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.
Have we come to the end of empiricism in economics? The increasing influence of the Tea Party and its philosophies, makes this question especially timely.
To quote from Wikipedia: “Empiricism is a fundamental part of the scientific method that all hypotheses and theories must be tested against observations of the natural world, rather than resting solely on a priori reasoning, intuition, or revelation. Hence, science is considered to be methodologically empirical in nature.”
If economics is a science, all hypotheses in economics must be tested against observed reality, not against intuition or faith. Here are some observed realities in economics:
1. Being on a gold standard requires a nation to hold gold in an amount equal to, or greater than, the amount of sovereign money it issues, according to an agreed-upon formula.
2. In August 1971, the U.S. federal government exited the gold standard.
3. Exiting the gold standard gave the U.S. government the legal ability to create unlimited numbers of dollars without being restricted by gold inventories.
4. Being able to create dollars without limits, the U.S. government does not need to obtain dollars from any other source.
5. Not needing to obtain dollars, the U.S. government needs neither to borrow dollars nor to levy taxes. It merely can create dollars to support any spending need.
6. The above is part of “Monetary Sovereignty.”
7. Not all entities are Monetarily Sovereign. The U.S. states, counties and cities, and the euro nations, are monetarily non-sovereign. They do not have the legal ability to create unlimited quantities of money.
8. Because a Monetarily Sovereign nation can create unlimited money, it cannot go “broke,”i.e., be unable to pay its debts, nor can paying any debt be a financial burden, nor must future generations be forced to pay taxes.
9. Again, quoting from Wikipedia, “A commodity is a good for which there is demand, but which is supplied without qualitative differentiation across a market.” The U.S. dollar is a commodity. It is freely traded on exchanges, and all U.S. dollars are identical.
10. A decrease in the perceived value of a dollar, compared to the perceived values of goods and services, is known as “inflation.”
11. The value of a commodity is based on supply and demand. An increase in supply without a corresponding increase in demand, generally reduces the value of a commodity.
12. Demand is based on risk and reward. An increase in risk, without a corresponding increase in reward, generally reduces the value of a commodity. For money, risk is inflation and reward is interest.
All of the above are empirical. While there may be some legitimate quibbles about the exact wording, I suspect there is agreement that all of the above have been the subject of countless observations.
13. Therefore, the constriant on money creation by a Monetarily Sovereign nation is neither taxes nor borrowing, but inflation.
14. Inflation can be prevented/cured by reducing the supply of, or increasing the demand for, money.
These last two are not empirical, but follow logically from the above empirical statements.
15. Reductions in money supply growth have been associated with recessions and depressions. Increases in money supply growth have been associated with recoveries.
This last statement is not itself empirical, but is based on empirical data. See: Understanding economics.
The following statements neither are empirical, nor are they derived from empiricism. No facts support these statements. They are not science, but rather are based on intuition and popular faith. Yet they not only are parroted, but are believed, by many politicians, economists and members of the general public.
A. Knocking on wood will improve my luck.
B. The federal deficit (or debt) is unsustainable [or a ticking time bomb].
C. Taxpayers or taxpayers’ children will pay for federal spending.
D. Reducing the federal deficit (or debt) will improve Americans’ quality of life
E. Reducing the federal deficit (or debt) will improve security, defense, education, housing, the infrastructure and/or the ecology.
F. The federal deficit (or debt) is similar to your personal debt.
G. The federal deficit (or debt) is similar to states’ debt
H. The U.S. government is broke or going broke.
I. The federal Debt/GDP ratio is too high.
J. When the federal Debt/GDP ratio reaches [any figure], the U.S. economy will suffer.
K. Ireland’s [or any euro nation’s] finances are similar to those of the U.S.
L. The federal debt ceiling is a good thing with a good purpose.
M. Social Security (or Medicare) will go broke without a tax increase or a benefit decrease.
N. Cutting the deficit (or debt) will reduce unemployment.
O. Small government is better than big government
P. Friday the 13th is an unlucky day.
So as Congress, led by the Tea Party and freshman senators, marches toward a debt ceiling showdown, we ask again, have we come to the end of empiricism in economics? Have we come to the end of economics?
Rodger Malcolm Mitchell
No nation can tax itself into prosperity, nor grow without money growth.