●The more budgets are cut and taxes increased, the weaker an economy becomes.
●Austerity starves the economy to feed the government, and leads to civil disorder.
●Until the 99% understand the need for federal deficits, the upper 1% will rule.
●To survive long term, a monetarily non-sovereign government must have a positive balance of payments.
●Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
Some say the many federal stimulus attempts “didn’t work,” as witness the current poor economy. Others say stimulus did work, because without stimulus we would be in a more serious recession or depression.
Part of the problem may be the definition of “stimulus.”
Federal Reserve Chairman Ben Bernanke | Olivier Douliery/Abaca Press/MCT
WASHINGTON — A strong signal Friday from Chairman Ben Bernanke that more economic stimulus is on the way puts the Federal Reserve squarely in the middle of the fight for the White House in November’s presidential election.
Speaking at the Fed’s annual retreat in the Wyoming resort city of Jackson Hole, Bernanke offered a spirited defense of his unconventional efforts over the past three years to stimulate economic activity through the purchase of government and mortgage bonds. And he seemed to signal that more steps would be taken soon.
To stimulate the economy is to stimulate Gross Domestic Product (GDP) growth.
GDP = Federal Spending + Private Investment and Consumption + Net Exports
So, to stimulate GDP growth it is necessary to increase one or more of these factors: Federal Spending, Private Investment, Private Consumption, Net Exports.
In 2001, George W. Bush’s Economic Growth Tax Relief Reconciliation Act included tax rebate checks and tax reductions, which stimulated private investment and consumption for three years. Back then, there also were claims that the stimulus “didn’t work,” but:
The red line is Gross Domestic Product; The green line is Private Consumption; The blue line is Private Investment; The orange line is Federal deficit Spending
All rose in the 2001 – 2004 period, then began to fall, together.
[Important Note: When evaluating the effect of a stimulus, the claim often is made that “people didn’t spend the money; they just “sat on it.” But “sitting on” money, i.e. putting it in the bank, is investment, and Private Investment is part of GDP]
If the Fed does take action, it’d come less than two months before the Nov. 6 election, and history suggests that what the Fed does during an election is always viewed through a political prism.
President George H.W. Bush famously blamed his 1992 re-election defeat to Bill Clinton on then-Fed Chairman Alan Greenspan’s failure to cut interest rates in a slow economy.
President Bush wrongly believed low interest rates are stimulative. They are not. (See: “The low interest rate/GDP growth fallacy” )
Republicans have criticized the Fed’s use of bond buying to stimulate the economy, fearing it eventually will bring inflation.
With inflation hovering near historic lows, the greater danger is deflation;
Sen. Bob Corker, an influential Republican from Tennessee on the banking committee, underscored the political fight in a statement after Bernanke’s speech. He warned that “policies from Congress, not more short-term stimulus from the Fed,” are needed to restore growth.
He’s right. Congress, for political reasons, has abdicated its responsibility for growing the economy. Because tax reductions and spending increases – the two ways to stimulate the economy – also increase the deficit, and because increasing the deficit wrongly is considered negative for the economy (see the irony?), Congress asks the Fed to do what it cannot do.
The Fed’s reduction of interest rates (which contrary to popular wisdom, is slightly negative for the economy) and its “quantum easing” (buying long term bonds to lower interest rates), do not stimulate GDP growth. They don’t increase Federal Spending (Federal Reserve Purchases of government bonds are no “spending”). They don’t increase Private Investment and Consumption. And they have a little, but very little, effect on Net Exports (by slightly weakening the dollar). Quantitative easing is not a stimulus.
The Fed has been given the tool to control inflation (interest rates), not to grow GDP. Congress has asked the Fed to hammer nails with a wrench.
>Bernanke warned Friday that the Fed’s monetary policy “cannot achieve by itself what a broader, more balanced set of economic policies might achieve; in particular, it cannot neutralize the fiscal and financial risks that the country faces.”
That was a tweak of lawmakers, unable to agree on budget cuts, expiring tax cuts this year and additional measures to spark economic growth.
And a correct tweak it is. Our lawmakers believe GDP can be increased while the right side of the above equation is decreased. Essentially, our lawmakers deny algebra.
The algebraic calculation of GDP states that stimulus grows GDP if it increases Federal Spending, Private Spending, Private Investment and/or Net Exports. To stimulate the economy requires increasing the federal deficit.
Federal deficit spending increases (by identity) Federal Spending.
Federal deficit spending increases Private Spending and Private Investment by adding dollars to the private sector.
Federal deficit spending, in of itself, does not affect Net Exports, which currently run about $50 billion per year to the negative. Thus, for GDP to grow by even $1, the federal deficit must be at least $50 billion.
Consider the Troubled Asset Relief Program (TARP). The federal government purchased assets from institutions. Sounds good, right? Federal spending increases GDP, and dollars are added to the private economy – dollars which are spent and invested.
Unfortunately, the recipients have paid back the vast majority of the dollars, reducing their ability to spend and invest. On balance, TARP had very little long term effect on the right side of the equation. TARP was not a stimulus.
When people complain that stimulus doesn’t work, and others claim stimulus did work, they may not be talking about stimulus. Tarp and quantitative easing, so called “stimuli,” were not stimuli at all. Neither increased the right side of the equation.
By contrast, the American Recovery and Reinvestment Act (ARRA) of 2009 was a stimulus. It allocated $787 billion for tax cuts, unemployment benefits and various grants and loans. While loans are not stimulative (they must be paid back), the other spending is stimulative, because it increases the right side of the equation.
In summary, the measure of economic growth is not unemployment, business profitability, new business startups, poverty, hunger, consumer optimism or any other measure currently in vogue. The measure of economic growth is GDP growth. Period.
The formula for computing GDP is: GDP = Federal Spending + Private Investment + Private Consumption + Net Exports. For GDP to grow, at least one of the four factors must grow, and growing the first three factors requires the stimulus of federal deficit spending.
Many argue about whether or not stimulus works to increase GDP, but mathematically, true stimulus, i.e. federal deficit spending, does work, always works, cannot help but work.
Simple algebra says so.
Rodger Malcolm Mitchell
Nine Steps to Prosperity:
1. Eliminate FICA (Click here)
2. Medicare — parts A, B & D — for everyone
3. Send every American citizen an annual check for $5,000 or give every state $5,000 per capita (Click here)
4. Long-term nursing care for everyone
5. Free education (including post-grad) for everyone
6. Salary for attending school (Click here)
7. Eliminate corporate taxes
8. Increase the standard income tax deduction annually
9. Increase federal spending on the myriad initiatives that benefit America
No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption – Net Imports