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Economists enjoy talking to themselves. They especially enjoy “speaking in tongues,” debating social issues in such abstruse terms, the public neither understands nor cares.
Lately, they have debated Bernie Sanders, who clearly and simply has offered the best proposals of any Presidential candidate. According to his web site, here are but a few of the things Bernie would like to do:
–Create a progressive estate tax on the top 0.3 percent of Americans who inherit more than $3.5 million.
–Increase the federal minimum wage from $7.25 to $15 an hour by 2020.
—Invest $1 trillion over five years towards rebuilding our crumbling roads, bridges, railways, airports, public transit systems, ports, dams, wastewater plants, and other infrastructure needs.
–Make tuition free at public colleges and universities throughout America.
–Enact a Medicare for all single-payer healthcare system.
—Break up huge financial institutions so that they are no longer too big to fail.
–Tax carbon pollution, repeal fossil fuel subsidies and invest in energy efficiency and clean, sustainable energy such as wind and solar power.
–Create a Clean-Energy Workforce of 10 million good-paying jobs by creating a 100% clean energy system.
–Fight to overturn Citizens United.
–Dismantle inhumane deportation programs and detention centers.
–Pave the way for a swift and fair legislative roadmap to citizenship for the eleven million undocumented immigrants.
–Federally fund and require body cameras for law enforcement officers.
–Ban prisons for profit.
–Fully fund and expand the VA
These are good ideas, adult ideas. Some are part of the Ten Steps to Prosperity (below).
Go to Bernie’s web site, and compare his ideas with those of the other candidates. You’ll find no ridiculous “build-a-wall-and-make-Mexico-pay.” No nonsensical “global-warming-is-a-myth.” No destructive “cut-Social-Security-and-Medicare-to-balance-the-budget.”
Bernie’s ideas, taken in total, clearly are the best of any candidate.
Unfortunately, economists, like the public at large, don’t really like to think in those terms. They, also like the public at large, prefer to fixate on one narrow issue, and critique an entire plan based on that one issue.
In the case of the public, the one issue might be abortion, or gay marriage, or education or gender. In the case of the economists, there are two issues — affordability and inflation — which are not real issue.
Consider this article:
On February 17, Christina Romer and three other former Council of Economic Advisers (CEA) chairs joined in a letter in panning economist Gerald Friedman’s analysis of Bernie Sanders’ economic plan.
They ridiculed his findings and by implication Sanders’ economics.
Where Friedman found substantial positive impacts from the substantial initiatives in the plan, the four former chief economists to the president found fairy tales and flying puppies. In less than twenty-four hours there was pushback, from James K. Galbraith, among others.
Galbraith’s letter criticized the CEA chairs for using high position rather than reasoned examination, and excoriating their lesser-known colleague without foundation. Indeed, detail was conspicuously absent. Galbraith described the model used by Friedman was not out of line with what the CBO and CEA themselves employ and the results were consistent with historical precedent.
The economists are debating something that exists only in the hopeful imaginations of economists: An economic model.
A model is a mathematical “If/then” prediction. “If A happens, then Z will happen.” This works quite well in physics, less well in quantum mechanics, and hardly at all in a social science, i.e. economics.
The problem with social sciences is that they describe people, and people are so darn unpredictable, both individually and in groups. So an economic model becomes, “If 2.76A times 3.43B divided by 5.63C . . . cubed by 8.46V . . . plus 6.47X all happen in exactly the right sequence, then Z probably will happen.
But that is what economists like to argue about.
A few days later, Romer and her economist husband David Romer provided detail.
We had a chance to review the Friedman report, the Romers’ paper, and Friedman’s rebuttal. We found that the Romers’ basic critique is weak, and Friedman is correct in saying it is based on a brittle understanding of how the economy works.
Friedman’s model imagines a dynamic economy, the Romers a very static economy. The view that government investment and spending can expand the economy is explicit in Friedman’s view. The Romers suggest that things may get better while the spending is going on, but will contract to the previous state, or even below, once it’s over.
A non-economist might ask, “If everyone agrees that things get better when federal spending is going on, why stop federal spending?”
But no, economists don’t think that way. They want to fight about the details of “the model,” specific effects that absolutely are not predictable.
It’s like fighting about the exact amount of rain in Chicago on a day five years in the future.
The Romers appeal to a higher law, a “standard economics” as if it were a universally accepted and validated norm that Friedman does not understand.
They define error as deviation from this standard economics.
While it may be that the static equilibrium view they hold is the flavor of the moment in Academia, it is far from being universally accepted, nor has it always been the norm.
Friedman points out in his rebuttal that his is closer to the economics of Keynes. (The “standard economics’ of the moment comes under the title “New Keynesian,” but much like the program of Neoliberalism is not liberal as most use the term, nor are Neoclassical economists very close to Classicals, New Keynesians owe more to John Hicks and Paul Samuelson and early 20th century economists than they do to John Maynard Keynes.)
The article goes on and on in this vein, and actually is well written considering the subject matter — except for one not-so-small detail.
Michal Kalecki, a major economist in the middle of the 20th century once characterized another “standard” economics when he once observed:
“A solid majority of economists is now of the opinion that, even in a capitalist system, full employment may be secured by a government spending programme
. . . If the government undertakes public investment (e.g., builds schools, hospitals and highways) or subsidizes mass consumption (by family allowances, reduction of indirect taxation, or subsidies to keep down the prices of necessities), and if this expenditure is financed by borrowing and not by taxation … . . . the effective demand for goods and services may be increased up to a point where full employment is achieved.)
[from “Political Aspects of Full Employment”]
Another, more appropriate term for the Romers’ “standard” economics would be “failed,” since economists of this school universally failed to see the Great Financial Crisis coming, to understand it when it happened, and to effectively mitigate many of its impacts.
It failed Christina Romer herself, as we noted in our previous piece, when as CEA chair during the Obama stimulus period she predicted an immediate turnaround in employment, as the stimulus accelerated the natural return to equilibrium.
When the effects failed to materialize as she predicted, the policy of government spending as a corrective was discredited, at least in political circles, and so it remains to this day.
Did you see that line, ” . . . if this expenditure is financed by borrowing and not by taxation . . . “?
Readers of this blog know that federal spending NEVER is financed by borrowing or by taxing. The federal government, uniquely being Monetarily Sovereign, creates its own sovereign currency ad hoc, whenever it pays a bill.
So the fake “affordability” issue is raised, quoted and left undenied.
Then we come to the other issue, inflation, which IS properly denied:
The Federal Reserve – itself in the grip of another major fallacy of standard economics – is almost sure to squelch recovery once it begins for fear of inflation.
The Romers say “interest rates will rise.” But in fact, as they admit elsewhere, rates will rise not for any natural or market-driven reason, but because the Fed will raise them.
Informing, if that is the word, the Fed’s raising rates is the doctrine of NAIRU. NAIRU, the Non-Accelerating Inflation Rate of Unemployment, is a fallacy that contends that at some indistinct and moving rate of unemployment the inflation genie will get out of the bottle and run amok.
NAIRU survived both the stagflation of the 1970s and the high employment/low inflation of the 1990s and the era previous to 1963, and became a favorite of Alan Greenspan.
It is highly likely the Fed will act from its belief in NAIRU in the belief it is preventing a runaway inflation, and likely will abort any expansion by raising interest rates and inciting a slowdown.
Here, we see the economists version of this scenario: “Federal spending increases employment and causes inflation, which causes the Fed to raise interest rates, which causes recession.“
Yes, federal spending can increase employment. And yes, federal spending can increase inflation. And yes, the fed worries about inflation almost as much as it worries about deflation, so will likely raise interest rates at the mere hint of inflation.
BUT, raising interest rates does NOT slow the economy. In fact, if anything it can stimulate the economy by forcing the federal government to pay more interest into the economy.
I cannot do justice to Mr. Harvey’s excellent article or Bernie Sanders excellent proposals, so I recommend you visit both.
The sad bottom line to all of this is: Economists cannot see the forest because they are focused on a tree, and the public cannot see the tree because they are focused on a leaf, and virtually no one cares about facts.
Elections are decided on the “cut of his jib” basis, not on reality.
So Trump is “tough,” and Cruz is “mean,” and Kasich is “adult,” and Clinton is “untrustworthy” and Sanders is “crazy,” and that is how the people, in their profound and stubborn ignorance, will vote.
Meanwhile, the economists will babble incoherently about the number of angels who can dance on the head of a pin — or is it the point of a pin — while making wrong predictions based on wrong assumptions.
It was ever thus.
Rodger Malcolm Mitchell
Ten Steps to Prosperity:
1. Eliminate FICA (Click here)
2. Federally funded Medicare — parts A, B & D plus long term nursing care — for everyone (Click here)
3. Provide an Economic Bonus to every man, woman and child in America, and/or every state a per capita Economic Bonus. (Click here) Or institute a reverse income tax.
4. Free education (including post-grad) for everyone. Click here
5. Salary for attending school (Click here)
6. Eliminate corporate taxes (Click here)
7. Increase the standard income tax deduction annually Click here
8. Tax the very rich (.1%) more, with higher, progressive tax rates on all forms of income. (Click here)
9. Federal ownership of all banks (Click here and here)
10. Increase federal spending on the myriad initiatives that benefit America’s 99% (Click here)
The Ten Steps will grow the economy, and narrow the income/wealth/power Gap between the rich and you.
10 Steps to Economic Misery: (Click here:)
1. Maintain or increase the FICA tax..
2. Spread the myth Social Security, Medicare and the U.S. government are insolvent.
3. Cut federal employment in the military, post office, other federal agencies.
4. Broaden the income tax base so more lower income people will pay.
5. Cut financial assistance to the states.
6. Spread the myth federal taxes pay for federal spending.
7. Allow banks to trade for their own accounts; save them when their investments go sour.
8. Never prosecute any banker for criminal activity.
9. Nominate arch conservatives to the Supreme Court.
10. Reduce the federal deficit and debt
THE RECESSION CLOCK
Recessions begin an average of 2 years after the blue line first dips below zero. A common phenomenon is for the line briefly to dip below zero, then rise above zero, before falling dramatically below zero. There was a brief dip below zero in 2015, followed by another dip – the familiar pre-recession pattern.
Recessions are cured by a rising red line.
Vertical gray bars mark recessions.
As the federal deficit growth lines drop, we approach recession, which will be cured only when the growth lines rise. Increasing federal deficit growth (aka “stimulus”) is necessary for long-term economic growth.
•Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
•Any monetarily NON-sovereign government — be it city, county, state or nation — that runs an ongoing trade deficit, eventually will run out of money.
•The more federal budgets are cut and taxes increased, the weaker an economy becomes..
•No nation can tax itself into prosperity, nor grow without money growth.
•Cutting federal deficits to grow the economy is like applying leeches to cure anemia.
•A growing economy requires a growing supply of money (GDP = Federal Spending + Non-federal Spending + Net Exports)
•Deficit spending grows the supply of money
•The limit to federal deficit spending is an inflation that cannot be cured with interest rate control.
•The limit to non-federal deficit spending is the ability to borrow.
•Liberals think the purpose of government is to protect the poor and powerless from the rich and powerful. Conservatives think the purpose of government is to protect the rich and powerful from the poor and powerless.
•The single most important problem in economics is the Gap between rich and the rest..
•Austerity is the government’s method for widening the Gap between rich and poor.
•Until the 99% understand the need for federal deficits, the upper 1% will rule.
•Everything in economics devolves to motive, and the motive is the Gap between the rich and the rest..