The debt hawks are to economics as the creationists are to biology. Those, who do not understand monetary sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.
I think Professor Randy Wray (UMKC), one of the leading proponents of Modern Monetary Theory, has given up butting heads with debt-hawks, and has adopted a new, and perhaps more realistic approach. Recently, he gave a radio interview in which he said that the states (and counties and cities), desperately needed financial help, and that this help only could come from the federal government.
As I’ve noted previously on this blog, ( Why the states are in financial trouble ) it is mathematically impossible for any monetarily non-sovereign entity to last long-term without an outside source of income. You and I are monetarily non-sovereign, and to survive long term we need a salary and/or investment income sufficient to prevent us eventually from going bankrupt. We cannot survive indefinitely on the money we have saved, no matter how much that may be.
The states (and counties and cities) also are monetarily non-sovereign, and they too need an outside source of income. Taxes, coming from money that already exists in the state, are not sufficient to support a state long term, because inflation makes that money decline in value each year. For a state, outside income might come from exports or tourism. Examples are Alaska’s exports of oil and Nevada’s tourism.
Most states find even these outside sources of income insufficient to pay for education and infrastructure, two huge expenses the federal government could and should support. So most states have entered into a downward spiral of borrowing, which causes their credit ratings to drop and interest payments to increase, then borrowing more, which causes further ratings drops, and on and on and on.
Professor Wray suggested, in his interview, that the government should provide economic aid to the states and this would re-energize the economy, which eventually would reduce the federal deficit. Now Randy knows the following three things:
1. Re-energizing the economy does not reduce the federal deficit. GDP growth does not reduce the deficit. Yes, GDP growth can increase taxes, but taxes are not necessary for spending. More importantly, deficit growth is necessary for GDP growth (See: Summary)
2. There is no economic or financial reason to reduce the federal deficit, though reducing state deficits is necessary. The federal government is Monetarily Sovereign. The states are not.
3. There is no negative economic results from federal deficits.
So if increasing deficits are what drives a growing economy, why did Randy suggest stimuli as a way to decrease deficits? My belief: By positioning a stimulus plan as a way to reduce the federal deficits, he may be trying to provide political cover for our leaders to do what must be done, i.e. financially support the states. If so, that is a clever approach, which I have termed “jiujitsu economics.”
I’ve written Randy to see whether that, in fact, is what he had in mind. I’ll let you know what he says.
Rodger Malcolm Mitchell
No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”