Mitchell’s laws: Reduced money growth never stimulates economic growth. To survive long term, a monetarily non-sovereign government must have a positive balance of payments. Economic austerity causes civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
In economics, there is one Big Question we often neglect to ask, but instead we ask many, small and wrong questions, which is why we arrive at the wrong answers, this recession being one of the wrong answers.
Economics either is very complicated or very simple, depending on how you approach it. If you slip into economics’s many formulae, or argue the details of positive, normative, rational, behavioral, macro, micro or heterodox economics, you quickly may find yourself drowning in abstruse terminology and hypothetical argument, from which you never will emerge nor be seen again.
But economics can be simple if you look at the big picture which leads directly to the Big Question. The big picture in economics revolves around the fundamental purpose of economics, which I submit is to improve our lives.
Now you may believe economics has another purpose or purposes, and that’s all right. I won’t argue, so long as somewhere in your belief statement are the words, “improve our lives.” That’s what economics is really about. That’s why people devote their careers to economics. They wish to understand how to improve our lives.
But strangely, this often is forgotten, when people discuss economics. In our ongoing, historical effort to improve our lives, we have created our greatest invention: Government. All social animals have some sort of government, and as the most sophisticated social animal, we have created the most sophisticated governments, rife with labyrinthine and intertwining laws and interpretations of laws, and elaborate systems for interpretations of interpretations.
To guide our detailed, complex social structure we need such intricacy in our government, or at least, such intricacy is inevitable. For each problem we devise a solution, which we add to all the other solutions previously devised – solution upon solution upon solution, growing ever larger, until what millennia ago began as a few, small shrubs has evolved into a great, expanding jungle of giant trees, which no one could hope to understand in it entirety.
The economic jungle, this Government, has become so big it has acquired a life of its own, a living organism separate from those of us who created it. It demands that we support it and care for it, and that is where we have lost our direction. Remember, government was created to “improve our lives,” but because government has become so large and powerful, the purpose often is perverted to “improve the government’s life.”
Thus, we have invented such initiatives as federal debt reduction, federal spending reductions, firing of federal workers, taxes and austerity. Consider this October 4, 2011 article in the Huff Post:
Should the federal government concentrate on paying off its debt, even if it comes at the expense of a more robust economic recovery? Or should it focus on stimulating the economy, even if that means running up more costs?
According to a poll published Wednesday, 59 percent of Americans want the government to make national debt reduction its top priority, even if it comes at the expense of kick-starting the economy. Only a third think the focus should be on stimulation.
Talk about a perversion of purpose! We have become so confused by the complexities of government, we have forgotten why government exists at all. We have been led to believe caring for a tool we created and can modify in any way we choose, is more important than caring for ourselves. We have been led to believe we must sacrifice for the sake of the tool rather than re-making the tool to work for us.
The Big Question we repeatedly should ask is this: Does this improve our lives, now?
When someone tells you to pay more taxes, because the government needs taxes, ask, “Is my taking money out of my pocket and sending it to the government the best way to improve our lives, now?” Or should I change the government so it doesn’t need my taxes?
When someone says to cut Social Security, Medicare and Medicaid benefits, ask, “Does providing lower benefits to humans, while reducing government costs, improve our lives, now?” Or should I change the government so it can pay me these benefits?
Does firing federal human workers, so the government can pay less, improve our lives now? Does reduced federal purchases of goods and services, to save the government money, while hurting the human vendors of those goods and services, improve our lives, now? Or should I change the government so it can hire us and buy from us?
We are asked to sacrifice for the “greater good,” but is it for the greater good of human people or the greater good of the government? We own the government. We created it and we can change it. It is our lump of clay. We can make it taller or shorter, fatter or thinner. We can make it walk or run or jump or sit. It can create money, stop inflation, prevent recessions, facilitate education, eliminate poverty. It can do or be anything we want. Government is infinitely malleable. It is our creation.
When we are told to provide for this lump of clay, we should refuse. The lump of clay should be molded to provide for us. If government wants more taxes, change the government. If government wants to pay less benefits, change the government. If government wants to fire people, change the government.
The right wing wants smaller government. They want us to be forced to be self-sufficient, to do with a weaker, less effective tool. Exactly wrong. Self sufficiency is not a goal; it is one means to a goal, and a terrible means it is. We created government specifically so we would not have to be self sufficient. We created government to improve our lives. We created it and we can modify it, not be enslaved by it.
Yes, the Big Question we must ask is, “DOES THIS IMPROVE OUR LIVES, NOW?” not later, not eventually, not someday, but now. Life is short and death is forever. We cannot wait for a distant, unknowable, unpredictable future. We cannot wait for politicians’ promises or guarantees. They know nothing. Ask the question, “Does this improve our lives, now?”
Rodger Malcolm Mitchell
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. The key equation in economics: Federal Deficits – Net Imports = Net Private Savings
42 thoughts on “–The one Big Question in economics: We continually ask the wrong questions so we get the wrong answers”
Thanks, Rodger, for the Big Picture. One minor suggestion. At the beginning, perhaps include that Government was also invented to “improve our lives”. You refer to it later when you say “Remember, government was created…” in the seventh paragraph, but there is no antecedent to remember.
Otherwise, an excellent essay.
How will cuts in federal spending improve our lives? The man is a dangerous fool.
Rodger Malcolm Mitchell
Thank you for your article Rodger.
“How will cuts in federal spending improve our lives? The man is a dangerous fool.”
Who will benefit? There must be someone making money out of spending cuts?
Because the voters believe federal spending cuts are necessary, politicians who espouse that philosophy benefit by being elected. Otherwise, I don’t know whose pockets are filled by federal spending cuts.
There are individual circumstances one could point to. For instance, making Social Security benefits begin later could force some people to delay their retirements, thereby forcing them to accept lower wages for the privilege of working, which could benefit employers.
But overall, spending cuts reduce the money supply, which over time hurts everyone.
Rodger Malcolm Mitchell
the privatized prison complex need prisoners, what better way to improve bussiness than make people desperate enough to turn to crime. the military industrial complex needs fresh young men and women to go to war, what better way to make someone enlist when there is no where else to go? “war is a racket” smedley butler. oh yeah, the whole health care debacle is a racket as well, college tuition is also a racket. what is the term? debt peonage?
This essay does not address the need to cut so many dumb programs that simply throw money at problems with no real fix. That amounts to trillions. And the spending of those trillions has not improved our lives at all.
There is a solution in between the extremes of cutting government and pumping endless dollars into the economy.
I do enjoy reading your essays.
Jeff, your comment is about wasteful spending, which ironically is beneficial to the economy. All those “dumb programs” employ people, who spend money, which goes to other people, and on and on.
You are right that well-spent money is immediately more productive than ill-spent money, but all federal spending benefits the economy as the dollars fly from hand to hand.
Similarly, all federal spending cuts hurt the economy by removing money from the economy.
Rodger Malcolm Mitchell
If well-spent money is better, then why not cut the ill-spent money and make an equal reduction in taxes. Or do you believe that bad government spending is still better than private spending?
Likewise, if government employees are working on “dumb” programs, would they not contribute more to society and to our well-being NOW if they were working in the private sector instead?
And about the “NOW” part. Do you not acknowledge that there are things we could do to make it better for ourselves now, but that would make it worse later? Maybe much worse? Like, for instance, encouraging banks to make NINJA loans and liars’ loans? That housing bubble sure was fun, until it popped.
Rodger, Not all government spending helps the economy or as you said it, improve our lives. We have to demand responsible government, if that means getting rid of the 100s of dumb agencies and laying of 1000s of federal workers so be it. We have to first start clean before we can fully implement Monetary Sovereignty. Not in its current state.
Here’s a link that shows what our government has done in the last 30 years. You are right, it is time to change the government as it is not improving our lives. Please take some time to read this post, you may not agree with his comparison of Greece to the US (nor do I), but the problems he listed is dead on.
Some excerpts from it:
“Not all government spending helps the economy . . . “
All domestic spending does.
The writer is referring to inflation, which is not caused by federal spending. See: https://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/
The Fed has an inflation target of 2%-3%. That’s why we have inflation.
Rodger Malcolm Mitchell
Thanks for this post. Excellent, excellent!! If only your message could get through to those 59% of brainwashed fools. I scream it to high heavens every day. My friends and co-workers think I’ve gone over the deep end. Every once in a while the light goes on in one of their brains and they get it. It’s quite satisfying when it happens. Again, thanks for helping me get it.
The public wants to decrease the deficit because they think their children and grandchildren will get stuck paying the tab and have a lower quality of life.
Never mind that the debt was even higher after WW2 and the children(baby boomers) and grandchildren(genX) were the most prosperous generations in our history. Facts don’t matter anymore and people create their own realities. Debt = bad and they are quite convinced they are right.
These are scary times and I can certainly see now how the great depression came about. We are our own worst enemy.
The WWII debt was inflated away, and that is the only way it could be reduced then, or now. Whether it was right to do it is another story. According to MMT, the size of the debt no longer matters, in a fiat regime.
There is a real problem with the intergenerational thing, though. It’s not that the government can’t create enough money to pay off the baby boomers. The fact is that they must be paid from the current production in the year they receive the money, not from any money that exists today, or can be put into any “trust fund”. We can’t avoid that.
The problem is that, based on assumptions about growth and inflation and longevity and population, in the future there will be more retirees and fewer workers, and a larger and larger portion of our children’s and grandchildren’s labor will be required each year to pay the promised benefits, if we leave the system “as is”. They say that in some future year the 15% tax will equal only ¾ of the required benefits. That means about 20% of our children’s and grandchildren’s labor will go to pay the retirees. Another 15% or so will be needed for the rest of government, if government doesn’t grow between now and then. If we become like Europe, where government today, before the crunch, is 40% of the economy rather than 20%, then the total burden could be 55%.
It doesn’t matter if this is financed by deficits or by taxes. It is a share of the real GDP, no matter how you do the accounting.
Can they afford it? Will they stand for it?
Seems to me the only way to afford it, without changing the rules (raise the retirement age, or means-test the benefit, for instance) is to increase the growth rate of the economy, and the straightforward way to do that is to import more workers. Productivity growth alone can’t do it, and we’re not fertile enough by ourselves.
Sorry, John, but the ideas you quote relate to monetary non-sovereignty, and do not describe today’s Monetarily Sovereign America.
” . . . WWII debt was inflated away . . . “
It is impossible for federal debt to be “inflated away.” Debt is paid with dollars, regardless of their value. If the government owes $1,000 it merely credits the creditors checking account for $1,000. Inflation is irrelevant to that procedure.
” . . . must be paid from the current production . . . “
The federal government pays benefits by crediting checking accounts. This process has zero relationship to production or GDP.
“. . .the only way to afford it, without changing the rules (raise the retirement age, or means-test the benefit, for instance) is to increase the growth rate of the economy . . . “
Simply wrong. The federal government can “afford” anything. It pays all bills by crediting bank accounts. John, you claim to have read Monetary Sovereignty, but I see no evidence of comprehension. Everything you say applies to the pre-1971 monetary non-sovereignty beliefs of the debt hawks.
Rodger Malcolm Mitchell
The WWII debt was paid with dollars, but dollars worth less than the ones borrowed. (More accurately, it was rolled over, not paid off.) And it went away only in relation to the size of the economy, also measured in inflated dollars. Except for very short and infrequent times, most recently in the late 1990’s, the debt has increased monotonically in nominal terms. It “went away” as a fraction of GDP only because it grew more slowly than the economy grew and the dollar depreciated.
All that occurred before 1971, when we became monetarily sovereign. It is the appropriate analysis for the time, although it works today as well, because it has nothing to do with monetary sovereignty. MMT advocates continuous deficits, and growing debt, just as we have practiced since WWII and before. The only realistic way to permanently reduce debt as a portion of GDP today is the same way as in 1950, to grow it slower than the economy and inflation. (You’ll notice I didn’t say that would be a good idea.) Without deficits and growing debt, the economy does not grow, says MMT, and we are doomed.
As for Social Security, I refer you to L. Randall Wray, who says what I said: benefits in 2050 must be paid from GDP in 2050, and it is affordable without tax hikes or benefit cuts only by increased growth:
Fortunately, he thinks the growth estimates are too low and the problem as envisioned will not occur.
Yes, the government can “afford” anything, because it can create money out of thin air, but that money gives seniors a claim on production, which is the production in 2050. We cannot produce it today and save it until 2050. If growth is low, there will not be enough production to both pay the promised SS benefits and maintain the workers’ standard of living. It is the workers who will have the affordability problem, not the government.
P.S. Prof. Wray believes in MMT, too.
Charles, one day those same friends will tell you they knew it all the time, and you misunderstood their comments.
Rodger Malcolm Mitchell
I just came across this http://inflationdata.com/inflation/Inflation/AnnualInflation.asp
If you read down to the current commentary section and read the quantitative easing part the author is saying we are heading for an inflationary recession. I am hoping you can show me how this guy is wrong. If it is not too much to ask.
“Based on that we can estimate that inflation from QE1 will run through July of 2012 and then possibly slack off until around December 2012 and then pick up again through August 2013. By that time we could possibly be seeing inflation in the 10-12% range.
Inflation rates above 5% begin to cripple the economy as we saw with the last Oil spike. So as the low monthly numbers continue to drop out of the equation over the next four months we could see a significant spike in the inflation rate and possibly another round of recession. And an inflationary recession can not be fixed by printing more money. The only cure is fiscal responsibility and that takes time and a government that is willing to act responsibly- which is sorely lacking these days. “
That author is a chartist. They believe repeating price patterns help foretell the future, which usually is correct only in the rear-view mirror. Notice how his “6-year inflation up trend” ends suddenly and unexpectedly, with the biggest rate dive in recent history.
Inflation does not seem to have been related to money supply, but rather to oil prices. See: https://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/
Additionally, the author attempts to correlate inflation with QE1 and QE2, neither of which added many dollars to the economy, nor had much effect at all.
So in answer to your question: Inflation depends on oil prices, and I doubt whether the recession will allow oil prices to rise. If they do, the Fed will raise interest rates to increase the value of the dollar.
The author’s prediction of 12% inflation seems outlandish, barring an unforeseen oil disaster.
Rodger Malcolm Mitchell
Monetarists have always found a lag between money growth and price rises. That would be their explanation for why high inflation from QE1 and 2 has not kicked in yet.
The lag from 2008 is getting to be quite longer than they have found in previous cases, though.
In your data, do you see a consistent lag between the oil price and CPI? Is the CPI peaking now, corresponding to the oil peak in April-May? There seems to have been a lag of just a few months between the oil low around Jan 2009 and the CPI low around June 2009.
Thanks for the response sir.
I see no such lag.
Rodger Malcolm Mitchell
Nor a close correlation, except in the middle part of the graph. Kind of hard to make sense of it, with the different scales and different zero points, but the lines converge in the ’60s, and diverge starting in the ’90.s. To me, that suggests some sort of more secular change in the use of various forms of energy, not just oil. I like graphs where the meaning is clear and immediately obvious.
I expect CPIENGSL lags the oil spot market by a few months, too, to the extent that oil influences energy prices in general, as the change works its way through the supply chain.
Check again. Look at peaks and troughs. They match up almost perfectly. Try it. List the dates of oil price peaks; then list the dates of CPI peaks. Do the same with troughs.
Rodger Malcolm Mitchell
Yes, the peaks and troughs match up, but from, say, just after the 1990 recession to just before the 2000 recession, CPIENGSL went from 0 to 20, with wild swings in between, and CPIAUCSL went from about 3 to about 3, with much smaller variation.
Correllation of the dates of peaks and troughs could just be correlation of both measures to the general path of the economy.
Contrast the divergences of 1990-2000 to the virtually overlapping lines of 1973-1983, when both had wild swings in perfect coordination. If 20% CPIENGLS caused 20% CPIAUCSL in 1973 and 1979, then why not in 1998, 2002, 2006, and 2008?
And oil peaked in April this year, CPI is still rising today.
Rodger, do you have a link to the huff post article?
Thanks Rodger. But the poll there is from July. I wonder what sentiment is today? It may be that most people don’t care about the national debt, but you wouldn’t know it from media and politicians.
John, you never will find perfect correlations in economics. Clearly, other factors influence inflation, but so far as I can see, oil prices have been the most important factor. Do you know of graphs showing other factors with a better correlation?
No, I can’t point you to any graphs today, but I recall being very convinced by graphs presented by Milton Friedman, maybe 30 or so years ago. The CPI line moved perfectly in tandem with Msomething, lagged by 18 months. Could have been data from before 1971, and probably before the 1979 oil price shocks and embargo. I want to think maybe the point of it was that inflation continued to accelerate even after Nixon instituted wage and price controls — 1973?
Perhaps 30 years from now, you’ll recall being convinced by more up-to-date graphs presented by Rodger Malcolm Mitchell.
What about this year? Oil peaked in April, and maybe just now has bottommed out, but inflation continued to accelerate through the summer as oil prices (and other commodities, too) fell. Whether it’s oil or M3 or whatever, doesn’t it take time from cause to effect?
Randy Wray is one of the leading voices in MMT. I’ve not had time to see the paper you referenced (been traveling), but if Randy said that 2050 benefits must be paid from GDP in 2050, I’ll have to have a serious talk with him. If he was referring to Social Security and Medicare benefits, these are paid by the government, and not by private industry. Yes, government spending is part of GDP, but I think it is somewhat misleading to say that GDP pays benefits.
Rodger Malcolm Mitchell
Here’s a short quote from the paper in the link above:
What really matters is whether the economy will be able to produce a sufficient quantity of real goods and services to provide for both workers and dependents in, say, the year 2035. If it cannot, then regardless of Social Security’s finances, the real living standards of Americans in 2035 will have to be lower than they are today.
He used 2035 as an example rather than 2050, but it applies to any year, past or future. I may have used the term “GDP” misleadingly. Perhaps ”production” would be better. The real point is that you can have any number of bits in your bank account, but if there is not something to buy you don’t have any real “benefits”.
There are no dates on his papers, but I would hope that if he had changed his mind about something he wrote a long time ago, he might remove it from his web site.
Roger — I couldn’t believe Randy Wray would say such a thing, either. So I went and scanned the article. It must have been written in his pre-MMT days. The most recent citation in his bibliography is a magazine article from January, 2000. And he does say that when Social Security goes into deficit there will have to be a way found to “pay for it”!?! He was seriously out of paradigm at the time. When did you first develop Monetary Sovereignty and Warren and others first develop MMT?
The predecessor to FREE MONEY was THE ULTIMATE AMERICA, which was finished in 1995. I began writing it in about 1993, so that marks my beginning flirtation with Monetary Sovereignty, though I didn’t call it that, then.
I don’t know when Randy and Warren began, but I’m sure it was well before. I met Randy in 2005, and by then he was well into MMT.
No one is born with the knowledge. Each of us has learned. There are things in FREE MONEY that I would say differently, today.
Rodger Malcolm Mitchell
I don’t see where Wray says “when Social Security goes into deficit there will have to be a way found to “pay for it””
He does discuss different ways of funding pension plans, contrasting private plans with those run by a monetarily sovereign government. In the section where he discusses how the government might run a “paygo” type plan, he says
“If necessary, the government can raise tax rates OR CAN DEFICIT-SPEND (emphasis added) to ensure that it meets its Social Security obligations–things that private firms cannot do. Hence, while government cannot really build up a trust fund, it also does not need to do so.”
As you can see, “paying for it” by raising taxes is only one option. Deficit spending is another. He puts no limitations on the deficit. And he doesn’t even say it must be a “paygo” plan. That was his example of an alternative to the “advance funded” plan created by the 1983 reforms.
Anyway, the original idea in Snodog’s post was
“The public wants to decrease the deficit because they think their children and grandchildren will get stuck paying the tab and have a lower quality of life”
“There is a real problem with the intergenerational thing”
The problem is not that future generations will have to pay off today’s deficits. It is that Social Security does today, and will in 2035 transfer real output from workers to retirees. In 2035 it will transfer more real output than it does today, because there will be more retirees. If economic growth between now and then is not sufficient, that WILL put more of a burden on the workers of 2035, reducing their standard of living. The size of the burden does not depend on whether we tax today (or later) or not, whether we pay benefits then by deficit spending or not, or whether we have a “trust fund” or not. It is the output of workers in 2035 that has to be sufficient.
The irony is that lower deficits today will reduce our chances of having sufficient output in 2035.
One of the factors causing unemployment today is increased productivity. Fewer workers are needed to produce more. I suspect that trend will continue, which if true, means the workers of 2035 will have no difficulty producing the goods wanted by the retired people.
I can imagine that 100 years from now, the average work week might be 1 hour, with machines doing virtually all the labor — including thinking labor.
Intergenerational transfer may be a straw man.
Rodger Malcolm Mitchell
Actually, Wray had a different solution. And a different analysis of the problem, which may be the more important aspect.
The measure of the burden on the working population is the total size of the non-working population, not just the size of the retired population. People have to support their minor children as well as their retired grandparents, and in 2035 while the retired grandparent population will be much larger than today, the minor child population will be much smaller, and the total burden on GenY and those following will be smaller than the burden on baby boomers. Assuming (of course, this is economics, right?) that fertility trends continue.
But the other solution is simply average growth of the economy. The “doom and gloom” scenarios are based on (perhaps unrealistically) low assumptions of growth. Using average postwar growth rates, Social Security will not pay out more than it taxes in 2035, or ever.
Ironically, one of the best ways to help Social Security survive is to cut the payroll tax today, enough to get growth back on track, so that in 2035 the economy will produce enough to support everyone, working or not, at the current standard of living (or better).
Increased productivity causes unemployment? If that is the case, maybe the increasingly productive workers of the future will be able to support their retired parents, but will they also be able to support their unemployed classmates at the same time?
If what you say is true, then the additional production caused by increased productivity will be just exactly enough to support the additional unemployed, and nothing will be left over for the retired people.
But instead, maybe increased productivity causes economic growth and a rising standard of living for the economy as a whole. That seems to be our experience since ancient times, from stone age to iron age to industrial revolution and beyond. Is there something in MMT that says that relationship ended in 1971?
Well, no, there isn’t. Warren Mosler says there is always more work to do than people and time to do it. Increased productivity simply frees people up to do work that was left undone before, because there was not time to do it all.
Rodger — We all continue to learn and adjust to better evidence and ideas. Thanks for all yours.
Roger, you say that government spending, even wasteful spending, is beneficial to the economy, since it gets money into the hands of the public. Happily, you then amended this to mean all DOMESTIC spending, since spending on war brings little benefit to society. It brings money to weapons makers, but most of that money is used to develop ever-more-expensive weapons. Of course, spending should be responsible.
But no matter what, government spending is only helpful if we have public (State) monetary sovereignty. When the money supply and central bank are under private monopolistic control (i.e. creditor sovereignty) then government spending means more DEBT, since we must borrow our currency from the private banksters.
Yes, this is self-evident, but nonetheless I think you should change your banner from “monetary sovereignty” to “PUBLIC monetary sovereignty.”