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Taxes do not enable sovereign spending. The sovereign, being sovereign, can spend as much as it likes, when it likes.

That is very much a minority position.

Not among economists. Although the cargo cultists of the neoclassical tradition (including New "Keynesians" like our friend Bofinger) claim that "unfunded" spending will inevitably lead to inflation. But then, they are the same people who think that everybody can be a net exporter.

And please don't make up my position for me: I never said anything about surpluses. I said balance and that was long-term balance.

That comes to the same thing: Long-term balance implies zero nominal long-run growth in the national asset base. This is very likely to prove unstable under current institutional arrangements. In fact, if the economy grows in real terms it will be deflationary, which is proven beyond any sane doubt to be unstable under present institutional arrangements.

Alternatively, one can imagine sustained growth under a balanced budget scenario. Since the only way to create new money (in the sense that most people understand the term, which is to say high-powered money) is to deficit spend, sustained growth under long-run budget balance means that the volume of government-issued money in the economy will approach zero as time goes on.

We tried that in the 19th century. That experiment is the reason we have central banks these days.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Aug 14th, 2011 at 04:26:24 PM EST
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