by For a new fiscal policy framework Poorer and lower-income households have a higher marginal propensity (MPC) to consume than richer and higher-income households. The more equal income and wealth are distributed, the higher the structural level of demand of an economy. A high structural level of demand in turn reduces the need for public deficits: full capacity utilisation is already achieved at a lower level of debt and deficits. The more unequal the distribution, on the other hand, the higher the need for deficits and debt … Hence, if there is a way to limit the need for debt in the long run—without running the economy into the ground—it is not through overly restrictive fiscal policy, but rather through thoughtful measures for evenly distributed
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For a new fiscal policy framework
Poorer and lower-income households have a higher marginal propensity (MPC) to consume than richer and higher-income households. The more equal income and wealth are distributed, the higher the structural level of demand of an economy. A high structural level of demand in turn reduces the need for public deficits: full capacity utilisation is already achieved at a lower level of debt and deficits. The more unequal the distribution, on the other hand, the higher the need for deficits and debt …
Hence, if there is a way to limit the need for debt in the long run—without running the economy into the ground—it is not through overly restrictive fiscal policy, but rather through thoughtful measures for evenly distributed wealth gains. Structural reforms such as the reintroduction of a wealth tax or a more progressive income tax are doubly effective:99 they reduce the budget deficit directly without slowing down demand (since the consumption behaviour of the wealthy changes little even in the face of higher taxes). At the same time, they can raise the structural level of aggregate demand by tending to equalise the distribution of income. Any effects on investment demand can be offset by interest rate cuts, fiscal investment incentives or public investment.
A coherent fiscal policy can thus resort to structural reforms such as progressive taxation of high incomes and wealth to combine the goals of full capacity utilisation and limiting government (as well as private) debt levels. Rising wages through full capacity utilisation would further reduce the deficit- and debt levels required to sustain full utilisation, as they too would raise aggregate demand. Reducing debt via contractionary fiscal policy, on the other hand, is a counterproductive tool: in the context of secular stagnation, it lowers output and reduces debt levels, if at all, only with considerable collateral damage. It directly contradicts the goal of keeping the economy running at full capacity on a sustained basis.
Public debt is normally nothing to fear, especially if it is financed within the country itself (even foreign loans can benefit the economy if invested wisely). Some members of society hold government bonds and earn interest on them, while others pay taxes that ultimately cover the interest on the debt. The debt is not a net burden for society as a whole, as it ‘cancels itself out’ between the two groups. If the state issues bonds at a low interest rate, unemployment can be reduced without necessarily leading to strong inflationary pressure.
For both John Maynard Keynes and Abba Lerner — as well as yours truly and other MMT proponents — it was evident that the state has the ability to promote full employment and a stable price level, and it should use its powers to achieve this. If that means the state has to take on (temporary) debt and run a budget deficit — so be it! Public debt is neither good nor bad. It is a tool to achieve two overarching macroeconomic goals — full employment and price stability. What is sacred is not having a balanced budget or reducing public debt per se, regardless of the effect on macroeconomic goals. If ‘sound’ public finances, austerity, and balanced budgets lead to increased unemployment, unstable prices, and an escalating climate crisis, they must be abandoned.