Tag: debt

–Jim Bunning and the populist health care position

An alternative to popular faith

In a March 4, 2010 editorial titled, “Bunning had a point,” the Chicago Tribune wrote: “Bunning had a very good point. Congress won’t pay for what it spends.” What the writer meant is, Congress doesn’t levy as much in taxes as it spends — the old balanced-budget theme. The editorial goes on to criticize President Obama: “‘Congress can only spend a dollar if it saves a dollar somewhere,” ‘President Obama proclaimed.’ But here Congress was spending $10 billion without saving a dime elsewhere.”

If there is one statement that is the uncontested bedrock of truth in economics, it’s this: A growing economy requires a growing supply of money. That statement actually is a tautology, for the very definitions of economic growth are measured in terms of money. Big economies have more money than do small economies, so for any economy to go from small to big, it has to increase its money supply, and for real growth, it has to increase its per capita money supply.

What is money? Every form of money is a form of debt. Bank accounts are bank debts. Credit card accounts are card-holder debts. Money market accounts are money market debts. Travelers’ checks are debts of the issuer. T-bills are federal debts. All are money and all are debt. There is no form of money that is not a debt. Even dollar bills (which have the words “Federal Reserve Note” printed on them) are debts of the U.S. government. ( “Bill” and “Note” are words signifying debt.)

So, to grow the economy, we must increase the money supply, i.e. increase the debt supply. But whose debts should we increase? We can select from personal, bank, business, state or local government and federal debts.

Shall we increase personal debts? That often is part of economic growth, though it can get to dangerous levels, at which time the frequency of bankruptcy increases and the economy suffers. So there is a limit to personal debt. Further, increases in personal debt usually are the result of economic growth, seldom the cause. And finally, what action could America’s politicians take to force increases in personal debt?

Shall we increase bank debt, also known as “savings accounts”? Increased saving sometimes is thought (wrongly) to be beneficial to the economy. Of late we have seen complaints that saving instead of spending slows the economy.

Shall we increase business or state and local government debt? Like personal debt, this can be dangerous debt. Many state and local governments already are over-borrowed, and are trying to reduce their debt.

That leaves the federal government as the safest source of increased debt/money. The federal government has the unlimited ability to create money; it cannot run out of money; it cannot go bankrupt; it has complete control over its debt-creation; it even can control the inflation some feel results from money creation. In short, the federal government is the ideal source of additional money to grow our economy

But the Chicago Tribune wants a balanced budget, meaning the federal money supply does not grow. Worse yet, in a balanced budget, the real money supply shrinks. Say in year 1 the money supply is $10 trillion and inflation is only 2% annually. By year 2, the real value of that $10 trillion has shrunk to $9.8 trillion. By year 10, with the same ongoing inflation, that balanced budget money supply has shrunk in real value to only $8.2 trillion. A balanced budget, with only 2% annual inflation, will cause our real (inflation adjusted) money supply to shrink almost 20% in ten years.

To achieve economic growth, the per capita money supply growth must exceed inflation, the trade deficit (which sends money overseas) and population growth, combined.

So yes, President Obama deserves criticism, but not for wanting to spend too much or tax too little. He deserves criticism for his populist, balanced-budget pronouncements, which by disparaging money growth, hurt America.

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

–Prof. Barro and the cost of federal spending

An alternative to popular faith

The 1/22/10 Wall Street Journal published an opinion piece by Professor Robert Barro (Harvard University), who believes, “Much more focus should be on incentives for people and businesses to invest, produce and work. On the tax side, we should avoid programs that throw money at people and emphasize instead reductions in marginal income-tax rates — especially where these rates are already high and fall on capital income. Eliminating the federal corporate income tax would be brilliant. On the spending side, the main point is that we should not be considering massive public-works programs that do not pass muster from the perspective of cost-benefit analysis. Just as in the 1980s, when extreme supply-side views on tax cuts were unjustified, it is wrong now to think that added government spending is free.”

Mostly, I agree — with one huge exception. That last phrase, ” . . . it is wrong now to think that added government spending is free” is itself, wrong.

If federal government spending is not free, it must have a cost. So what is the cost? Not higher taxes, which have no historical relationship to deficit spending. (See item #9 at https://rodgermmitchell.wordpress.com/2009/09/07/introduction/.)
Taxes generally have been based on political, not economic, considerations. From a financial standpoint, taxes no longer (after 1971, the end of the gold standard) affect the federal government’s ability to spend. In fact, all federal taxes could be eliminated tomorrow, and the federal government’s ability to spend would not be reduced by even one penny.

Is the cost of federal government spending increased inflation. No, not that either. There is no historical relationship between federal deficits and inflation. The highest inflation since WWII came with the modest Carter deficits, and was cured during the robust Reagan spending years. A graph of deficit growth vs. inflation shows a zero cause/effect relationship. (See item #8 in https://rodgermmitchell.wordpress.com/2009/09/07/introduction/ )

Well then, does deficit spending cause high interest rates? The graph at https://rodgermmitchell.wordpress.com/2009/11/15/deficits-and-interest-rates-another-myth/ indicates no relationship between high deficits and high interest rates.

Even if deficit spending did cause interest rates to rise, there is no historical relationship between low rates and high GDP growth. See item #10 at https://rodgermmitchell.wordpress.com/2009/09/07/introduction/

In summary, there is no post-1971 cost to federal deficit spending, a strong argument for tax cuts and increased spending and a strong argument against deficit concerns.

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

–The Greek tragedy

An alternative to popular faith

Observe a Greek tragedy, courtesy of the European Union, which insists that Greece reduce its deficit, i.e. reduce its money supply in the face of a recession, where money already is in short supply. This is akin to applying leeches as a cure for anemia.

Read this quote from an article today (2/27/10):

“ATHENS (Reuters) – Greece must take further measures to reduce the deficit or it will face sanctions, Eurogroup chairman Jean-Claude Juncker (said) . . . Greece has until March 16 to convince EU . . . that proposed measures to cut its budget shortfall this year to 8.7 percent of gross domestic product from 12.7 percent in 2009 are sufficient.

“‘Greece must intensify its efforts and move to further actions to reduce its deficit,’ (said) Juncker, ‘If it doesn’t convince us then it will possibly face sanctions. Greece must understand that the taxpayers in Germany, Belgium or Luxembourg are not ready to fix the mistakes of Greece’s fiscal policy,’ Juncker said.”
(Reporting by Lefteris Papadimas; editing by Ingrid Melander and Philippa Fletcher)

The mistakes were not of Greek policy, but of EU policy. The creation of the euro pegged all nations to the same money, exactly what the failed gold standard did.

In short, the EU expects Greece to tax itself into prosperity. Sadly, this may be a perfect test of the debt-hawk theory that cutting deficits benefits an economy. Heaven help the Greeks.

And don’t think it couldn’t happen in America. The debt-hawks control most of the media, politicians and economists. Congress’s and the President’s stated mission to minimize or even eliminate federal deficits, could make the Greek tragedy resemble a musical comedy compared to what would happen here.

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


–Danger sign?

An alternative to popular faith

Do we see the first hint of another recession?

In other posts, I have called to your attention the coincidence of reduced federal deficit growth and the start of recessions. History shows this repeated coincidence dates back even to the 1800’s, which arguably indicates a cause/effect relationship.

I also have noted that reduced deficit growth can continue for several years before a recession begins. I searched for a factor, that, when added to reduced deficit growth, would trigger the recession. One such factor seems to be rising energy prices, perhaps more specifically, rising oil prices.

Economics, like meteorology, is complex, so perfect correlations seldom are found, but this correlation is striking:

Debt and energy

The graph shows that when reductions in deficit growth are added to oil price increases, there is a strong incidence of recession.

An exception might be in 1981, though this may have more to do with the arbitrary definition of “recessions.” The recessions of 1980 and 1982, may more realistically be considered one long downturn.

I mention this, because today (Feb., 2010) we see the first hints of reduced deficit growth accompanied by increased energy prices, a possible danger signal. If these mini-trends continue, we may find ourselves on the cusp of yet another recession.

The U.S. government may have two options for preventing the next recession: Keep oil prices from rising, or increase deficit growth. The former might temporarily be accomplished by executing a release from the Strategic Petroleum Reserve. The later can be accomplished in myriad ways, though I tend to favor the elimination of the FICA tax as described at http://rodgermitchell.com/reasons-to-eliminate-FICA.html.

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