–French lobster leaders debate best way to pull their economy down

Mitchell’s laws: The more budgets are cut and taxes inceased, the weaker an economy becomes. To survive long term, a monetarily non-sovereign government must have a positive balance of payments. Austerity = poverty and leads to civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.

The following WSJ article brings to mind the old saw about why lobsters never can get out of a pail. As soon as one starts to climb up, the others pull it down.

Wall Street Journal, February 29, 2012
French Front-Runner Pledges 75% Tax Bracket
By Gabrielle Parussini

PARIS—French presidential front-runner François Hollande said taxpayers earning over €1 million ($1.35 million) a year would be subjected to a special 75% tax bracket should he be elected, underscoring heightened interest across Europe in raising taxes on the wealthiest individuals.

“It’s a message of social cohesion….It’s a matter of patriotism,” he told journalists on his way in to Paris’s annual agriculture fair.”

Across Europe, the idea of raising taxes on high-income earners began to burgeon three years ago, when the Continent started to descend into recession. In 2009, the U.K. government increased its top marginal income-tax rate to 50% from 40%. In the U.S., the top 1% of earners have been the target of widespread protests under the umbrella of the Occupy Wall Street movement.

Mr. Sarkozy’s government has already slapped a 3% temporary levy on high revenue to be applied to those with a taxable income exceeding €500,000 a year.

Revenue disparity, which has been on the rise in most industrialized economies since the 1980s, has remained relatively contained in France, according to an Organization for Economic Cooperation and Development study published in December. The top 1% taxpayers in France earn less than half the average earned by the top 1% in the U.S.

The Monetarily Sovereign U.S. destroys tax money upon receipt. The monetarily non-sovereign France spends tax money. French tax money flows through the government’s hands, back out into the economy.

While the U.S. government is a creator and destroyer of its sovereign currency, the dollar, the French government is only a conduit for its non-sovereign currency, the euro. Few people, including most economists, politicians and media writers understand this difference.

Hypothetically, raising the tax rate on the rich could be an effective way for a monetarily non-sovereign government to close the gap between the 1% and the 99%. (A Monetarily Sovereign goverenment could do it simply by giving money to the 99%.)

However, to the degree French debt is owned by outsiders, debt service reduces the nation’s total money supply, negatively affecting GDP growth. France cannot overcome this the way the U.S. does – by creating money ad hoc as it pays its bills.

When any government takes from its citizens to pay foreign debt, those taxes temporarily mask a serious problem: Domestic money loss. The government can appear to be prudent, while its economy suffers austerity.

Seemingly, this is what the EU leaders want: Support the public sector at the expense of the private sector. That is why they urge the PIIGS to reduce government debt by increasing private debt (i.e. raising taxes), while offering to lend more euros to the “offending” nations.

The combination of more taxes and more outside borrowing, leads to recessions, while giving the false appearance of a government being financially wise. Whether the euro nations’ leaders want this consciously – these leaders are, after all, creatures of the public sector – or do it out of ignorance, the effect is the same: Deeper and deeper recession, with the reason hidden, thus preventing positive efforts to cure the recession (“We already are doing everything we can.”)

If France is to remain monetarily non-sovereign (a terrible, but likely, path), it never should borrow from outsiders. If 100% of France’s debt were domestic, all tax increases to support debt service, merely would recirculate euros within France, thus delaying the inevitable bankruptcy all monetarly non-sovereign governments face, if their balance of payments is negative.

Of course, the above begs the question: Is it economically wise or morally fair to take away 75% of anyone’s marginal income? The rich are not stupid, you know.

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. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports


8 thoughts on “–French lobster leaders debate best way to pull their economy down

  1. Rodger, so long as the government increases spending by the same the Amount that it increases taxes, and leaves the size of the debt payments where they are, then the additional taxes just represent a redistribution rather than a money loss, right?

    So the question is whether that kind of redistribution would be publicly useful for France right now. I guess that really depends on the nature of the additional spending. If the new tax-and-spend mainly draws down saving to increase both consumption and capital development, it could be a good thing.

    But the European situation is tragic because Europeans have turned over their currency sovereignty to EU and ECB technocrats and have no effective democratic channel for deploying their monetary power for fiscal expansion. All they can do is adjust tax-and-spend levels domestically, without expanding the creation of net financial assets.


  2. Dan, the answer to your question is, Yes — if the additional spending all is domestic. However, any of the additional spending that pays foreign creditors is not a redistribution.

    Re. your 2nd paragraph, money in savings accounts doesn’t really stop. It is part of reserves, against which banks lend. Yes, banks also can get reserves from the government, but paying interest to the government reduces the money supply. So savings account money does benefit the economy.

    Overall however, you have the picture. Perhaps you should run for President.

    Rodger Malcolm Mitchell


    1. Rodger, I don’t think I am convinced by the standard picture of the channeling of private sector savings is channeled into investment. What percentage of non-consumed income ends of as capital expenditure? There is always a certain amount of net income in our society that is not spent, either on consumption or capital development.

      Suppose Lydia the potter receives an inheritance from her uncle the lumber baron: she receives a certain quantity Q of finished lumber. She decides decide to burn up 1/3rd of the lumber in an enjoyable bonfire, use 1/3rd of it to build a new pottery barn for her business and put 1/3rd in storage for future use. Her consumption of the lumber income is Q/3, investment is Q/3 and net saving is Q/3.

      Suppose she received a commensurate quantity of money from her uncle instead of lumber, and she used the money to buy some lumber for a bonfire, some lumber for a pottery barn, and put the rest of her money in her safe. The consumption, saving and investment rates are the same.

      People don’t put their money into safes as much anymore. And we are now taught from childhood that our savings become the investment financing of others. But some savings is just collecting interest from the government as bank reserves, or is used to purchase government securities which provide interest in another form.

      Yes, banks have to pay interest to borrow reserves from the government. But they have to pay interest on the reserves they get from the public as well. Most of those savings are deposited in interest-bearing accounts. And I don’t know if paying interest to the government decreases the money supply, since the interest payments occur in a later period than the borrowing, and in that later period more reserves are being borrowed. So one needs to see some data on total borrowing from the government vs. total interest payments to see if the trend extended over time represents a net injection of reserves. I suspect it does.


    1. When I was a kid, my boss had a favorite expression: “Bullsh*t baffles brains.” I think he could have been talking about the balanced budged multiplier, which if it ever existed in reality, required some very specific criteria.

      My reading of Billy Mitchell is that he is quite brilliant — far more brilliant than me — at making the simple, complicated.

      Rodger Malcolm Mitchell


  3. Dan, add time to your calculations. Any savings that are “just collecting interest from the government,” are in fact, growing the money supply. That is stimulative. If you buy a $1000 T-bill with your savings, you effectively create $2 (if rates are .2%) to stimulate the economy.

    By the way, the above is one reason I disagree with MMT’s belief the “natural rate of interest is 0%.”

    The only reason a T-security exists, under current law, is that it was created to match the deficit, which originally pumped money into the economy. Deficit spending = T-securities.

    As for banks paying interest to the government, yes that interest reduces the money supply, as the government destroys all dollars it receives from any source.


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