An alternative to popular faith

Warren Mosler, economist, perturbed by the misunderstanding of monetary policy by the current and past administrations, is running for President in 2012. He has been speaking at the Tea Parties, explaining to taxpayers that Washington is either at best ignorant of economic policy or at worst deceptive.” By Barry Ritholtz – The Big Picture, October 7th, 2009, 11:00AM

Warren Mosler has a better understanding of the economy than almost anyone I have known. If you want to see the real facts, in plain, clear English, go to http://www.moslereconomics.com/ and click the “7 Deadly Innocent Frauds” box on the left side of the page. I promise, you will learn something important.

In 2008, Warren helped edit an article I had written earlier. The article, endorsed by a number of eminent economics professors, is as follows:

Is It Time For a FICA Holiday?

Traditional thinking has produced an economic disaster, which the same traditional thinking cannot solve. As the U.S. and world economies slip into recession, we must remember this ultimately is a bookkeeping crisis. The housing “market” was destroyed, but not the actual houses. They still exist. Nothing real has been destroyed. Instead, we are starved for money.

This problem should be easier to remedy than a food shortage, water shortage or wartime destruction, because a money shortage can be cured by the simple expedient of adding money – something the federal government is uniquely empowered to do.

We propose a FICA payroll tax “holiday,” whereby the U.S. Treasury will make our Social Security and Medicare payments for us. This will add about $10 billion per week to our take-home pay, and another $10 billion to business income, both of which urgently are needed. When we eliminate this partly double, severely regressive tax, we will give consumers the income they need to make mortgage payments, to pay bills, and to do the shopping American business craves. The FICA holiday also will provide business with money for jobs and investment.

In contrast, the “top down” approach (saving Fannie Mae, buying toxic mortgages), while necessary, does not directly address consumer/business money needs, and has had only modest effect.

Common knowledge holds that Social Security and Medicare will face bankruptcy even with FICA. So proposed fixes invariably include benefit cuts, reducing consumer incomes, or tax increases, cutting consumer and business spending power – the opposite of what our economy requires.

Many people fear federal deficit spending when it supports Social Security and Medicare, but not when it supports the military. Social Security spending for 2008 is approximately $600 billion, about equal to the defense budget. Ironically, both candidates for President believed Social Security will run out of money and the military will not. The $1 trillion in “stimulus” spending was authorized without increased taxes. Both candidates advocated tax cuts.

Even during the darkest days of the Great Depression, the federal government never ran out of money. Massive government spending, before and during World War II, helped lift us from the Depression.

In 1971 President Nixon eliminated any risk of government insolvency by ending the last vestiges of the gold standard. At the stroke of a pen, he assured that neither the government, nor any of its agencies, could run short of money. Social Security and Medicare, being two of those 400+ agencies, are immune from bankruptcy.

If Congress authorizes the Treasury to make our Social Security and Medicare payments for us, thus allowing our take-home pay to rise, the economy will begin to recover. The elimination of FICA deductions would provide consumers and business with more than a trillion additional dollars annually, exactly what a healthy economy needs.

Won’t this increase the federal deficit? Yes, but President Nixon’s signature guaranteed the government never will run short of money to service its debts. This act removed taxes as a necessary source of federal money. Together with federal spending, taxation became a mere tool to create optimal output and employment. Whatever deficit accomplishes that goal is the right size.

Doesn’t a large deficit cause higher interest rates? No, interest rates are set by the Federal Reserve. The government can set rates at any level it wishes.

Doesn’t a large federal debt create a shortage of lending funds? No, the more money the government pumps into the economy, the more lending funds are created.

Won’t our children have to pay for the increased deficit? No, the government owes the debt and easily services a debt of any size. Our children are not the debtors. (In many cases, they even are the creditors.) Because the “right” size debt will continue to grow forever as our economy grows, it never should be reduced or paid back.

Meanwhile, each year the increased debt will help keep output high and unemployment low, benefiting our children with additional income, goods and services.

Won’t increasing the deficit by eliminating FICA, cause inflation? President Carter had modest deficits and high inflation. President Reagan had the highest deficits in American history and modest inflation. Contrary to popular faith, federal debt has not caused inflations, recessions, high interest rates or any other negative economic effects. On the contrary, large deficits have been associated with economic growth.

In summary, we offer new thinking – an accounting fix to an accounting problem: Eliminate FICA and pay for Medicare and Social Security the same way we pay for Congress, the military, the Supreme Court and every other federal agency, by functionally folding these two agencies into the general fund. The economic crisis has presented us with the rare opportunity to accomplish two important goals: Permanently fix the seemingly intractable Social Security and Medicare problems, and energize our economy.

Rodger Malcolm Mitchell