Modern Monetary Theory. The government is not a household and imports are still a benefit – Bill Mitchell.

A government is not a household, is a core Modern Monetary Theory (MMT) proposition because it separates the currency issuer from the currency user and allows us to appreciate the constraints that each has on its spending capacities.

Another core MMT proposition is that imports are a benefit and exports are a cost.

In the case of a household, there are both real and financial resource constraints which limit its spending and necessitate strategies being put in place to facilitate that spending (getting income, running down savings, borrowing, selling assets).

In the case of a currency issuing government the only spending constraints beyond the political are the available real resources that are for sale in that currency.

Beyond that, the government sector thus assumes broad responsibilities as the currency issuer, which are not necessarily borne by individual consumers. Its objectives are different. Which brings trade into the picture.

Another core MMT proposition is that imports are a benefit and exports are a cost.

So why would I support Jeremy Corbyn’s Build it in Britain policy, which is really an import competing strategy? Simple, the government is not a household.

Household consumers are users of the currency and aim to use their disposable incomes to create well-being, primarily for themselves and their families.

We exhibit generosity by extending our spending capacities to others when we give gifts.

But our aims are to get the best deal we can in our transactions. That means we like goods and services that satisfy our quality standards at the best price possible.

Which means that we will be somewhat indifferent to geography. If local suppliers are expensive and imported goods and services are cheaper, then as long as quality considerations are broadly met, we will purchase the imported commodity and be better off in a material sense.

If other nations are willing to send more goods and services to us than they get back in return then the real terms of trade are in our favour.

Exports require we give up our use of those real resources while imports mean we deprive other nations of the use of their resources.

There are nuances obviously.

A nation with lots of minerals (Australia) may not feel it is too much of a ‘cost’ to send boatloads of primary commodities to Japan or China.

We also individually might ascribe to broader goals in our purchasing decisions, although the evidence for this is weak.

For example, some of us believe that imports are only a beneflt if they come from nations that treat their workers reasonably (no sweat shops, killing trade unionists etc) and do not ravage the natural environment in the process of producing the goods.

I would guess those concerns do not dominate our decision making generally because if they did China would not have huge export surpluses.

But there are nuances.

However, a government is not a household. It has a wider remit (objectives) than a household and must consider a broad range of concerns when it uses its currency issuing capacity to shift real resources (as goods and services) from the non-government sector to the government sector to fulfill its elected mandate.

In that sense, imports remain a benefit but the broader concerns make the net decision more complex than it is for the nongovernment sector.

The government must consider regional disparities. When a household is making a decision to purchase a good or service, what is happening elsewhere in the nation might not rank very high in the decision.

The government must consider how best to maintain full employment. A household is really only concerned with their own employment although that doesn’t preclude us being generally concerned with high unemployment rates.

But ’buy local’ campaigns typically do not work when they try to steer household consumption expenditure.

The government can always maintain full employment through its fiscal spending decisions. We know that because it can always purchase the services of all idle labour that wants to work and receive payment in the currency of issue.

So from that starting point, there is no question that mass unemployment is a policy choice, not some uncontrollable outcome of a ’market‘.

In that context, the challenge for government is to work out how to frame the spending capacity to get the best employment outcomes:

* Direct public employment, that is obvious.

* Subsidy of local non-government firms, that is, operate by lowering the unit costs for firms to render them profitable when they otherwise would not be.

* ‘Build it in Britain’ that is, use procurement policies to sustain sales for local firms rather than subsidise their costs.

None of these full employment strategies negate the insight that imports are a benefit to a nation.

But the government has to consider broader concerns than just getting a good or service at the cheapest ’market’ price.

There are more considerations, but that is how we can understand this issue.

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