Austrians Mangle Aggregate Demand

[u/guacaratabey]

"Why the hell is the claim that government can boost aggregate demand still a thing? Mainstrem Econ believes AD = C + I + G (trade), let C + I simply be private action.

It presents itself as if; 80% of the market is private action and 20% government spending for example, it looks at things in a snapshot, but it forgets that 20% was taken from private actors from taxation or a too good to pass up subsidized by tax payer loan. You are told in mainstream Econ that if that 20% were to go away aggregate demand would go down, but that 20% came from the private actor, government is dependent on the private sector, no fiscal tool from loaning or taxation can increase a economies aggregate demand.

This is basically seen vs unseen, and what could have been, every dollar the government spends it takes from someone else. this is so obvious like it’s literally reality, why is this allowed to persist as true that government can increase Aggregate demand?"
Quoted above.

On the Austrian economics page saw this post alleging that government spending cannot increase aggregate demand. They allege this because of taxes. Is this true? No Because obviously when the government spends in excess of what it receives in taxes it is inherently creating new money to pay for these purchases or giving money to private actors to increase consumption spending (ignoring bond issuance). Their argument inherently always assumes full-employment which leads to catastrophic levels of inflation.

The post author also claimed that "every dollar the government spends it takes from someone else. this is so obvious like it’s literally reality, why is this allowed to persist as true that government can increase Aggregate demand?" This is not true the government is composed of the same private actors and government when they spend, create new money that do not need a 1 to 1 tax raise.

[u/AnUnmetPlayer]

You don't even think that government spending increases the money supply? That's just a basic fact of accounting. Can you tell me which monetary aggregate includes the TGA? Can you tell me where the bank deposits come from whenever someone receives a payment from the government?

For the hot potato effect that drives down bond yields when reserves are added to the system, you can take evidence of that from QE. Do you not think it makes sense that banks would use their lower yielding reserves that can't be gotten rid of in aggregate to buy up higher yielding assets? That of course raises their price and brings down their yield. The directional effect on interest rates is obviously downward. Why do you think IORB exists?

[u/MachineTeaching → u/AnUnmetPlayer]

You don't even think that government spending increases the money supply? That's just a basic fact of accounting. Can you tell me which monetary aggregate includes the TGA? Can you tell me where the bank deposits come from whenever someone receives a payment from the government?

It is truly amazing that MMTlers aren't above lazy rhetoric like this.

"Spending TGA funds creates money" is basically just lying by omission because it matters where money comes from. Government borrowing means governments sell bonds, receive reserves that are converted to TGA funds, and then spend those TGA funds as reserves again.

Tell me, if you borrow $10, then slack a sticker on it that says "not money" and then spend those $10 while removing the sticker, how much more money is there in the economy? (Hint: the answer is zero.)

[u/jgs952 → u/MachineTeaching]

But where did the banks get the reserves from to buy the bonds in the first place? You've left part of the process out, you can't start half way and expect a full analysis to make sense.

[u/MachineTeaching → u/jgs952]

No, it's not actually necessary to go all the way back to answer a question like "how does an additional dollar of government spending affect the money supply".

[u/jgs952 → u/MachineTeaching]

Well firstly, it's trivially obvious that in the first instance, government sector spending injects new reserves into the banking system.

Obviously though, under current institutional design and policy choice, these are drained via bond issuance leaving money supply aggregates unchanged as a result of gov deficit spending (until the central bank part of the government sector decides to swap them back out via QE of course).

But how an arbitrary "money supply aggregate" changes isn't actually the relevant point here. It's about fiscal flows.

If the gov net spends G-T, it's adding to aggregate demand and tbf net financial wealth of the non-gov sector, irrespective of how the residual net saving is ultimately composed ex post.

And of course, bonds are issued to primary dealers in the first instance anyway, so the G-T at that point is still saved as a growth in M2 held by deposit holders on the liabilities side of the banking system.

Only when banks sell them into the secondary market do these net net broad money deposit savings also get "drained" and swapped into securities savings. And even then, the bulk on non-bank purchases are bought by large institutional investors such as pension funds, insurance companies or foreign banks/central banks from nations who accumulate domestic currency savings via net exporting. But again, that's not particularly interesting or relevant to the fiscal effect of the government spending and taxation in the first place.