N. Gregory Mankiw is a well-known (in the economics community) professor of economics at prestigious Harvard University.
So it is both remarkable and saddening that he seems to have no understanding of the economic reality that is Monetarily Sovereignty.
He wrote an opinion piece that was accepted for publication by the prestigious New York Times, an acceptance that in itself also is remarkable and saddening.
Here are excerpts from Professor Mankiw’s article, together with my comments:
Can America Afford to Become a Major Social Welfare State? Guest Essay, Sept. 15, 2021,
By N. Gregory Mankiw
In the reconciliation package now being debated in Washington, President Biden and many congressional Democrats aim to expand the size and scope of government substantially.
Americans should be wary of their plans — not only because of the sizable budgetary cost but also because of the broader risks to economic prosperity.
The details of the ambitious $3.5 trillion social spending bill are still being discussed, so it is unclear what it will end up including.
In many ways, it seems like a grab bag of initiatives assembled from the progressive wish list.
Mankiw’s use of such trigger phrases as, “Welfare State,” “expand . . . government substantially,” “sizable . . . cost,” “risks to economic prosperity,” “grab bag,” and “wish list,” all tell us about his anti-deficit spending proclivity.
Apparently, he subscribes to the false notion that federal debt is harmful, and should be reduced.
Unfortunately, that is not the only false notion to which he subscribes:
People of all ages are in line to get something: government-funded pre-K for 3- and 4-year-olds, expanded child credits for families with children, two years of tuition-free community college, increased Pell grants for other college students, enhanced health insurance subsidies, paid family and medical leave, and expansions in Medicare for older Americans.
And why are these wonderful benefits supposedly bad things? Read on:
If there is a common theme, it is that when you need a helping hand, the government will be there for you. It aims to assist people who are struggling in our rough-and-tumble market economy.
On its face, that instinct doesn’t sound bad.
It doesn’t sound bad to me, either. But for an economics professor who seemingly doesn’t understand Monetary Sovereignty, good often is bad, primarily because good doesn’t make the poor suffer enough.
Many Western European nations have more generous social safety nets than the United States. The Biden plan takes a big step in that direction.
Can the United States afford to embrace a larger welfare state? From a narrow budgetary standpoint, the answer is yes.
Yes, the Monetarily Sovereign, U.S. government easily can afford everything mentioned, and much more. So, again, what’s the problem?
But the policy also raises larger questions about American values and aspirations, and about what kind of nation we want to be.
The Biden administration has promised to pay for the entire plan with higher taxes on corporations and the very wealthy. But there’s good reason to doubt that claim.
The “values and aspirations” phrase has to do with the Puritanical belief (by the “haves”) that the “have-nots” should be made to suffer and labor in order to receive assistance.
(Of course, that does not apply to the born-rich or the got-rich-by-pure-luck recipients of excessive monetary largess.)
Biden’s claim that he will “pay for” the plan with taxes, simply is a lie. Because the federal government is Monetarily Sovereign, federal taxes do not fund federal spending. Period.
Even if all federal tax collections were $0, the federal government could continue spending, forever.
(This is different for state/local/euro governments which are monetarily non-sovereign):
Alan Greenspan: “A government cannot become insolvent with respect to obligations in its own currency.”
Ben Bernanke: “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.”
Budget experts, such as Maya MacGuineas, president of the Committee for a Responsible Federal Budget, are skeptical that the government can raise enough tax revenue from the wealthy to finance Mr. Biden’s ambitious agenda.
The fact that Mankiw considers MacGuineas to be a “budget expert” falls somewhere between laughable and shocking.
She is a paid shill for the rich, “debt-is-a-ticking-time-bomb” fakers, who neither understand nor want you to understand, the substantial differences between federal finances and personal finances.
The United States could do what Western Europe does — impose higher taxes on everyone.
Most countries use value-added tax, a form of a national sales tax, to raise a lot of revenue efficiently.
If Americans really want larger government, we will have to pay for it, and a VAT could be the best way.
Here, Mankiw demonstrates his own misunderstanding of the differences between Monetary Sovereignty and monetary non-sovereignty.
Many Western European nations are monetarily non-sovereign, meaning they do not have the unlimited ability to create their own sovereign currency. Why?
Because they have no sovereign currency. They use the euro, which is the sovereign currency of the European Union, not of any Western European nation.
There are also broader economic effects. Arthur Okun, the former economic adviser to President Lyndon Johnson, addressed this timeless issue in his 1975 book, “Equality and Efficiency: The Big Tradeoff.”
According to Mr. Okun, policymakers want to maximize the economic pie while slicing it equally. But these goals often conflict. As policymakers attempt to rectify the market’s outcome by equalizing the slices, the pie tends to shrink.
Mr. Okun explains the trade-off with a metaphor: Providing a social safety net is like using a leaky bucket to redistribute water among people with different amounts. While bringing water to the thirstiest may be noble, it is also costly as some water is lost in transit.
That false metaphor would be apt if no water could be added to the bucket.
But our Monetarily Sovereign federal government has infinite “water” (dollars) at its disposal. The bucket never is empty.
So giving dollars to one group does not reduce the number of dollars available to other groups. The federal government has the infinite ability to provide infinite slices of pie. The pie need not “shrink.”
In the real world, this leakage occurs because higher taxes distort incentives and impede economic growth.
That distortion of incentives and reduction of economic growth is a function of all federal taxes, not just higher taxes.
Since federal taxes pay for nothing (They are destroyed upon receipt by the Treasury), raising taxes to “pay for” spending is a useless — no, not just useless, but harmful –fools mission.
And those taxes aren’t just the explicit ones that finance benefits such as public education or health care.
They also include implicit taxes baked into the benefits themselves. If these benefits decline when your income rises, people are discouraged from working. This implicit tax distorts incentives just as explicit taxes do.
Again, Mankiw cites the Big Lie that federal taxes fund federal spending.
The implicit taxes include, for instance, Social Security benefits which needlessly decline as income increases. Does that discourage anyone from working? Doubtful.
But this is the trope the rich love to cite: Paying unemployment benefits discourages people from working. It would be true only when salaries are so miserly, normal humans can’t survive on them.
These are the starvation wages the rich want to pay.
Economists disagree about why European nations are less prosperous than the United States. But a leading hypothesis, advanced by Edward Prescott, a Nobel laureate, in 2003, is that Europeans work less than Americans because they face higher taxes to finance a more generous social safety net.
In other words, most European nations use that leaky bucket more than the United States does and experience greater leakage, resulting in lower incomes.
By aiming for more compassionate economies, they have created less prosperous ones. Americans should be careful to avoid that fate.
The above is so misleading as to be incomprehensible for a Harvard economist.
Let’s begin with a bit of nit-picking. Prescott won the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. He is not a “Nobel laureate.” There is no Nobel prize in Economics.
Europeans may face higher taxes, but the reasons are mixed. For the monetarily non-sovereign nations, this sadly, is necessary. These nations voluntarily surrendered the single most valuable asset any government can have: Their Monetary Sovereignty. Like U.S. cities and states, They must levy taxes in order to pay for things.
The Monetarily Sovereign nations don’t need to levy taxes in order to pay for things, but they (like the U.S. government) don’t want the taxpayers to know it.
Why? Because the rich run governments, and the rich have rigged the U.S. tax system to widen the Gap between the rich and the rest.
Do you remember when Warren Buffett admitted he pays taxes at a lower rate than does his secretary? And I am quite sure you pay more taxes than does billionaire Donald Trump, who actually paid zero taxes in eight of the past ten years.
Did you pay zero taxes in eight of the past ten years?
Although some European nations are Monetarily Sovereign, and so, don’t need to levy taxes, the rich who run those nations want the poor suckers to pay, pay, pay.
There are various reasons why America is so prosperous: World War II, our size, our natural resources, our lack of intermural wars, just to name a few.
The “leaky bucket theory isn’t one of those reasons.
And now we come to: “the poor should labor, while the rich don’t need to” pseudo-moralistic meanderings of an economics professor who should be ashamed:
Compassion is a virtue, but so is respect for those who are talented, hardworking and successful.
Most Americans descended from immigrants, who left their homelands to find freedom and forge their own destinies.
Because of this history, we are more individualistic than Europeans, and our policies rightly reflect that cultural difference.
That is not to say that the United States has already struck the right balance between compassion and prosperity. It is a continuing tragedy that children are more likely to live in poverty than the overall population.
That’s why my favorite provision in the Biden plan is the expanded child credit, which would reduce childhood poverty. (I am also sympathetic to policies aimed at climate change, which is an entirely different problem. Sadly, the Biden plan misses the opportunity to embrace the best solution — a carbon tax.)
Call the above, Mankiw’s “I pretend to be compassionate but I’m not really” fake moralism.
But the entire $3.5 trillion package is too big and too risky.
Why is it “risky” for a government that has the unlimited ability to create dollars and spent $6.6 trillion in 2020, to budget another $3.5 trillion in spending? What exactly is the “risk”?
No, it’s not inflation, which comes from scarcity, never from federal spending.
No, it’s not insolvency. The federal government cannot unintentionally become insolvent (though Sen. McConnell threatens to force insolvency on us with the phony debt “ceiling”).
No, it’s not reduced GDP. By formula, federal spending increases GDP.
(GDP = Federal Spending + Non-federal Spending + Net Exports)
There is, in fact, zero risk associated with the $3.5 trillion package.
N. Gregory Mankiw is a professor of economics at Harvard. He was the chairman of the Council of Economic Advisers under President George W. Bush from 2003 to 2005.
And we all know what a great economist was George W. Bush, who started his Presidency with a recession, and having learned nothing, ended his Presidency with another recession.
Biden’s proposed $3.5 spending program would benefit hundreds of millions of Americans. It easily is affordable, requires zero tax increases, would not be a burden on anyone, and would not be inflationary.
It has zero downsides, which is the real reason why the Republicans don’t want it.
Rodger Malcolm Mitchell
Facebook: Rodger Malcolm Mitchell
THE SOLE PURPOSE OF GOVERNMENT IS TO IMPROVE AND PROTECT THE LIVES OF THE PEOPLE.
The most important problems in economics involve:
- Monetary Sovereignty describes money creation and destruction.
- Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”
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 Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps:
Ten Steps To Prosperity:
- Eliminate FICA
- Federally funded Medicare — parts A, B & D, plus long-term care — for everyone
- Social Security for all
- Free education (including post-grad) for everyone
- Salary for attending school
- Eliminate federal taxes on business
- Increase the standard income tax deduction, annually.
- Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.
- Federal ownership of all banks
- 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 the rest.
One thought on “When even a Harvard economics professor gets it wrong, what hope is there for the average voter?”
Makiw is wrong about something else too. He says “If Americans really want larger government, we will have to pay for it, and a VAT could be the best way.” This is demonstrably untrue. As far back as Adam Smith, it has been recognized that not all taxes have equally bad effects on the economy. And even further back then Henry George, it has been recognized that a tax on Land Values is different from productivity-destroying taxes.
A tax on Land Values encourages more buildings and improvements, discourages hoarding and speculating on land – one of the consistently largest causes of major economic crashes, like 2008-09. It doesn’t discourage work by taxing wages, capital (like buildings) or sales (which is regressive).
Economists knew this until the rise of neo-classical economics in the early part of the 20th century, expunging true reformers like George. Mason Gaffney and Fred Harrison cover the deliberate change in their short and easy-to-read book, The Corruption of Economics.
The basic corruption was the conflation of Land – a finite gift of nature and typically appreciating – with Capital – produced by humans and generally depreciating, and limited only by human and natural resources.
If land and capital are not treated as separate parts of production, along with labor – which some have tried to miscategorize as “human capital” – there is no end to bad policies resulting, including confusing shortages of land – every natural resource in the universe – with shortages of “capital” (really, just money, which is not even true capital).
Money, as you know, is not even studied as part of economics! Sure, there’s price theory, and supply and demand, but money, as Stephen Zarlenga called it, is a “lost science.” Thanks for making it a bit less lost. It is frustrating.
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