Taking Big Government outside the box. Separating money creation from money direction. Part II

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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In the previous post, I speculated that concerns about “big government” had less to do with size than with control. (Suggestion: Read that post, before reading this one.) Those who abhor big government face the difficult task deciding which federal initiatives to eliminate, for every federal expenditure benefits some group. Eliminating benefits neither is popular nor appropriate for a great nation. There may be a solution to that dilemma.

Many people equate big government with “Big Brother,” the dictator in the book “1984,” whose motto was, “Big Brother is watching you, “ and who controlled every aspect of people’s lives. I suggested the concerns about big government would be allayed, not by reducing the physical size of government, but rather by reducing its control over us. In the previous post, I had said:

Visualize a new nation, called “Freedom.” The Freedom federal government creates dollars, which on a per-capita basis, it distributes to each state, each county, each city and each person. There would be no federal, state or local taxes. The states, counties and cities would get all their money according to a formula, and spend the money they receive according to their local requirements. The people would spend the money according to their personal desires.

The solution to big government is not to do away with the services government provides, but rather to transfer responsibility for implementing those services to state and local governments, while the federal government continues to pay the bill.

Let’s say in year 1, the federal government were to give each state $2,500 per state resident, while transferring to each state $2,500 worth of financial obligations currently funded by the federal government. There would be no net effect on the federal deficit, but the states would take control over $2,500 per capita of funding now controlled by the federal government. This would have no effect on the federal deficit.

Assume, in addition, the government were to give each state an additional $1,500 per resident, which the states could use for debt reduction, tax reduction or for new initiatives, at each state’s option. This would increase the deficit $1,500 per capita. The U.S. has about 310 million people, so that $1,500 gift would total about $465 billion. The federal government estimates it will spend about $3.9 trillion in 2011, so that $465 billion would add a net of about 12% to the federal budget, bringing the federal budget up to $4.4 billion.

In year 2, assume the federal government were to transfer an additional $2,500 in per capita obligations to each state, while giving each state $5,000 ($2,500 to cover existing obligations and $2,500 for the additional obligations). Again, there is no net effect on the federal deficit. In addition the government again gives each state a gift of $1,500 per resident.

Assume the federal government continues to follow this procedure each year.

What does this accomplish? At the end of 10 years, the federal government will have transferred to the states control over nearly $8 trillion worth of federal spending. Further, depending on how the states decide use their annual $1,500 per resident gift, some can be debt-free, or tax-free or both.

The above example assumes a steady $1,500 per capita gift from the government. What if, instead, the government provided a steady 12% increase as a gift to the states. By the end of 10 years, the states would receive about $4,600 per resident. The table below shows the per capita debt, deficit and taxes for several states. You can judge how additional annual support from the federal government might affect these states.
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Fiscal year 2007; Debt Rank
All Figures are Per Capita
State Debt Rank
1 Massachusetts
2 Alaska
3 Rhode Island
12 Illinois
23 California
48 Georgia
49 Texas
50 Tennessee

(Source: Center on Budget
Policy Priorities)
Debt –|– Deficit
$10,546 -|- $1,171
$ 9,630 -|- 0
$ 7,944 -|- 428
$ 4,256 -|- $543
$ 3,151 -|- $922
$ 1,204 -|- 320
$ 1,011 -|- 144
$ 677 -|- 161

State Tax Collections Per Capita Rank
(Tax Foundation)
1 Alaska $12,295
11 Massachusetts $3,359
12 California $3,224
25 Illinois $2,489
45 Georgia $1,891
47 Texas $1,856
46 Tennessee $1,859

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Each state would acquire the option to eliminate its deficit, reduce its taxes, reduce its debt and/or create new state initiatives for the benefit of its citizens.

In summary:
-The above approach could reduce the power of “big government” to rule our lives, since “small government” would acquire the finances to assume many big government initiatives.
-States could become healthier financially, while providing more services to their citizens.
-Any reduction in state debt would reduce states’ interest cost, thereby speeding the elimination of debt, reduction of taxes and increase in citizens’ money ownership.
-Any reduction in state taxes would add to the dollars owned by the private sector, increase each state’s GDP, reduce unemployment and increase each state’s average standard of living.
-The federal government, being Monetarily Sovereign, has the money-creating, legal power to support any additional per capita spending, subject only to inflation. The deficit increases are well within the levels of previous, non-inflationary deficit increases, so are unlikely to cause inflation, which in any event can be prevented/cured via interest rate control.

This would mark the end of big government control, while not giving up the benefits of federal spending.

One caveat: Every state has different financial circumstances, different needs and different spending philosophies. So transferring each federal obligation to each state, will not affect the states identically.

Comments?

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

No nation can tax itself into prosperity, nor grow without money growth.

–Taking Big Government outside the box. Separating money creation from money direction.

One central myth forms the foundation of the right wing / left wing debate — a myth that energizes the right wing against “Big Government” — and that myth is the belief that dollar creation inevitably requires dollar control.

Few people are opposed to Big Government per se; instead, they oppose what they believe Big Government does, namely take away our personal freedoms. Consider the objections to “Obamacare.” Yes, there are the usual budget concerns expressed by those who don’t understand Monetary Sovereignty, but the more visceral objections have to do with the potential for “Big Government” to rule our lives.

Sarah Palin’s fictional “death panels” were her woolly-headed attempt to scare voters about the loss of their personal freedom. Her “Mama-bear” persona speaks to personal control and freedom. The debate about mandatory purchase of health insurance is a debate about freedom. The gun-control debate is more about freedom than about guns. The abortion debate devolves to a disagreement about personal freedom’s boundaries. The Patriot Act’s bitter debates have had to do with personal freedom.

America fought the Revolutionary war for freedom. The Boston Tea Party was about freedom, as is the current Tea Party. Americans are born into a cowboy, can-do, independent mind-set. President Obama tapped into it with his “Yes we can” mantra. John Wayne is an American icon, because he symbolized personal freedom. “Socialist” is a powerful epithet, because to many Americans, “Big Government” is a synonym of “Big Brother,” the all-seeing, all-controlling, monster entity that will turn us each into a helpless robot, taking away our freedoms.

And it doesn’t have to be that way.

Yes, the federal government has the infinite ability to create dollars, limited only by inflation. That is a fact. But the mere production of dollars does not need automatically to confer power over those dollars. The federal government could retain its ability to create the dollars, while being stripped of its ability to direct most of those dollars.

Visualize a new nation, called “Freedom.” The Freedom federal government creates dollars, which on a per-capita basis, it distributes to each state, each county, each city and each person. There would be no federal, state or local taxes. The states, counties and cities would get all their money according to a formula, and spend the money they receive according to their local requirements. The people would spend the money according to their personal desires.

Federally directed spending would be limited to national defense (the military, CIA, FBI et al and the few other instances where state control would be inefficient). All other initiatives – transportation, communication, ecology, education, food inspection, police, fire protection, health care, justice, would be paid for by the Freedom federal government, but directed by the states and local governments.

Where state and local governments disagreed about some mutually important question (for instance water rights, air space, pollution, etc.) some form of arbitration could be established to settle the issue. Where greater efficiency can be attained by combining jurisdictions the states and local governments could create mutually appropriate ad hoc entities.

In essence, what I have described is something resembling the 13 original colonies, sovereign as to most laws, but hanging together for mutual protection. The Freedom states, counties and cities tell their federal government: “You create the money and give it to us; we’ll decide how to spend it.”

The argument over “Big Government,” is not so much about “bigness” as it is about control. While Americans enjoy the benefits of federal spending, they chafe under federal control of spending. What if we were to separate the money creation from the money control, having the federal government continue creating dollars, while the local governments control their use? Now some may believe that “He who pays has the say,” but I wonder whether that is necessarily true.

Thoughts?

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

No nation can tax itself into prosperity, nor grow without money growth.

–What federal budget cuts will mean to you, your kids and your grandchildren

As a readers of this blog you probably have learned about Monetary Sovereignty. You know that the federal government has the unlimited ability to create dollars, limited only by inflation. You also know that neither taxes nor taxpayers nor borrowing pay for federal spending. In fact if taxes and borrowing were eliminated, this would not reduce by even one dollar, the federal government’s ability to spend. So long as inflation can be controlled, federal spending is stimulative to the economy. This all is absolute fact, not opinion or hypothesis.

On point, here is an article by Lori Montgomery and Shailagh Murray, Washington Post Staff Writers, Wednesday, February 9, 2011. I’ll quote from it, then translate.

Republican leaders unveiled a list of proposed cuts in government spending Wednesday that would strike hardest at priorities of the Obama administration, such as high-speed rail, scientific innovation and a wide array of clean energy programs.

Translation: Despite the fact that these initiatives would take not one dime from you taxpayers’ pockets, we have decided your children and grandchildren do not need high-speed rail, scientific innovation and clean energy.

“Never before has Congress undertaken a task of this magnitude,” House Appropriations Committee Chairman Harold Rogers (R-Ky.) told Republican lawmakers at a caucus meeting Wednesday morning. “You will be voting on the largest set of spending cuts in the history of our nation.”

Translation: Although federal spending is proven stimulative, we in Congress wish to starve the economy of money, so we have decided to do so, big time.

House conservatives were unappeased, however, and vowed to offer a plan to cut spending by at least $10 billion when the measure come before the full House for consideration next week. It was not clear whether the conservative Republican Study Committee would propose a lists of cuts to specific programs, as the Appropriations Committee has done, or whether it would simply instruct the White House to cut spending across the board, allowing it to avoid the sometimes painful specifics.

Translation: We heroically will pander to the far right by starving the economy of money, but we don’t want to take the blame for the horrendous results. So we will force the White House to do it. Then we can point fingers. Clever, huh?

House GOP leaders endorsed the Appropriations cuts but were vague about the details. House Speaker John A. Boehner (R-Ohio) said the package of reductions would fulfill “our pledge to the American people that we will cut spending. All of this will help create an environment where we’ll have more jobs in America.”

Translation: See, it’s this way: Removing money from the economy somehow encourages businesses to hire more. We’re not sure how that works, but so long as no one is asking, we’re not telling.

House Majority Leader Eric Cantor (R-Va.) told reporters Wednesday morning that excessive federal funding has “been a big inhibitor to investment and job growth.”

Translation: Like Boehner and the Tea Party said, adding money to the economy inhibits investment and taking money from the economy is stimulative. We know that doesn’t make sense, but is that important?

The list of cuts . . . (would include) Obama’s high-speed rail initiative and the AmeriCorps volunteer program, one of President Clinton’s signature creations.

Translation: Our kids don’t need high-speed rail. Walking is healthful. And sure, AmeriCorps members address critical needs in communities all across America, for instance: *Tutor and mentor disadvantaged youth, *Fight illiteracy, *Improve health services, *Build affordable housing, *Teach computer skills, *Clean parks and streams, *Manage or operate after-school programs, *Help communities respond to disasters, *Build organizational capacity

But the Tea Party tells me none of those things are important, and who am I to argue about details? I just say what they tell me.

The list takes direct aim at Obama’s innovation agenda, slashing the budget of the Office of Science by 20 percent. Elite science labs in Tennessee, California and Illinois are bracing for furloughs and possibly layoffs.

Other Republican targets include arts and cultural funding through the Corp. for Public Broadcasting, the Smithsonian Institution, the National Archives and Records Administration, the National Endowment for the Arts and the National Endowment for the Humanities. All of the entities are routinely included on GOP lists; federal subsidies for the CPB would be effectively eliminated under the House proposal, fulfilling a long-standing conservative pledge to cut federal ties with NPR and public television.

Funds for minority business development, family planning and conservation programs would also be axed. Despite the persistently high unemployment rate, job training funds would be reduced by $2 billion. Community health centers, which serve a large number of low-income uninsured people, would lose $1 billion in funding. And more than $200 million would be trimmed from maternal and child health grants, which provide funding for immunizations as well as assistance for blind and disabled children.

Translation: Oh, quit your whining. Just a bunch of bleeding heart stuff. Name one thing on the list that benefits our children, our grandchildren or America. Who cares about them, anyway. The important thing is to:
a. Beat Obama. b. Pander to the Tea Party. c. Remain ignorant about economics. So please, don’t bother us with facts. We have our priorities.

I hope this translation clarifies things.

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

No nation can tax itself into prosperity, nor grow without money growth.

–“How to Slash the State: 14 ways to dismantle a monstrous government, one program at a time”

The debt hawks are to economics as the creationists are to biology.

The November 2010 issue of reason.com contains an article titled, “How to Slash the State: 14 ways to dismantle a monstrous government, one program at a time”

It’s a thoughtful article, but only if you believe the federal government should be smaller, the federal deficit should be lower and taxpayers pay for federal spending. Unfortunately, there is no evidence to support any of these three beliefs. In fact, all the evidence points to the need for ever increasing federal deficit spending, i.e. money creation. (A growing economy requires a growing supply of money.) Also, in a monetarily sovereign nation, taxes do not pay for federal spending (though taxes do pay for state and local spending, as the states, counties and cities are not monetarily sovereign).

Further, some of the “dismantling” they suggest is more like shifting, because some of the suggestions merely push expenses from the federal government (which has unlimited money) to state and local governments (which are having great difficulty paying their bills) – a terrible idea.

Nevertheless, here are the ideas, with my comments.

1. Overhaul Medicaid
“stop the matching grant funding process, in which states receive federal money for each Medicaid dollar they spend” or “scrap the program entirely in favor of a temporary assistance program that doesn’t create long-term dependency.”

The first part of the suggestion shifts more burden to the struggling states, which are not monetarily sovereign, and so cannot create unlimited money. The second part of the suggestion goes under the heading, “These Medicaid recipients aren’t really poor; they are lazy. If we stop giving them help, they’ll go to work.” That simply is nuts.

2. Bring the Troops Home
“. . . a swift and total deoccupation . . . probably would save “$50 billion to $70 billion in fiscal 2011 and perhaps $80 billion to $100 billion a year in 2012 and beyond.”

I’d like to see the troops come home, but not for financial reasons. I have no idea why we’re in Afghanistan, but saving money is a foolish way to manage a war. It kills soldiers.

3. Erase Federal Education Spending
“. . . the federal education budget is full of cuttable programs. If eliminating the entire Department of Education is politically impossible, then the programs with the most tenuous relationships to raising student achievement need to be the first to go.”

This falls under the “make government more efficient” heading. Sure, who can argue with that, but again, it’s not a money thing. It’s an effectiveness thing.

4. Slash State Budgets
“ . . . lawmakers have been living way beyond their means for far too long.”

Not sure what this has to do with the federal government, but I love it. Any specific ideas?

5. End Defined-Benefit Pensions
“ . . . public servants of the future should be put into 401(k) plans like the rest of us, with responsibility to contribute to and manage their own retirement nest eggs.”

This would mean federal employees would receive less money, which would be anti-growth. I agree however, for state and local government employees, as the state and local governments spend taxpayer money.

6. Declare Defeat in the Drug War
“To enforce drug prohibition, state and federal agencies spend more than $40 billion and make 1.7 million arrests every year. This effort wastes resources that could be used to fight predatory crime. . . While imprisoned (as half a million of them currently are), drug offenders cannot earn money or care for their families, which boosts child welfare costs.”

I agree, but again not for money reasons. Prohibition didn’t work in the 1920’s. I can’t imagine why the public and the politicians think it will work, today. Prohibition caused crime in the 1920’s. It causes crime, today. The war on drugs is a perfect example of how the government and the public are incapable of learning from experience.

7. Cancel the Federal Communications Commission
“. . . just about everything the FCC does is either onerous, constitutionally dubious, ineffective, or all three.. . . its role as broadcast censor . . . The best alternative is a world in which spectrum is freely tradable private property rather than a government-managed resource, interference is treated as a tort, and no one worries about whether their next on-air word will result in a seven-figure fine—in other words, a world with no FCC at all.”

The FCC’s role as public scold is useless – actually harmful. The Internet has eliminated the prohibition against swear words, as today one easily can find the most pornographic videos. Fining CBS for Janet Jackson’s 1 second breast reveal, while every sexual act imaginable is available on the Internet, is just plain silly. But, the limited public bandwidth has to be managed to prevent monopolies.

8. Uproot Agriculture Subsidies
“They distort markets and spark trade wars. They make food staples artificially expensive, while making high-fructose corn syrup—the bogeyman of crunchy parents, foodies, and obesity activists everywhere—artificially cheap. They give farmers incentives to tamper with land that would otherwise be forest or grassland. They encourage inefficient alternative energy programs by artificially lowering the price of corn ethanol compared to solar, wind, and other biomass options. School lunches are jammed full of agricultural surplus goods, interfering with efforts to improve the nutritional value (and simple appeal) of the meals devoured by the nation’s chubby public schoolers.”

I agree. Any time the federal government subsidizes an industry, it controls that industry. So you have bureaucrats determining what food is best. While those agriculture subsidies are stimulative, in that they add money to the economy, they distort the market.

9. Unplug the Department of Energy
“. . . more than half of the department’s $26 billion budget ($16 billion) was devoted to managing . . . facilities that make and dispose of materials used for nuclear weapons. . . If Congress and the White House must pursue the development of alternative energy via social engineering, a far more effective alternative to allowing DOE bureaucrats to pick technology “winners” would be a tax on conventional energy. The boost in energy prices would at least encourage inventors and entrepreneurs to get to work.”

All taxes hurt the economy. Taxing energy would tax us all, as we all use energy. The federal gasoline tax has accomplished nothing but take money out of the economy. It certainly has not reduced the consumption of gasoline. It has been an economic cost. This falls under the heading: “If something is harmful, do it again, only more so.” Once again, a failure to learn from experience.

10. Dismantle Davis-Bacon
“. . . which requires all workers on federal projects costing more than $2,000 to be paid the “prevailing wage,” which typically means the hourly rate set by local unions. . . . born as a racist reaction to the presence of Southern black construction workers on a Long Island, New York, veterans hospital project.”

I agree. See #8. It’s another example of the federal government distorting the market, this time the labor market.

11. Repeal the Stimulus
“. . . as of early September, 18 months after the stimulus was passed, an estimated $301 billion remained unspent. That money should be banked, not wasted . . . deficit spending has crowded out private investment.”

A demonstration of financial ignorance. There is no way federal money can be “banked.” And there is no way deficit spending can “crowd out” anything. This is a myth. Without deficit spending, we would be in the deepest depression one could imagine. Of all 14 suggestions, this is the most ignorant.

12. Spend Highway Funds on Highways
“ . . . just to maintain the Interstate Highway System at a decent level is $10 billion to $20 billion per year. . . . lesser highways should all be the states’ problem.”

In other words, transfer the cost from the federal government, which can afford it, to the state governments, which can’t. And how does this help the taxpayer?

13. Privatize Public Lands
“Letting the states manage this land instead would take up to $5 billion a year off the federal books. . .One Forest Service contractor in Arizona recently offered to take over six state parks targeted for closure amid budget cuts. The concessionaire would collect the same visitor fees the state charges today while taking the operations and maintenance costs off the state’s books entirely. Further, the company would pay the state an annual “rent” based on a percentage of the fees collected, turning parks into a revenue generator instead of a money eater.”

In the very few cases where a private company could do this, profitably and under federal supervision, it could be a good idea. Now let’s talk about the other 99% of the public lands. Get real.

14. End (or at Least Audit) the Fed

It’s not explained how auditing would cut federal spending. Bernanke warned that opening the Fed’s books would diminish the central bank’s political independence. I believe him. Imagine relying on Congress to make quick economic decisions. These people can’t decide to go to the bathroom without the threat of filibuster. Let’s face it. The most dysfunctional of all federal agencies is Congress.

In summary, most of these suggestions simply are foolish or would not save taxpayers anything. A couple have some value, not because they “save” money, but because they are good governing policy. All are based an the false assumption that federal spending should be reduced.

Think of the economy as a child and money is its food. Today, the child is starving. To make the child healthy, we must feed it. As the child grows, it will need an increasing amount of food. Yes, if you overfeed the child, it will become fat (inflate), but we are a long way from that. The debt hawks want to starve the child, and then always are surprised when it becomes ill.

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

No nation can tax itself into prosperity

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