GOVERNMENT?
Focusing the political discussion on taxes and how or who will pay, who gets the benefits, etc.
moves away from the public purpose of government and into an individualized benefit/cost analysis: “I paid taxes, what do I get for it?” The simplest answer is maybe nothing because the the public purposes. For example, the Social Security problem is not a financial problem; Social Security cannot go bankrupt. There is no need for a Trust Fund, no need to put dollars in a locked box, no need for payroll taxes. Social Security benefits can be paid the day they are due just by typing a number on the computer. The funds will come from debiting the TGA. TGA will obtain funds directly or indirectly from the Fed.
The hard part is figuring out how and what to produce to meet the needs of an aging society. We will need more infrastructure, workers, goods and services that cater to the needs of an older population; we will need to raise the productivity of available workers. That cannot be done by the
willing to be involved in solving the problems of the future. The government should also be involved directly through infrastructure spending and others. All this means more federal government spending today, not less. relevant questions are: “What do we want the government to do for us?”, “Do we want a government that represents 50% of GDP or 20% of GDP?”, “Do we want the burden of switching real resources to schooling, childcare, eldercare, etc. to be shared by society through higher taxes, or do we want to individualize that burden through higher personal expenses?”, “Do we prefer a society in which everybody fights for himself or do we prefer a cooperative society?” Once these questions are answered (hopefully through democratic process), the public purpose is clearly defined and the point becomes to implement it. Paying for its implementation in financial terms is can be done through taxing (permanent sacrifice of private consumption) or deferred pay (temporary sacrifice of private consumption), with the aim of reducing private monetary income to what is needed to meet subsistence.
While Keynes puts the choice in front of us in a blunt fashion given the dramatic situation of the time, the same applies in peace time. The two main differences are that, first, there is more flexibility in terms of resources given that usually the size of the cake can grow and, second, that a political consensus about the public purpose is less easily achieved. Of course, some countries that are monetarily sovereign may not have much resources and may not export enough to obtain the
foreign goods and services needed to fulfill the public purpose. In that case it is difficult, but not
2‐ To neutralize the impact of fiscal operations on the FFR, the Treasury uses cash and debt management techniques. These techniques have varied in amount and obviousness overtime depending on the circumstance and the political appetite for an overt interaction between central
TGA, TT&Ls, TSFA, excess reserves, FFR, cash management, debt management, tax receivable/payable
Review Questions
Q1: If the Fed or Treasury did not neutralize the impact of a fiscal deficit, what would happen to the FFR? What would happen to other rates?
Q2: If the Fed did not ensure that banks have enough reserves, how would that create problems for tax settlements, Treasuries auction settlements, and targeting the FFR? Explain each case in detail.
Q3: How did the Treasury help the Fed during the Great Recession? Why did the Fed request the help of the Treasury?
Q4: Explain how the Fed was and is still involved in the direct financing of the Treasury
Q5: Explain how the Fed has been involved in the indirect financing of the Treasury and why auctions of Treasuries cannot fail.
Suggested readings
For a more detailed analysis of the cash management technics used during the Great Recession by the Treasury read Santoro, P.J. (2012) “The Evolution of Treasury Cash Management during the Financial Crisis,” Federal Reserve of New York Current Issues in Economics and Finance, 18 (3): 1‐8.
For a discussion of the historical role of the U.S. Treasury in monetary policy and the reasons for its involvement, see U.S. Treasury (1955) Annual Report of the Secretary of the Treasury on the State of the Finances for the Fiscal Year Ended June 30 1955. Washington, D.C.: Government Printing
Office, pages 275‐290:
http://fraser.stlouisfed.org/docs/publications/treasar/AR_TREASURY_1955.pdf
Bruce K. Maclaury provides an interesting and accessible discussion of the independence of the central bank and its necessary coordination with the U.S. Treasury.
https://www.minneapolisfed.org/publications/annual‐reports/perspectives‐on‐federal‐reserve‐
independence‐a‐changing‐structure‐for‐changing‐times.
For an historical analysis of the auctions of long‐term Treasuries and the role the Federal Reserve has played, see Garbade, K.D. (2004) “The Institutionalization of Treasury Note and Bond Auctions, 1970‐75,” Federal Reserve Bank of New York Economic Policy Review, May: 29‐45.
https://www.newyorkfed.org/medialibrary/media/research/epr/04v10n1/0405garbpdf.pdf More advanced readings are:
Bell, S.A. (2000) “Do Taxes and Bonds Finance Government Spending?” Journal of Economic Issues 34 (3): 603‐620.
Mitchell, W. F., and Muysken, J. (2008) Full employment abandoned: Shifting sands and policy failures. Cheltenham: Edward Elgar. (CHAPTER 8)
Tymoigne, E. (2016) “Government monetary and fiscal operations: Generalising the endogenous money approach,” Cambridge Journal of Economics, forthcoming
Wray, L.R (2007) “The employer of last resort programme: Could it work for developing countries?”
International Labor Organization, Economic and Labour Market Papers 2007/5.
http://natlex.ilo.ch/public/english/employment/download/elm/elm07‐5.pdf
______. (2015) Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems, Second Edition. New York: Palgrave.
1 See Federal Reserve Bank of New York, “Statement Regarding Supplementary Financing Program,” September 17, 2008 at https://www.newyorkfed.org/markets/statement_091708.html
2 See U.S. Treasury, “Treasury Announces Supplementary Financing Program,” September 17, 2008, HP‐1144 at https://www.treasury.gov/press‐center/press‐releases/Pages/hp1144.aspx
3 “Over the years, a variety of provisions had permitted the Treasury to borrow limited amounts directly from the Federal Reserve. Options for such loans existed until 1935. Temporary provisions for direct loans were reintroduced in 1942 and renewed with varying restrictions a number of times thereafter. Authority for any kind of direct loans to the Treasury lapsed in 1981 and has not been renewed.” (Meulendyke 1998, 238, n.3)
4 The following link brings you to a video made by two of my students that provides a visual explanation:
https://www.youtube.com/watch?v=Wgcv_wJOLcA