It was German Chancellor Angela Merkel who explained government spending in very simple terms for her very simple people: “You should have just asked the Swabian housefrau. She would have told us a wisdom of life: You cannot live beyond your means in the long run.” This neo-liberal platitude has resulted in a failing EU and euro, much suffering and misery for many Europeans, grwoing inequality, and now in resistance, as in the case of the Yellow Vests in France and Brexit in Britain.
Dirk Ehnts is a research assistent at the Faculty of Economics of Technical University Chemnitz. He is the author of “Modern Monetary Theory and European Macroeconomics” and spokesperson of the Pufendorf-Gesellschaft für politische Ökonomie e. V.
You can read the German version of this article here
Translated and edited by BRAVE NEW EUROPE
On April 1st an article with the title “Nothing against the Swabian housewife” appeared in the German newspaper Frankfurter Allgemeine Zeitung. According to the subheading, “Debt making […] is a dangerous thing. The state should hold back there.” My reply shows that the transfer of the morality and behaviour of a Swabian housewife to the behaviour of a national government such as the Kingdom of Sweden is not appropriate.
The Swabian housewife is over 18 years old and lives alone. She may have been or is married and might have children, but we know little more about her. As a citizen of Germany, she has rights and duties which are laid down in the Basic Law. As far as economic matters are concerned, she is essentially responsible for herself.
The Kingdom of Sweden is over 500 years old and today has more than ten million citizens. Sweden has four basic laws and is a parliamentary hereditary monarchy. The central bank and government are required to keep inflation within reasonable limits, promote sustainable growth, and generate a high level of employment.
The Swabian housewife can earn an income or receive transfers, possibly from her spouse. She earns her income in euros. She can pay her household expenditures if she has previously earned income. She uses the national currency.
The Kingdom of Sweden is the creator of the currency. The state must first spend Swedish kronor so that households and companies have money to pay their taxes with. The state determines in which currency taxes are paid. It can only generate tax revenue to the extent that it has previously spent money.
The Swabian housewife sees money as a vehicle for buying goods and services, as a vehicle for saving, as a yardstick for price relations and as a unit of account. She also uses it for payments.
The Kingdom of Sweden sees money as a tax credit, because it merely promises citizens that their money will be accepted for payments to the state. By paying for workers and materials with tax credits, the government provides itself with resources.
The Swabian housewife can also get into debt through credit. She signs a loan agreement and promises to repay the loan, plus interest. She will have to do without the additional money tomorrow that she borrowed today, as she has to make repayments. The repayment is fraught with risk, as her income and assets may not be sufficient to pay off the loan.
The Kingdom of Sweden cannot get into “debt”. It cannot therefore finance its expenditure “on credit” or borrow money “from future generations”. The state spends money through its central bank. The banks borrow money from the central bank and use it to buy government bonds. When the state spends the money, it is received by the banks. The banks repay the loans to the central bank.
The Swabian housewife can find she is broke and even insolvent if she does not earn sufficient income. Debts can be a problem.
The Kingdom of Sweden can promise the banks that the central bank will buy up all the government bonds at face value at any time. Since the central bank manages the computer with the account system, this promise is easy to keep. Swedish government bonds are therefore risk-free, because in case of doubt you can always sell them without loss of principal to the central bank, which credits the seller´s account.
The Swabian housewife does not create any additional savings or assets through her expenditures. These lead to income elsewhere, so she increases someone else’s wealth only by reducing her own wealth by the same amount.
The Kingdom of Sweden creates additional savings or assets through its expenditure. The expenditure leads to income elsewhere, without which the income of others would have been reduced by tax payments. The public debt corresponds to private financial assets in the same amount.
The Swabian housewife can incur debts and the more debt she has, the less likely she is to be able to repay her debts. The difference between income and expenditure increases her debt.
The Kingdom of Sweden cannot incur debts. As the creator of the money, there are tax credits which are collected through taxes. The difference between income and expenditure increases the tax credits in the private sector.
The Swabian housewife can increase her expenditures, but this will probably not lead to more employment. The Swabian housewife does not orient her expenditure with regard to the unemployment rate.
The Kingdom of Sweden can increase its expenditure, which leads to more employment. The Kingdom of Sweden also adjusts its expenditure to the unemployment rate. In times of high unemployment, the Kingdom of Sweden automatically spends more than it does in normal times because of social insurance.
The Swabian housewife’s expenditure is not responsible for the level of unemployment. Given the expenditure of other households and companies, a change in their expenditure will not change anything.
The Kingdom of Sweden’s expenditure is responsible for the level of unemployment. Given the expenditure of other households and enterprises, a change in government expenditure will reduce unemployment, which would otherwise be significantly higher.
The Swabian housewife can offer to sell her work, but it is not certain that she will find employment.
The Kingdom of Sweden can create demand for work and thus create jobs.
The Swabian housewife can cut her spending without the economy collapsing. This frees up resources for other uses.
The Kingdom of Sweden, if it reduces its spending because of a misguided theory of expansive austerity policy, brings the economy to the brink of recession or beyond. Released resources are not automatically used by others, which can lead to a collapse in production.
The Swabian housewife is not responsible for providing public goods, financing policies that increase the common good, or other public services.
The Kingdom of Sweden is responsible for the provision of public goods, the financing of policies that increase the common good or other public services.
The Swabian housewife cannot live beyond her means in the long run (consume more than she produces) because she cannot indefinitely increase her debt.
The Kingdom of Sweden cannot live above or below its means. It can use the resources available for its expenditure. Once all resources have been used, the Kingdom of Sweden can only draw resources from the private sector. The normal situation, however, is the existence of unused resources (labour), the non-utilisation of which leads to the decay of labour. The state therefore normally lives, if at all, “below its means”. Since the “public debt” is only the tax credit currently in private hands, it cannot be said from a financial perspective that the state can “live beyond its means”.
The Swabian housewife likes to save a lot. But today she doesn’t enjoy the usual benefit, because the money on her account is losing value, as inflation rates are higher than the interest rates.
The Kingdom of Sweden cannot “save” in the sense of “spend more later”, because it can draw its money free of charge and can therefore always spend as much as it wants when it wants. The central bank does not set interest rates to give savers more money, but to bring private investment to a level that changes inflation in the desired direction. Interest-rate cuts, so the theory goes, should increase investments and thus the inflation rate, interest-rate increases reduce both.
Anyone who therefore thinks that the Kingdom of Sweden should behave like a Swabian housewife should not be surprised if the implementation of what are undoubtedly well-intentioned proposals for a private household in reality lead to catastrophic results in a national economy. While saving can be a virtue for one person, it is usually a vice for the state. The state’s fear of spending money is therefore not a virtue, but results in social problems, unemployment, and the neglect of the common good.