decide to form an LLC for your Home Owners Association. You need to fund that HOA with what is essentially a tax. You could even fund it by selling debt (assuming there was someone stupid enough to buy it). When you expand that balance sheet the liability falls on the LLC. But where does the money come from? Who is ultimately responsible for the LLC's viability?  The homeowners are! When you pay $100 into the HOA you are really funding that entity's spending. When the HOA takes out a loan that loan ultimately needs to be serviced by the HOA's cash flows (which will come from the homeowners of course).

The govt operates in the same basic way. We form the govt as a separate entity for legal purposes. But that entity is very much funded by the private sector. It isn't a piggy bank that you can just tap into when you want.

Now, it's important not to hyperventilate about this either. HOAs are a bummer in some ways. They basically tax us and provide a form of communal insurance. That's actually a good thing in many ways. Again, same basic thing with the govt. It's good to have a military and fire departments, etc. But if anyone tells you that these balance sheets don't need to be "funded" then they do not understand finance 101.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

They're a bunch of socialists. They really do think the government is a piggy bank. Of course, they don't actually pay for anything because none of the MMT people pay very much in taxes because they're mostly unemployed and screaming at people on the internet. Even Mosler, the only remotely innovative one in the group is dodging taxes in USVI. The arrogance of these people is astounding considering how stupid many of their views are.

That's a bit harsh, Lars! I wouldn't label them all socialists. After all, Mosler is a hedge fund manager living in the Virgin Islands for tax reasons. That's about as capitalist as it gets.

But yes, I do think some socialists are attracted to MMT by the notion that govt spending is a big free lunch and they like thinking that they have an operationally sound view to support that view (even though they don't).

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Depends on how you define "socialism". No modern economies are socialist. They're all varying degrees of capitalism with elements of socialism. But I don't think there's any doubt that MMT people want the US economy to be less capitalist and more socialist. So Lars has a good point.

"... One thing that still confuses me a little bit is the accounting of government "net financial assets""

Attached is a slide with real US accounting data  for illustrating  true meaning of sectoral balance (S-I = Gov Spending - Gov Income) and for explaining   "net financial assets"  in sector financial accounts.

In fact, there are 2  kinds of accounts for each sector :
1.  Non-financial account for recording sector income and spending.
2.  Financial account for recording financial transaction part of  sector income and spending. The account is organized by  financial instruments such as debt securities, loans, etc.

For each income in Non-financial account, there must add a financial asset in Financial account   and subtract the same amount of financial asset in other sector financial account. One sector spending must be another sector income.  They are the same money  with different names.  In seller's side, it is called income and in buyer's side, it is called spending.

Sector financial account is not a sector balance sheet used for net worth.  MMT people often use the  term "net financial assets" without knowing the details and correct interpretation  for  this Financial account balance .   Sector  financial  account  shows how sector spendings are financed.  A  negative financial account balance means this sector is not self-financed and is financed by other positive balance sectors.

Sectoral balance can tell three accounting identities:

1.  For each sector ,  non-financial account balance = financial account balance
2.  Sum of  all  sector  non-financial account balance = 0
3.  Sum of  all  sector  financial account balance = 0

In 2018 US data,

Gov nonfinancial account balance (income - spending) = - 1437.4B
Gov financial account balance (assets - liabilities) = - 1437.4B

Pvt nonfinancial account balance (income - spending) =  1437.4B
Pvt financial account balance (assets - liabilities) =  1437.4B

The root problem in MMT  is  that government deficit spending is self-financing.  In reality, government financial account balance is often negative with a large amount of liabilities in financial instrument "debt securities".  It means Gov borrows money from Pvt for financing government spending.

Uploaded files:
  • sectoral-balance.png

Yes this is a common MMT slight-of-hand - ignoring that bonds are purchased from and owed to the private sector.

Quote from Cullen Roche on 08/08/2019, 9:41 AM

MMT makes a mess out of this stuff. They claim to be accounting experts, but they totally botch the idea of "net saving". I cover the accounting in some detail in Myth #2 here.

We should be very clear about this - govt bonds are not net financial assets in the aggregate. They are net financial assets for the private sector. But the private sector is necessarily liable for the government sector.

Think of it like this. Say you and your neighbor decide to form an LLC for your Home Owners Association. You need to fund that HOA with what is essentially a tax. You could even fund it by selling debt (assuming there was someone stupid enough to buy it). When you expand that balance sheet the liability falls on the LLC. But where does the money come from? Who is ultimately responsible for the LLC's viability?  The homeowners are! When you pay $100 into the HOA you are really funding that entity's spending. When the HOA takes out a loan that loan ultimately needs to be serviced by the HOA's cash flows (which will come from the homeowners of course).

The govt operates in the same basic way. We form the govt as a separate entity for legal purposes. But that entity is very much funded by the private sector. It isn't a piggy bank that you can just tap into when you want.

Now, it's important not to hyperventilate about this either. HOAs are a bummer in some ways. They basically tax us and provide a form of communal insurance. That's actually a good thing in many ways. Again, same basic thing with the govt. It's good to have a military and fire departments, etc. But if anyone tells you that these balance sheets don't need to be "funded" then they do not understand finance 101.

Cullen, great response.

I don't know if someone else said this first, but, the ability to take very abstract and difficult concepts and put them in layman's terms and examples is a sign of genius from my perspective.

To add to your HOA point, here in Florida we have CDD's (Community Development Districts), which can be former by a residential or commercial developer, an existing residential neighborhood or commercial development, etc. to offset infrastructure and other certain costs. In some ways it functions in the same way as an HOA, however, it is given the authority to tax and appears on your property tax statement. It is on the same level as property taxes in terms of quote unquote lien position and is paid prior to a bank's first mortgage. Basically, for new developments, it is a way for the developer to get greedy and pass on some of the infrastructure costs to the end homebuyer. In other instances, an existing neighborhood can, for example, vote to form a CDD to purchase a golf course that is owned by the original developer, which he/she would now like to sell and the homeowners are worried the new buyer could redevelop the golf course or run the golf course into the ground and plummet their property values. Sad thing is unlike for new developments, I would be pissed if this happened in my neighborhood, raised my property taxes and made my house more difficult to sell compared similar neighborhoods as a result.

Your comment caught my attention regarding "stupid enough to buy it" because institutions buy/interst in CDD bonds all the time around here and there are loans we make as commercial banks to CDDs.

My house does not have an HOA, so no one measuring my lawn length on Saturday morning with nothing better to do or telling me about what Christmas decorations I can have or whether I can fly an American Flag outside my house. HOAs are where America comes together perfectly in a cross roads... our love of property ownership, freedom, "trespassers will be shot on site", with our love of money, protecting our investment at a cost and maximizing our property values.

Quote from Cullen Roche on 08/08/2019, 1:17 PM

That's a bit harsh, Lars! I wouldn't label them all socialists. After all, Mosler is a hedge fund manager living in the Virgin Islands for tax reasons. That's about as capitalist as it gets.

But yes, I do think some socialists are attracted to MMT by the notion that govt spending is a big free lunch and they like thinking that they have an operationally sound view to support that view (even though they don't).

I'll be the first to admit I'm no MMT expert, but, I find some of the ideas spot on and provide a more compelling explanation on some topics than neo-Keynesian orthdox theory. I will say that I have the first MMT textbook in my queue to order, when I finish my current book. I enjoy learning heterodox economics, as well, and keep an open mind.

But, let me play devil's advocate (I enjoy attempting to argue both sides of a debate as convincing as possible, like a great professor, so the students/listeners don't know where I stand)...

I can see how some believe MMT is the left's version of the "LAUGH"er curve, tax cuts and I could be misunderstanding the tenants of MMT,but, as I understand them:

(1) They make the case that the government can borrow more than we think, not that we can borrow indefinitely without inflation. We find the money to borrow to fight wars for years, fund incredible amounts of defense spending, bail out the banks or auto industry (not arguing whether we should or not, but, we do). What if we spend that money on our own people / citizens? What happens is we figure out the amount of additional money we could borrow to become a AA+ rated country, how many Americans could we help and put to work to rebuild our crumbling infrastructure or like we did when we built the hoover dam. There is a saying in the commercial banking world, if you don't have any special/problem assets (deals that went bad) you are not taking enough risk; there is an optimum level of special assets. Seems like crony capitalism when it's socialism for the rich and capitalism for the poor.

(2) The government has the ability to put people to work, for a long-term productive purpose, that the private sector may not value at this time. Whether you call it a government guarantee or not, I think it is interesting, since labor unions are all but extinct and the jobs guarantee at least attempts to set a floor to be able to keep the private sector honest. Times are good, people move out of the guaranteed government job to the private sector for higher paying jobs, times get tough, individuals who are laid off could be put to work for productive purposes, without sitting on their @ss collecting welfare checks, which is the kind of quote-unquote handout you would think we would want to avoid.

Same reason I don't understand the argument against people QE. I would argue dollar for dollar putting money in the hands of the american people would be your higher return on investment than artificially proping up boomers real estate values or buying treasuries off bank balance sheets, to increase liquidity that will not necessarily result in a single new loan being made.

Just because the owner of a restaurant receives a tax cut, doesn't necessarily mean he hires any additional staff. The best way to get him/her to hire new staff is to focus on increasing demand, which would happen if people have more money in their pocket to go out to dinner with and circulate the money throughout the community.

(3) From all of your perspectives, do you not find corporations using tax loopholes, tax havens, voodoo accounting tricks and slight of hand with accounts in Ireland or wherever to avoid paying a dollar in taxes part of the problem or should we just make legal what they ultimately want, "corporations don't pay taxes. They have the benefit of being viewed as an individual entity, except when paying taxes because they are job creators". Just one stat, "

  • Corporate share of federal tax revenue has dropped by two-thirds in 60 years — from 32% in 1952 to 10% in 2013.

How different would things look if corporations made up say 20% instead of 10%?

I'm prepared to be BBQ'd :).....hahaha

 

 

Quote from Paul Lebow on 08/12/2019, 9:22 AM

Yes this is a common MMT slight-of-hand - ignoring that bonds are purchased from and owed to the private sector.

except when they are bought and held on the Fed's balance sheet, right?