Tag: Committee for a Responsible Federal Budget

–1937 Redux: How our leaders have learned nothing from history

The debt hawks are to economics as the creationists are to biology. They, who do not understand monetary sovereignty, do not understand economics.

For those of you who don’t remember the Great Depression (almost everyone, now), it began in 1929, after several years of federal surpluses ( Item 3.), but by the early-1930’s we already were on our way to recovery – something like today. Then, the government decided to reduce the federal deficit with increased taxes and reduced spending — something like today. So we had four more years of depression (something like tomorrow?)

According to Wikipedia: “The Recession of 1937–1938, sometimes called the Roosevelt Recession, was a temporary reversal of the pre-war 1933 to 1941 economic recovery from the Great Depression in the United States. Economists disagree about the causes of this downturn. Keynesian economists tend to assign blame to cuts in Federal spending and increases in taxes at the insistence of the US Treasury, while monetarists, most notably Milton Friedman tended to assign blame to the Federal Reserve’s tightening of the money supply in 1936 and 1937.”.

Hmmm. Let’s think about that. “Cuts in federal spending . . . and increases in taxes” = federal deficit reduction. “Tightening of the money supply . . .” also = federal deficit reduction. So here you had two different schools of thought, both saying essentially the same thing. The 1937 recession was caused by what we today refer to as “austerity.”

So what do our political leaders favor, now that we are creeping out of the latest recession. Yes, that same austerity. Republicans hate federal spending. They stand ready with dozens of proposals to slash the federal budget. Reportedly, they want to cut $260 billion (25%) from the federal budget. Now that should be stimulative.

Republicans also do not believe their proposed cuts in education, Medicare, unemployment compensation and many other worthy federal projects will hurt anything or anyone.

The Democrats are no smarter. They have to be dragged kicking and screaming, to retain (not even cut, just retain) the Bush era tax levels. They do not believe taxes, which remove money from the economy, slow the recovery. They want to tax the “wealthy,” because . . . well, because that is what Democrats, with their eternal class warfare strategy, do.

Then we have the media. My hometown newspaper, the Chicago Tribune repeatedly rails against the federal debt. They never explain why. They don’t provide data. They just don’t like it. The Tribune is typical of the media, which almost universally hate the debt, and almost universally don’t provide data supporting their position.

And then there is Fed Chairman Bernanke, who feels we must “act to bring down long-term fiscal deficits.” He too, has no clue about why and never gives a coherent reason.

Finally, we have the mainstream economists – all those Nobel winners – none of whom seem to understand monetary sovereignty, and all of whom call for less deficit spending.

Put them all together and things look very bad for this fragile economy. With leaders like these, who needs enemies?

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”

–What will the Fed’s $600 billion Treasury purchase accomplish?

The debt hawks are to economics as the creationists are to biology. They, who do not understand monetary sovereignty, do not understand economics.
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Here’s how it works; you be the judge.

The first question is, if the Fed is buying, who is selling? Answer: The banks and the public. If the banks exchange their T-bonds for cash, will that stimulate the economy? Will that make banks more likely to lend? Are banks short of lending cash? The answers are, “No, no and no.”

Banks are not lending primarily because they can lend to the government, risk free, and make an easy 2% on their money. They are not short of lending funds. They don’t want the hassle of credit checking, defaults, collections, etc. Just borrow from the government at 0% and lend back at 2%. What could be easier?

The other reason banks haven’t lent is because business isn’t borrowing. Congress has made sure business has no idea what will happen, tomorrow. Taxes? Who knows? Interest rates? Unsure. A recovery? When? Expand my operations? Are you kidding? So with lenders and borrowers both unmotivated, lending is unlikely.

Well, what about the public? Do Fed bond purchases from the public stimulate the economy? When the Fed trades cash for T-bonds, this is tantamount to advancing the maturity date on those T-bonds. So what will the holder of T-bonds do when the government gives him cash for his bonds? He likes T-bonds, so if he can get a good price, he probably will buy more bonds – right back where he started.

But let’s say some people decide to invest those dollars in something other than T-bonds. Is that stimulative? Yes, but there is another problem. When the Fed buys bonds, the future interest on those bonds is not paid into the economy. The Fed’s purchase reduces future government interest payments, and that is anti-stimulative.

So my take on the $600 billion purchase is that it might have a very small and very temporary stimulative effect. Far better, and far more stimulative would be if the federal government cut taxes by $600 billion. But since our politicians don’t understand monetary sovereignty, that is unlikely to happen.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”

–Will the party of “NO!” become the party of “I don’t know”?

The debt hawks are to economics as the creationists are to biology. Those, who do not understand monetary sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.
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This should be interesting. Will the party of “NO!” become the party of “I don’t know,” when asked how they plan to reduce federal spending without alienating all the people who receive federal spending, and without destroying the economy, too?

My hunch is all those “small government” types will begin to whine loudly when their favorite federal benefits begin to disappear. And then there is the presumed reduction in federal employees, “to save money” at just the time when we’re supposed to be creating jobs.

For a reminder about some of the things we voters will have to worry about, read: “14 ways to dismantle a monstrous government”.

And why cut federal spending? The debt hawks have no clue. They do not understand monetary sovereignty, and have no desire to learn.

Ignorance has its costs.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”

–The Fed’s $500 billion bond purchase

The debt hawks are to economics as the creationists are to biology. Those, who do not understand monetary sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.
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Rumor has it the Fed soon will announce approximately $500 billion in Treasury bond purchases, with possibly more purchases in the future. The effect of the Fed buying government bonds will be to add dollars to the economy.

This is in recognition of two realities:

1. The economy has been starved for dollars by the economically suicidal, debt-hawk mantra of “lower federal deficits and less federal debt.” Bernanke and the Fed now will officially have acknowledged the economy needs more dollars and the federal government has to supply them.

2. Congress and the President either are ignorant of this economic fact or, more likely, are too afraid of the debt hawks to add dollars to the economy via deficit spending, and instead have passed that hot potato to the Fed.

The question now is whether adding $500 billion is sufficient to pull us out of this economic funk. I suspect it is not, and that something north of $1-2 trillion in actual spending will be needed.

Rather than relying on the indirect effect of bond purchases by the Fed, and hoping that somehow the dollars will find their way into the hands of business and consumers, Congress and the President should use a direct approach. They should reduce all tax rates and specifically eliminate FICA. That would provide both an immediate and long-lasting economic stimulus, resulting in stronger business and more jobs.

Yes, that would add to the dreaded and much maligned federal deficit and the debt, which is exactly what a growing economy needs. It also might bring the debt hawks to their senses, and finally we could stop, for instance, cutting Medicare payments to doctors and reducing Social Security benefits.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind one of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”