–What the Wall Street Journal editors want

An alternative to popular faith

Today (6/26/10), in an editorial titled, “The Keynesian Dead End,” the Wall Street Journal editors said, “. . .$1 in (federal) spending has to come from somewhere, which means in taxes or borrowing from productive parts of the private economy.

Wrong, wrong and wrong. Federal spending relies neither on taxes nor on borrowing. For today’s monetarily sovereign nations, federal spending neither is constrained nor facilitated by any form of income, either from taxes or borrowing. Federal spending is accommodated by the simple device of crediting bank accounts, which the government can do endlessly. If taxes and borrowing were reduced to $0, this would not affect by even one penny, the federal government’s ability to spend.

Further, “. . . borrowing from the productive parts of the private economy” implies that T-bill purchases somehow remove money from the private economy. In fact, T-bill purchases merely are an exchange of money within the private economy. When you buy a T-bill, your checking account at your local bank is debited and your savings account at the Federal Reserve Bank is credited. (Yes, by virtue of your T-bill purchase, you have a savings account at the Fed.)

No money is lost. It merely is moved from your checking to your savings account. Actually, money is gained, because when the T-bill matures, the money will be moved back to your checking account, plus interest.

The Journal editors also said, “Now the political and fiscal bills are coming due even as the U.S. and European economies are merely muddling along,” as a prelude to several references equating the U.S. with the EU. The editors do not know something so basic as the difference between monetarily sovereign nations and nations not monetarily sovereign. Without this knowledge, any understanding of economics is impossible.

The WSJ editors claim to favor lower taxes, less spending and lower deficits. At various times, the editors also have preached in favor of a stronger army, better schools, federal supervision of banks and other financial firms, better roads, defense of our borders, defense against terrorism, safer food, better retirement, better unemployment insurance, police, health care, rescue from hurricanes, oil spills and other disasters, more jobs, a better environment and a long list of other benefits. (One is reminded of the confused Tea Party platform).

The WSJ editors are like the person who says, I want to eat more, exercise less and lose weight. Let’s be clear. Under the current system, if you cut taxes you increase the deficit, unless you cut spending even more, which means you can’t have the stronger army, better roads et al. Of course, there is one solution, which the editors don’t even consider. If you eliminate borrowing, you can cut taxes without increasing the deficit. Without borrowing, there is no debt or deficit, and as we’ve shown many times previously, government spending does not require government income.

Finally, the WSJ editors said, “The Reagan and Clinton-Gingrich booms were fostered by a policy environment for most of that era of lower taxes, spending restraint and sound money.” Spending restraint?? Have the editors forgotten how Reagan began the largest debt growth in post WWII history, and how Clinton’s surplus introduced the 2001 recession?

I should commend the WSJ editors for one statement: “ . . . much of the U.S. stimulus went for transfer payments such as Medicaid and unemployment insurance . . . “ True, and a perfect reason why taxes ostensibly “for” Medicaid and unemployment insurance should be eliminated. Federal taxes do not pay for federal spending.

The balance of the editorial contained the usual fulmination about the size of the federal debt and deficits, with also, as usual, no facts showing how debt and deficits harm the economy. They end their editorial this way: “With the economy in recession in 2008 and 2009, we argued that some stimulus was justified and an increase in the deficit was understandable and inevitable.”

So, to summarize the WSJ position: Deficits were justified when times were bad; they are not justified when times are good. Today, times are bad and deficits are not justified.

Do you wonder why our politicians are confused?

Rodger Malcolm Mitchell

No nation can tax itself into prosperity

2 thoughts on “–What the Wall Street Journal editors want

  1. “Federal spending relies neither on taxes nor on borrowing. … If you eliminate borrowing, you can cut taxes without increasing the deficit.” You keep saying this, but you never explain. Are you suggesting that the Treasury Dept create dollars directly without Fed Reserve involvement?


    1. Nathan,

      Dollars were created before T-securities, else there would have been no dollars to buy them. The Federal Reserve was created in 1913, so yes, the Treasury Dept can and has created dollars without Federal Reserve involvement.

      What commonly is misnamed “debt,” really is just the net total of all federal dollars created. The process, in simple terms is:

      1. Treasury spends by crediting the bank accounts of its vendors. This creates dollars out of thin air.
      2. For dual entry accounting, Treasury simultaneously debits a column in its own balance sheet, and names this column “debt.” So far, no borrowing.
      3. Treasury creates T-securities from thin air, then sells these T-securities for dollars it previously had created. The new T-securities add to the debt, while the incoming dollars reduce the debt by exactly the same amount. No net effect on “debt.”

      As you can see from the above, borrowing (#3) is unnecessary, as it merely exchanges T-securities for dollars, both of which the Treasury creates in unlimited quantities from thin air.

      The problem is the ill-considered, semantically incorrect, but tragically misleading word “debt.” It is a pejorative word for a mere accounting of dollars created. See: Anthropomorphic Economics

      Warren Mosler gives an example something like this. Imagine you wish to encourage your child to behave. So you say, “Each day you are good, I will give you a slip of paper on which I have written, ‘Good.’ When you accumulate 5 ‘Good’ slips, you can trade them to me for one video game.”

      Is there ever a time when you would need to borrow some of those ‘Good’ slips of paper? Is there ever a time when you need to tax your child some of those slips of paper? Will you ever worry about your ability to create those “Good” papers? No, no and no.

      You have the unlimited ability to create “Good” papers without borrowing, without taxing and without concerns about “debt.”

      Does that clarify? If your next question is, “Why does the government borrow,” I will be glad to explain.

      Rodger Malcolm Mitchell


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