How Balanced Budgets Can Create Unemployment


In  a recent post I provided a summary about how today’s fiat money systems function according to Modern Monetary Theory, in particular drawing from L. Randall Wray’s Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems.

In chapter 7.6, titled “MMT for Austrians: can a Libertarian support the Job Guarantee?”, the following paragraph caught my attention:

“The problem with a monetary economy (…) is that from inception imposition of taxes creates unemployment (those looking for money to pay taxes). (…) It is sheer folly to then force the private sector to solve the unemployment problem created by the government’s tax.”

To me, this has probably been one of the most eye opening statements about the fiat money system that I’ve heard in a long time, as I had never looked at it from this perspective before.

We know about common causes of unemployment, such as minimum wage legislation, and other measures that raise employment cost above what the market can bear, such as mandated health care, or to sum it up: government intervention.

But that doesn’t mean we can’t consider other potential causes.

If you’ve read my post about Modern Monetary Theory you’ll know that in a fiat money system the government imposes a tax in a currency, and then proceeds to spend that currency which is now in demand to satisfy said tax obligation.

If you’ve read my post about Private Saving, deficits, and recessions you’ll know that when private sector savings runs low or even declines, a recession/depression is on the horizon, and that in a fiat money system there’s no other way to achieve sufficient private sector savings without government budget deficits.

According to MMT, the reason low or negative private savings cause unemployment is that the private sector is scrambling to save enough on top making the required tax payments. This, in turn, leads to systemically induced shortage in demand for goods and services in the private sector, which in turn leads to declining corporate sales, which ultimately results in corporate layoffs and unemployment, unemployment meaning that someone is looking for money but isn’t getting any.

Warren Mosler has always explained this most vividly in the university lectures that I’ve seen him in. It goes a little something like this: He pulls out a stack of business cards and tells the audience that he’s selling each for $50, which naturally nobody is interested in. Then he adds a factor to his simulation: He informs the audience that he’s got a guy waiting a at the door with a 9mm who won’t let anyone leave without presenting one of those business cards. He explains that now suddenly he has made everyone in the room unemployed. Everyone needs at least one business card, and nobody has one. So now Warren could find willing and able workers willing to trade labor for such a business card. But imagine he didn’t follow through and didn’t hire anyone, or only hired a few individuals in the room. By definition, he would have made people unemployed, without giving them a way to escape their unemployment. (Watch a clip where Warren Mosler explains this here.)

This is essentially how the fiat money system is set up: We all (or most of us) need money in order to ultimately make a tax payment by year’s end. In addition to desiring money to make tax payments, the private sector also desires to save a portion of the money received. But if the agency that has imposed the tax doesn’t arrange their racket in a manner where enough money is left in private sector pockets on the net, some people will inevitably remain unemployed.

Remember my explanation from “Sectoral Balances and Private Saving“:

This sectoral balance identity can be observed in this chart that I’ve put together on

USA Sectoral Balances Chart

You can see there that the private sector’s surplus (blue) plus the foreign sector’s surplus (green) consistently equal the inverse government budget deficit (red) to the cent. You may have noticed that the private sector surplus in the blue chart above is exactly the same chart as the one I presented a few weeks ago when I explained the correlation between private sector saving and recessions.

What do we conclude from this? In order to achieve a sustained level of net private saving, which seems to be important to the health of the domestic economy in a fiat money system, a country either needs to run a sustained current account surplus, or a government budget deficit, or a mix of both. In the case of the United States, which runs a current account deficit at the moment, there is in fact no other way to accumulate net private savings than to run a government budget deficit.

A balanced budget in a fiat money system implies not only insufficient money to satisfy saving demands, it implies that no money at all is left in private sector pockets, leading to systemically suppressed demand, which inevitably leads to systemic unemployment.

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Nima is an entrepreneur and Bitcoin advocate who writes about economics and freedom. He was born and raised in Berlin and received his Master's degree in the US in 2004. He co-founded an auction software company in San Francisco and successfully sold it in 2015. (Twitter: @economicsjunkie)