Pumping gasoline into your car is good. Therefore pumping gasoline into your dog is good. And while you’re at it, toss a couple bones into your gas tankImage result for dog at gas station

This would be O.K. if your dog was identical to your car.

Unfortunately, the writer of an article in THE WEEK doesn’t seem to know the difference between a dog and a car, or more to the point, he doesn’t know the differences between federal finances and state finances.

Here are a few excerpts from his article, followed by my comments:

Trump has taken the GOP’s ‘Kansas experiment’ national — with predictable results
Conor Lynch, August 28, 2019

It did not take long after former Kansas governor Sam Brownback signed the state’s historic 2012 tax cuts — hailed at the time as “one of the largest income tax cuts in Kansas history” — into law for it to become apparent that critics of the so-called “Kansas experiment” had been correct, while proponents of the legislation had been spectacularly and unambiguously wrong.

Advocates had promised enormous growth and a plethora of new jobs, but over the next few years the Kansas experiment went exactly as critics had anticipated: economic growth lagged behind other states (and the national average), the state budget collapsed, and Kansas gained fewer jobs than its northern neighbor, Nebraska, which has about a million fewer people.

Within a year of the bill’s passage, state revenues plummeted by about 10 percent, creating a massive deficit that led lawmakers to cut spending in infrastructure, Medicaid, education, and other areas.

The Kansas government, and indeed the governments of all U.S. states, counties, and cities, are monetarily non-sovereign. That means, they do not have their own sovereign currencies with which they can pay their bills.

Instead, they use the sovereign currency of the Monetarily Sovereign, United States government: The U. S dollar.

And so, the states can, and often do, run short of dollars.

(Some local government units, and even businesses, have created sovereign currencies for limited use within a defined area, but in no case do they have broad acceptance.)

Because the U.S. government uniquely is Monetarily Sovereign, it has the unlimited ability to create U.S. dollars. It never, unintentionally, can run short of dollars.

Even if the federal government did not collect a single penny in taxes, it could continue spending — even spending dramatically increased amounts — forever.

You might ask, “If the federal government doesn’t need tax dollars, why does it bother to collect tax dollars?”

There are four* main reasons, and two of them may shock you:

1. To control the economy. The government taxes heavily those activities it wishes to discourage (alcohol, tobacco), and offers tax breaks for those activities it wishes to encourage (homeownership vs. renting, deductions for health care, charitable deductions, IRAs, etc.).

2. To increase demand for the U.S. dollar, by requiring that taxes and other debts to the government be paid in U.S. dollars. This is considered the primary reason by followers of Modern Monetary Theory (MMT).

3. To please rich political donors. By taxing all forms of income, while providing the rich with shelters from those taxes that the rest of us must pay, the federal government appeals to the Gap Psychology desires of the rich.

“Rich” is a comparative term. Someone owning $100 is rich if everyone else owns only $1, but someone owning $1 million is poor if everyone else owns $10 million.

The rich always want to be richer. To do so doesn’t require obtaining more money. Simply widening the gap between those below, makes them richer, by definition.

Gap Psychology is a description of the desire to be richer by distancing oneself from those below (on any measure), and by narrowing the gap with those above.

The federal tax laws are designed to appeal to the Gap Psychology of the rich. They are designed to make the rich, who run America, richer.

4. To hide the truth from you. If the government didn’t collect taxes, you would begin to understand that not only are federal taxes unnecessary, but more importantly, you would learn that federal spending is not dependent on federal income.

This means such benefits as Medicare and Social Security are not limited by so-called “trust funds,” and neither of these programs (or any other federal program) can run short of funds unless Congress and the President want it to run short.

Increased social spending would narrow the Gap between the rich and the rest of us, and so, in actuality, make the rich less rich. The is the last thing the rich, who run America, want.

The article continues:

The state’s public school system was shattered, its roads and bridges deteriorated as money from the “highway fund” was transferred to pay for growing budget shortfalls, and the state’s credit rating was downgraded, raising borrowing costs as debt piled up.

By 2017, the state’s Republican (and Democratic) lawmakers had no choice but to repeal many of the tax cuts after five years of fiscal and economic devastation, ultimately overriding Brownback’s veto of the repeal legislation.

Yes, that is exactly what happened and always will happen to any monetarily non-sovereign entity that loses income while increasing spending.

Like Kansas, you are monetarily non-sovereign, so if your income were cut (for instance, you lose your job) you very well might need to cut your spending.

This is not true of the Monetarily Sovereign federal government.

More from the article:

If what happened in Kansas from 2012 to 2017 was truly an experiment meant to prove or disprove certain theories about fiscal policy, then it was an unequivocal triumph for opponents of supply-side economics.

And if proponents were seriously interested in the truth, they would have at the very least begun to question the central claims that have guided Republican fiscal policy for the better part of the last 50 years.

For knowledgable and honest economists (who seem to be in scarce supply), Kansas was not an experiment to prove or disprove federal financing, any more than feeding gasoline to your car is an experiment to prove or disprove the effects of feeding gasoline to your dog.

This did not happen, of course, and just a few months after Kansas ended its disastrous “experiment,” Republicans in Washington started their own experiment, this time for the entire country.

Repeating the same talking points we heard five years earlier in the Sunflower State, Republicans cut federal income tax rates for the wealthy and slashed the corporate tax from 35 percent to 21 percent, all the while promising that it would spur massive growth that would make it essentially revenue neutral — “We can pay for these tax cuts with economic growth,” declared Treasury Secretary Steven Mnuchin.

This was completely contrary to reality, and analysts forecasted a drop in government revenue by around $1.5 trillion over the next 10 years. It was even questionable whether the tax cuts would really spur much growth.

As always, Munchin lied. We cannot “pay for these tax cuts with economic growth.”  Nothing pays for a cut. It’s a cut, not an expense.

Image result for bernanke

Ben Bernanke, former Fed Chairman: ” “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

And federal taxes, themselves, do not pay for anything. In fact, federal taxes are destroyed upon receipt.

State and local tax dollars are not destroyed. They are saved in public bank accounts, from which state and local bills are paid. At any moment in time, one can learn how much money his state has.

But it is not possible to learn how much money the federal government has, for the federal government has infinite money.

“The experiment in Kansas has important implications for federal tax reform,” wrote Brookings Institution’s William Gale before the GOP tax bill, “the first being not to expect tax cuts to boost the economy much, if at all.”

Actually, the tax cuts did boost “the economy,” somewhat. By the usual definition, “the economy”  is Gross Domestic Product (GDP).

Gross Domestic Product = Federal Spending + Non-federal Spending + Net Exports

Tax cuts, by leaving more money in consumers’ and business pockets, allow more for Non-federal spending.

The tax cuts took effect in 2018, when they caused a significant bump in GDP growth.

Subsequent events, i.e. Trump’s trade war, which effectively was a tax increase in 2018, erased the effects of the tax cuts.

The article continues:

Just like the Kansas experiment, it hasn’t taken long for critics of the “Trump experiment” to be vindicated.

Last week, the Congressional Budget Office said that the federal deficit is set to reach $960 billion in the fiscal year of 2019 and projected that it would average $1.2 trillion annually over the next 10 years.

That’s an increase of nearly $400 billion from Obama’s last year in office (and $300 billion from Trump’s first year).

This unprecedented growth of the deficit during a time of economic boom (when the deficit is typically expected to remain steady or even decline) is a direct consequence of the Republican tax cuts, along with a sharp increase in the wasteful and bloated defense budget.

The critics of the are “vindicated” only by their own false beliefs.

The increase in the federal deficit merely means that that the federal government is pumping more growth dollars into the economy. I challenge any economist to provide evidence that this is bad for the economy.

And by the way, so-called “wasteful,” federal spending (by however one defines “wasteful”) actually helps grow the economy by putting dollars into consumers’ pockets.

Trump has been riding high on the economy for the past two years, but his reckless policies, from tax cuts to his trade war with China, are starting to catch up to him, and as signs of a coming recession become more apparent, the president has become even more detached from reality.

The trade war is just one of many stupid and reckless policies by a stupid and reckless President and his party. These policies can lead to a recession or worse.

And while the tax cuts for the rich may be widening the Gap, they are helping to prevent the recession. Whether they will be sufficient is the question.

The Daily Beast reported earlier this month that sources who have spoken with the president about a possible recession since 2017 say that Trump thinks “recessions or booms are often self-fulfilling prophecies,” and believes that he can “will the economy in a positive direction by feeding optimism to the ‘American spirit.'”

It’s unclear if this is what he was trying to do on Friday, when he went on an unhinged (even by his standards) Twitter rant against China, ordering American companies to “immediately start looking for an alternative to China,” which predictably caused the stock market to plunge.

After the market closed, Trump announced that he was raising his 25 percent tariffs on $250 billion in Chinese goods to 30 percent, while increasing his planned tariffs on the $300 billion in remaining imports from 10 to 15 percent, ratcheting up the trade war.

Yes, Trump is an incompetent psychopath. That cannot be denied. And he has inflicted great damage on many Americans and on people all over the world.

But again, this has nothing to do with the failed Kansas experiment.

Continuing the article:

The chief financial economist at MUFG Union Bank, Chris Rupkey, recently told the Washington Post that Congress and the Federal Reserve would be unable to combat another recession in the near future because of the already low interest rates (which have been close to zero for almost a decade) and the ballooning deficit.

“Both sides are out of bullets. I’ve never seen a situation where there’s a recession cloud on the horizon but Washington is totally unprepared to deal with a downturn in the economy.”

There are “precious few working tools left at policymakers’ disposal,” says another financial analyst for Société Générale, Albert Edwards, who sees a global recession right around the corner.

Rupkey and Edwards are absolutely wrong. The Federal Reserve has the unlimited ability to pump growth dollars into the economy.

Image result for greenspan

Alan Greenspan, former Fed Chairman: “Central banks can issue currency, a non-interest-bearing claim on the government, effectively without limit. A government cannot become insolvent with respect to obligations in its own currency.”

Congress has the unlimited ability to pump growth dollars into the economy by passing spending laws.

A recession is when the economy declines significantly for at least six months. There’s a drop in the following five economic indicators: real gross domestic product, income, employment, manufacturing, and retail sales.

All recessions have at their core, a lack of real money in the economy, and all recessions can be cured by pumping real dollars into the economy.

Recessions (vertical gray bars) begin with reductions in federal money growth (red line) and are cured by increases in federal money growth.

*Earlier in this post, we listed four main reasons for federal taxes. There is a popular myth that federal taxes, by reducing deficit spending (aka “money creation), help prevent inflations.

This myth assumes deficit spending causes inflations, and those photos showing people using wheelbarrows to carry enough currency to buy bread, still linger in the public memory.

The false assumption is that money creation reduces money value, i.e inflation. Wrong. It was the inflation that caused the currency-printing, not the other way around.

Fact: Inflations are caused by shortages of food or energy (oil, gas, coal, etc.) Over the past 75 years, massive money creation by the federal government has coincided with moderate inflation.

While federal money creation (blue line) has grown significantly, inflation (red line) has been moderate

There is zero relationship between changes in federal money creation (blue line) and inflation (red line).

The article continues:

In Kansas, Republicans ultimately had to repeal their own policies and overrule their own governor’s veto; it is doubtful whether Republicans in Washington would be willing to stand up to Trump.

Yes, Kansas was doomed from the beginning. Economists could see that.Image result for trump hugging flag

And yes, Republicans, formerly the moral party of “law and order,” have lost their moral center and despite ostentatious flag hugging, they have abdicated any real concern for America.

They will not stand up to an obviously immoral, lying incompetent President.

The article continues:

Republicans started this war long before Trump’s unceremonious arrival.

Now the president seems to think he can not only “will the economy” in a positive direction but will reality to fit his fictional universe.

As the economy stumbles, however, it may all come crashing down on that vision.

On Sunday, at the G-7 gathering in France, Trump floated the idea of declaring a “national emergency” because of the trade war that he started with China; if a recession comes between now and the 2020 election, how the president will respond is anyone’s guess.

The President will respond in the usual way: By pointing his finger at the Fed, exporters, importers, China, Barack Obama, Hillary Clinton, Bill Clinton, the “FAKE media,” and some of his advisors.

He will accept no blame.

Finally, the article ends with a perfect description of Trump’s followers — the people cheering his speeches, while he takes, takes, takes from them the beautiful American democracy in which they thought they lived.

Republicans have been stubbornly denying reality for decades, and the more discredited their economic worldview becomes, the more committed they seem to become, demonstrating the great psychologist Leon Festinger’s claim that those who are presented with “unequivocal and undeniable evidence” that their beliefs are wrong will frequently emerge “not only unshaken, but even more convinced of the truth of their beliefs than ever before.”

Unlike the false thrust of Conor Lynch’s article, that Kansas’s financing is an example of federal financing, his very last paragraph is frighteningly true.

In summary, Monetarily Sovereign financing is nothing like monetarily non-sovereign financing, and those who use one as an example of another, have no understanding of economics.

Rodger Malcolm Mitchell
Monetary Sovereignty
Twitter: @rodgermitchell
Search #monetarysovereignty Facebook: Rodger Malcolm Mitchell

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The most important problems in economics involve the excessive income/wealth/power Gaps between the richer and the poorer.

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics.

Implementation of The Ten Steps To Prosperity can narrow the Gaps:

Ten Steps To Prosperity:

1. Eliminate FICA

2. Federally funded Medicare — parts a, b & d, plus long-term care — for everyone

3. Provide a monthly economic bonus to every man, woman and child in America (similar to social security for all)

4. Free education (including post-grad) for everyone

5. Salary for attending school

6. Eliminate federal taxes on business

7. Increase the standard income tax deduction, annually. 

8. Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.

9. Federal ownership of all banks

10. Increase federal spending on the myriad initiatives that benefit America’s 99.9% 

The Ten Steps will grow the economy, and narrow the income/wealth/power Gap between the rich and you.

MONETARY SOVEREIGNTY