A Reply to "A Political Economic Commentary on Government Finance and Monetary Policy". (Notes and Communications)
Bell, Stephanie, Journal of Economic Issues
This note is a reply to "A Political Economic Commentary on Government Finance and Monetary Policy," which William Van Lear wrote in response to my "Do Taxes and Bonds Finance Government Spending?" Below I address the three main points raised by Van Lear in his assessment of my earlier piece.
The first point I wish to address is Van Lear's statement that "there is no real consolidated balance sheet." His comment refers to a more-or-less passing reference to the government's consolidated balance sheet, which I made in the concluding section of my paper. Van Lear's statement raises a question about what it is appropriate to do versus what it is necessary to do. I remain convinced that it is appropriate to construct such a balance sheet, but I agree with Van Lear--it isn't necessary to do so. Thus, Van Lear is correct to suggest that my primary thesis--that the proceeds from taxation and bond sales cannot possibly finance the government's spending--does not depend upon the implications of a "consolidated" government balance sheet. However, it is my belief that consolidating the balance sheets of the US Treasury and the Federal Reserve is useful because it exposes the accounting gimmick (Eisner 1998/9) which is masked by the arbitrary (Mosler 1997; Wray 1998) division of these accounts. If nothing els e, the consolidated balance sheet may simply help to demystify the frequently used, but little understood, concept of "printing money."
According to Abba P. Lerner (1943), macroeconomic policy should be implemented according to two fundamental "laws" or principles. From Lerner's perspective, the government should first decide on a policy objective (or set of objectives) and then use whatever means are expected to generate the desired results in the most efficacious fashion. Lerner's approach was dubbed "functional finance" because he wanted the government to choose its tools--e.g., its power to tax and spend and its power to buy and sell bonds-based on the way they work, or "function." Specifically, he proposed that the government should (1) ensure that the total rate of spending be maintained at the level necessary to provide for full employment and (2) "print money" to create the balances that would be used to carry out the first objective.
Lerner recognized that there was an "almost instinctive revulsion" to the idea of printing money, which was likely to conjure up visions of printing presses and escalating prices (1943, 41). But, he explained, the government could carry out the second tenet of functional finance simply by doing what it already does-selling bonds in exchange for credits to its accounts at commercial and central banks.' In his words, printing money meant using banks "as agents for the government in issuing credit or bank money" (fn, 41).
My purpose in referring to the government s consolidated account was simply to expose the process of "printing money" for what it is--an accounting maneuver, designed to put numbers on the government's balance sheet without taking them off anyone else's. As Lerner explained, money is "printed" by issuing government liabilities to banks--either the central bank or private banks--"on conditions which permit the banks to issue new credit money based on their additional holdings of government securities" (1943, 41). Let us examine the process by which the Treasury could sell newly issued bonds to the central bank, on conditions that enable the bank to pay for them simply by crediting the government's account. (2)
Figure 1 (part A) shows the balance sheet entries corresponding to the central bank's purchase of the Treasury bonds. Following Tobin 1997, we can amalgamate these balance sheets in order to arrive at the consolidated government balance sheet shown in part B. (3) Looking at the consolidated balance sheet, it is clear that each entry on the left side will be offset by an entry on the right side.
Van Lear objects to the consolidated balance sheet on the grounds that "while [the Treasury and the Fed] cooperate on policy, they also can and do take independent action. …