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. Austerity breeds austerity and leads to civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
Perhaps it is my perverse sense of humor that forces me repeatedly to ask debt-hawks the following question (which they never answer):
Read these two important equations in economics:
Gross Domestic Product = Federal Spending + Private Investment + Private Consumption + Net exports
Federal Deficits – Net Imports = Net Private Savings
Based on these equations, how do federal tax increases and/or spending cuts (aka deficit reduction) reduce unemployment or grow the economy?
The clear answer is, “They don’t.” But, consider the Committee for a Responsible Budget, whose president is Maya MacGuineas, and who continually demands the deficit reduction super committee to “go big” — i.e. cut $4 trillion, rather than “just” $1 trillion from the federal deficit.
Maya MacGuineas on “Debt Reduction Done Right”
November 17, 2011
Putting in place a deficit reduction plan to bring the debt back down to around 60 or 65 percent of GDP over a decade creates the opportunity to grow the economy in a number of ways that will not be achieved either through one-off stimulus measures or incremental spending cuts.
Those who understand Monetary Sovereignty are aware the debt/GDP fraction is meaningless. It measures nothing and provides zero information regarding the health of an economy. Go to http://en.wikipedia.org/wiki/List_of_sovereign_states_by_public_debt for a list of countries and their debt/GDP. See if you can see any pattern of economic health by debt/GDP.
Ms. MacGuineas begins her defense of debt reduction with a meaningless goal. But it gets better:
First, it would take off the table the risk of a fiscal crisis. I know that only a few years ago, comparing the U.S. to Greece seemed inflammatory and absurd. However, recent events – including the well-deserved downgrade and the paralysis of our political system – now show the possibility of a full-blown fiscal crisis to be not nearly as remote as we would have liked to believe. Only by charting a new fiscal course will we remove that risk.
Yes, comparing a Monetarily Sovereign U.S. with a monetarily non-sovereign Greece is inflammatory and absurd, almost as inflammatory and absurd as paying any attention whatsoever to S&P ratings. You remember S&P, don’t you? They are the ones who gave AAA ratings to worthless mortgage schemes and to monetarily non-sovereign France, while lowering the U.S. rating, and all the while, accepting money from the very companies they rate.
And to which “fiscal crisis” does Ms. MacGuineas refer? Does she mean the U.S. being unable to create enough of its own sovereign currency to pay its bills? Or does she mean the fiscal crisis caused by debt ceilings along with forced spending reductions and tax increases, i.e. deficit reduction?
Second, implementing fiscal reforms that are comprehensive in nature, rather than incremental, offers the opportunity to restructure our budget and tax systems in ways to promote growth. The key here is switching from a consumption-oriented to an investment-oriented budget.
Let’s parse this gobbledegook: “fiscal reforms” is her synonym for “cut the deficit” and “comprehensive” means “big.” So she is saying big deficit cuts are better than small budget cuts. Why? Because they “promote growth.” How? She never says.
Given those two undeniable equations in economics, deficit cuts simply cannot promote economic growth. But Ms. Macguineas and her group just know in their guts that deficits are bad, cutting them is good, and if its good, it must promote growth, and the more cuts, the more growth.
Anyway, she’s paid to believe that. Here are other comments she makes:
Our debt as a share of the economy is higher than it has ever been in the post-war period, and we are on track to continue adding to it forever.
I certainly hope so. If the economy is to grow forever, the money supply must grow forever, and if the government continues to be required by law, to create T-securities in the same amount as the deficit, the debt must grow forever.
By the end of the decade we could easily be paying interest payments of nearly a trillion dollars per year, which can be described as nothing other than a tremendous waste.
Or, more correctly, those interest payments can be described as a tremendous economic stimulus.
We know not only is the debt already probably a drag on the economy, but that at some point, unless changes are made, it will lead to a fiscal crisis.
“Probably,” Ms. Macguineas? “At some point?” Do I detect a bit of uncertainty there? Or just lack of evidence?
High debt levels harm the economy by diverting capital away from productive investments.
If federal debt is the legal result of federal deficits, which add to the money supply, how does this “divert capital away” from anything?
Higher interest payments in the budget squeeze out other priorities – whether they are other spending or lower taxes – and leave the budget highly vulnerable to increases in interest rates.
Only if there is a foolish debt ceiling, which Ms. Macguineas favors. Remove the debt ceiling and nothing gets squeezed out.
This inequity is exacerbated by the fact that the bulk of our government spending goes to consumption — much of it for the elderly — rather than investments, which would at least have the potential to boost longer-term growth.
And there you have the fundamental Tea Party, right wing mantra: Cut Social Security; cut Medicare; cut welfare, cut aid to the poor, cut all those benefits for “consumption,” i.e. payments to needy people.
To gain further understanding of what economic ignorance can produce, I recommend you read the full text of her paper, which you can find at http://www.riponsociety.org/forum114mm.htm
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
2 thoughts on “–How bleeding the economy grows it, and why sick, old and poor people are a drag”
Mr. Mitchell, I recently stumbled across your blog. If my perceptions are correct you subscribe to MMT? I applaud your articles. I realize tackling a blog on a regular basis must be a daunting commitment but it is greatly appreciated. I think your message is what Americans need to hear. You are a skilled communicator. I have sent several links to your articles to several of my friends recently. Please keep up your great effort and valuable contribution to making sense as opposed to the nonsensical pablum that we are fed by the Rupert Murdoch ilk medias.
I’m 95% with MMT. The other 5% (mostly having to do with inflation and interest rates), I merely argue with Warren Mosler and Randy Wray. 🙂
MMT and Monetary Sovereignty agree on the absolute facts of economics and disagree on a couple matters of opinion.
Rodger Malcolm Mitchell