An alternative to popular faith
A parable about the Fed budget:
We shall call him “Mr. Fed.” He has an unruly daughter named “Taxpay,” whom he wishes to encourage toward goodness, while teaching her basic budgeting. So Mr. Fed tapes two sheets of paper to the refrigerator.
One sheet is titled “Taxpay Savings.” The other sheet is titled “Deficit Scoresheet.” Each day when Taxpay is good, Mr. Fed will draw a checkmark on her Savings sheet, and because he is teaching her double-entry accounting, he also will draw a checkmark on his Deficit Scoresheet.
Taxpay wants these checkmarks, because Mr. Fed will allow her to use them to buy things like staying up late or having friends for a sleepover. She trusts Mr. Fed to exchange these goods and services for checkmarks (In some quarters this trust is known as “full faith and credit.”) Also, if she is bad, Mr. Fed will tax her, so she needs checkmarks to pay any “bad girl” taxes she might incur.
All of the first week, little Taxpay is good, so by the end of the week she has accumulated 7 checkmarks on her Savings sheet. Similarly, Mr. Fed has drawn 7 checkmarks on his Deficit Scoresheet.
The system works so well, Mr. Fed tells Taxpay that from now on, he will give her 2 checkmarks for every day she is good, which of course requires that he also draw 2 checkmarks on his Deficit Scoresheet.
This is no problem for Mr. Fed who has plenty of pencils to draw checkmarks. But it outrages a visiting busybody named “Debthawk,” who asks Taxpay the nonsensical question, “Who is going to give Mr. Fed checkmarks to reduce the number of checkmarks on his Scoresheet?”
Puzzled, little Taxpay asks, “Huh? Why does Mr. Fed’s Deficit Scoresheet need to be reduced? It’s just a scoresheet for accounting purposes. The checkmarks don’t cost Mr. Fed anything. They are free, backed by nothing. They merely are arbitrary symbols that Mr. Fed can draw in unlimited quantities. They are exactly like the dollars the federal government produces, now that we are off the gold standard – arbitrary symbols, free and backed by nothing other than full faith and credit.”
Taxpay is pretty smart for a little girl, obviously smarter than Debthawk, who keeps insisting that one day Taxpay’s children and grandchildren will have to give Mr. Fed checkmarks to offset those on the Deficit sheet. Debthawk calls this “inter-generational transfer.”
In short, Debthawk wants a “balanced budget,” aka “deficit neutral” which means every time Mr. Fed gives Taxpay a checkmark, she should give it back. Think about the sense of that.
The first day of the next week, Taxpay is bad, so Mr. Fed taxes her. He erases a checkmark on her Savings sheet, and also erases a checkmark on his Deficit Scoresheet, reducing the Deficit Score to 6 checkmarks. Debthawk is thrilled, failing to notice the reduction on Taxpay’s Savings sheet.
Taxpay then decides to spend all her remaining checkmarks for permission to have a dozen friends at a sleepover. Mr. Fed erases all her Savings checkmarks and simultaneously erases all the checks on his Deficit Scoresheet. At first elated to see the Deficit Scoresheet having no checkmarks, Debthawk belatedly realizes that Taxpay now has no checkmarks left to pay for future goods and services. This puts everyone into a Great Depression, at which time Debthawk says, “I always knew that in emergencies like this one, Mr. Fed would have to add to his Deficit Scoresheet so Taxpay would have checkmarks.” (Of course he did.)
But, the minute Mr. Fed started to give Taxpay more checkmarks, Debthawk again complained about there being too many checkmarks in the Deficit Scoresheet. Poor little Taxpay. Debthawk wants to take away her precious checkmarks, and because his mind is closed, she can’t seem to convince him that is unnecessary.
And that is the way the federal budget really works.
Rodger Malcolm Mitchell
http://www.rodgermitchell.com
Faith is belief without evidence. Science is belief from evidence.
#Monetary Sovereignty - Mitchell 
I keep coming back to the idea that a government with unchecked money printing capability would take on all sorts of new projects, expanding the money supply so much that it causes strong inflation. Thus they would in essence confiscate wealth accumulated by savers. If the ability to save is upended, how does one ever accumulate any capital to buy high value goods, expand/start a business, retire early, etc?
In this scenario where the government is allowed to print money at will (and does so on a large scale), you shift from a meritocratic society to a hierarchical one. Those select few in government would be free to adjust wealth distributions how they see fit, and there would be little social mobility. There might not be a large scale problem with finding work in this type of society, but that work might not produce a high level of satisfaction for many (admittedly not all that dissimilar from today). Many in the lower classes would not have any hope of attaining a better lifestyle or reaching a point where they could quit working. I guess one might be able to somewhat adjust their position in life through their choice of work (which would affect their income level), but that is usually done very early in life and can be constrained by their own family’s class. Eliminating the potential for social mobility enabled by the savings mechanism certainly seems like a bad direction to take.
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Travis,
In 1971, the government gave itself the power to create unlimited amounts of money. So printing money at will is a “done deal.” That is how, in the past 30 years alone, federal debt increased an astounding 1,400%, from $800B to $12T.
Interestingly, there has been no correlation between deficits and inflation. The times of highest deficits have not been the times of highest inflation. (See item #8 in https://rodgermmitchell.wordpress.com/2009/09/07/introduction/ )
Yes, massive money creation could cause inflation. But money supply is not the only (or even most important) inflation factor.
Demand for money, controlled by interest rates, is equally important. Supply and demand for goods and services also is a key factor.
In the past few decades, the supply and demand for oil seems to have been the prime inflation factor. (See the graph at https://rodgermmitchell.wordpress.com/2009/09/24/is-inflation-too-much-money-chasing-too-few-goods/ )
Nevertheless, some might argue that whatever inflation we have had is too much. Yet, since the saving rate is dependent on the federal spending (money-creation) rate, I’m not sure deficits have moved us closer to a class-oriented society than we always have been.
Rodger Malcolm Mitchell
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Rodger,
As you mentioned before, societal pressures/beliefs have been used to apply a debt ceiling, so while in theory we can print unlimited amounts of money in practice we do not (yet). My argument was centered around what could happen if a large expansion of the currently small money printing operations took place. I am advancing the argument as a dialogue with those such as yourself, who believe that US citizens and congressmen should embrace federal money printing in order to alleviate deflationary pressures and remove taxation/financing complications. Unlike staunch deficit hawks, I do not see your idea as outrageous. I am just concerned about a misuse of the money printing power, and what the ill effects that misuse would bring.
Your point on inflation historically being driven largely by oil prices is an interesting and important one. Like you, I have always seen oil as a very potent inflation threat because it’s not JUST used for transportation, it’s a feeder into almost every other good that gets manufactured, grown, packaged, or moved somewhere. However, there very well may be other factors which have the potential to influence overall inflation but which have historically been offset by deflationary factors. I particularly believe that much of our historical money supply growth has not given way to inflation because we were experiencing deflation of prices due to productivity improvements and comparative advantage.
We can’t let the past obscure our view of a potential future. All else equal, a money supply increase SHOULD lead to inflation, as many economic thinkers have agreed. If the government deposited a trillion dollars in every person’s checking account, we would certainly get massive inflation. It just so happens that these other factors which can affect prices have not been held constant, and in fact have been very pronounced in recent decades. The money printing relative to the size/growth of our economy hasn’t been large enough historically to overpower these other factors. What happens if that changes? What happens if politicians were allowed to take full and unlimited advantage of the printing presses? Would they overdo it? To me it’s not crazy to believe they would, given human nature. That scenario is what gives me pause given the potential ill effects that I laid out in the first post. Curious to hear your thoughts though.
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Travis:
I agree that:
1. Since money value is based on supply and demand, increasing the supply can cause inflation, unless demand were increased proportionately by raising interest rates.
2. Congressional inclination to act sensibly is almost nil.
3. Congressional understanding of economics is even less.
So yes, without some inhibiting factor, it is possible for Congress to increase the money supply too much. However, there always is an inhibiting factor, and that factor is inflation. It is measured continuously, and at the slightest hint of inflation, even the most dense politician has yielded to remedial efforts.
During the inflation of the late ’70’s, Paul Volcker not only reduced the money supply, but perhaps more importantly, raised interest rates massively, which increased money demand. I still miss those 14% bank CDs I owned.
My concern is less the about the possible and more about the actual. Because of wrong-headed debt fear, we actually do not have adequate health care, Social Security, infrastructure, education, R&D. Our army is under-equipped; we’ve not returned to the moon; our tax system is byzantine and expensive; our states are bankrupt; millions live below the poverty line and our lives could be so much better.
Thus, year after year, people suffer and die, or are uneducated, or live in poverty, all because of fears it is “possible” for the government to run amok and cause incurable inflation.
I had a relative, now deceased, who had Xenophobia. She spent her life in her home, seldom braving the outside world. Yes, it is true there are dangerous people out there, so it was “possible” that if she left home she could be attacked and even killed. But look at what she missed, based on her fear of an unknown possibility.
Similarly, it may be possible that if we are careless, a certain level of money creation could create excessive inflation that we may have difficulty curing, some time in the future — but look at what we are missing today, based on fear of an unknown possibility.
For instance, think what what benefits would accrue to employees, employers and the entire economy, if we eliminated the FICA tax. (Click the link titled “Ten Reasons to Eliminate FICA”)
Rodger Malcolm Mitchell
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Firstly I’m kind of disturbed by the vision of the citizenry as unruly little children who are to be led to “goodness” by the Federal government. It doesn’t jive with the individualist flavor of the nation’s founding and rings more of collectivism.
That said, and I grant you, it does appear our monetary system has become since the 70s a purely political economy. Money is created for the cause de jour, say windmills, and poured out on those the current party deems worthy. Another example may be that less money is taken from some industry rather than an other because of a political ideal to stimulate it or otherwise favor it.
The federal government then dictates who shall have money and who shall not, who will be granted boons and who shall have their goods taken from them in greater proportion. The federal government becomes the economy (arguably is) and all governed on the political will of the small number of persons who have gamed their way into the seats of congress, and been appointed to the various agencies subject to it.
While your discussion of check marks and double check marks is all well and good, is it any surprise that those who suddenly have their wealth taken and given to others based only on political favor should be displeased by this arbitrary, somewhat aristocratic power? Have they no ground to object to having their moral autonomy to determine “what’s good for them” stripped away by a power elite? And if they should attack the deficit system that enables these political transfers of wealth, is it really a sign of “closedmindedness” as you suggest?
I grant that it seems you have a different vision of society, and what “good” is. It seems to me however to be rather regressive in terms of the ideals of liberty the founders of the nation sought for. To boil it down, my objection is to the very idea that it is acceptable or moral for a government to be able to usurp from the individual citizens the right to decide where and how spending will occur, and who will and will not receive or be allowed to keep wealth. I didn’t find anything in the constitution, federalist papers, or anti-federalist papers that was consistent with such a system of government. Or is all that just outdated hogwash?
Yes the conditions you illustrate exist, but are they even moral to begin with? As a fan of the founders of the nation, I say no.
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And your specific solution is . . . ??
Rodger Malcolm Mitchell
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I kind of liked the founder’s solution, let the people determine their own business and keep the state out of the role of management of the society.
Let the people manage the society for themselves individually rather than concentrate power into small collectives that can confiscate the people’s resources and use promises of it’s return for coercion of behaviour. Let the people decide how their charity will be spent rather than allow the state to confiscate it and use it to build political support groups (ACORN for example). Let citizens of the states keep their money for support of individual states rather than confiscating it from the people and making states beg and do tricks of questionable constitutionality to get the money back (i.e. abolish the abuse of grant-in-aid).
Just a few thoughts. Not popular of course with those profiting by the current system, nor with those who’s dream it is to direct people according to their will and vision. The American revolution was the rarest of the rare, where the revolutionaries didn’t seek to reorder society around some grand humanistic vision, rather, it set society free to be what it could, and it accomplished amazing things without government direction.
I’m just sad to see advocacy of putting people back in the chains of an overbearing state. It is certainly not “progress”.
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