Have we come to the end of empiricism in economics? The increasing influence of the Tea Party and its philosophies, makes this question especially timely.

To quote from Wikipedia: “Empiricism is a fundamental part of the scientific method that all hypotheses and theories must be tested against observations of the natural world, rather than resting solely on a priori reasoning, intuition, or revelation. Hence, science is considered to be methodologically empirical in nature.”

If economics is a science, all hypotheses in economics must be tested against observed reality, not against intuition or faith. Here are some observed realities in economics:

1. Being on a gold standard requires a nation to hold gold in an amount equal to, or greater than, the amount of sovereign money it issues, according to an agreed-upon formula.
2. In August 1971, the U.S. federal government exited the gold standard.
3. Exiting the gold standard gave the U.S. government the legal ability to create unlimited numbers of dollars without being restricted by gold inventories.
4. Being able to create dollars without limits, the U.S. government does not need to obtain dollars from any other source.
5. Not needing to obtain dollars, the U.S. government needs neither to borrow dollars nor to levy taxes. It merely can create dollars to support any spending need.
6. The above is part of “Monetary Sovereignty.”
7. Not all entities are Monetarily Sovereign. The U.S. states, counties and cities, and the euro nations, are monetarily non-sovereign. They do not have the legal ability to create unlimited quantities of money.
8. Because a Monetarily Sovereign nation can create unlimited money, it cannot go “broke,”i.e., be unable to pay its debts, nor can paying any debt be a financial burden, nor must future generations be forced to pay taxes.
9. Again, quoting from Wikipedia, “A commodity is a good for which there is demand, but which is supplied without qualitative differentiation across a market.” The U.S. dollar is a commodity. It is freely traded on exchanges, and all U.S. dollars are identical.
10. A decrease in the perceived value of a dollar, compared to the perceived values of goods and services, is known as “inflation.”
11. The value of a commodity is based on supply and demand. An increase in supply without a corresponding increase in demand, generally reduces the value of a commodity.
12. Demand is based on risk and reward. An increase in risk, without a corresponding increase in reward, generally reduces the value of a commodity. For money, risk is inflation and reward is interest.

All of the above are empirical. While there may be some legitimate quibbles about the exact wording, I suspect there is agreement that all of the above have been the subject of countless observations.

13. Therefore, the constriant on money creation by a Monetarily Sovereign nation is neither taxes nor borrowing, but inflation.
14. Inflation can be prevented/cured by reducing the supply of, or increasing the demand for, money.

These last two are not empirical, but follow logically from the above empirical statements.

15. Reductions in money supply growth have been associated with recessions and depressions. Increases in money supply growth have been associated with recoveries.

This last statement is not itself empirical, but is based on empirical data. See: Understanding economics.

The following statements neither are empirical, nor are they derived from empiricism. No facts support these statements. They are not science, but rather are based on intuition and popular faith. Yet they not only are parroted, but are believed, by many politicians, economists and members of the general public.

A. Knocking on wood will improve my luck.
B. The federal deficit (or debt) is unsustainable [or a ticking time bomb].
C. Taxpayers or taxpayers’ children will pay for federal spending.
D. Reducing the federal deficit (or debt) will improve Americans’ quality of life
E. Reducing the federal deficit (or debt) will improve security, defense, education, housing, the infrastructure and/or the ecology.
F. The federal deficit (or debt) is similar to your personal debt.
G. The federal deficit (or debt) is similar to states’ debt
H. The U.S. government is broke or going broke.
I. The federal Debt/GDP ratio is too high.
J. When the federal Debt/GDP ratio reaches [any figure], the U.S. economy will suffer.
K. Ireland’s [or any euro nation’s] finances are similar to those of the U.S.
L. The federal debt ceiling is a good thing with a good purpose.
M. Social Security (or Medicare) will go broke without a tax increase or a benefit decrease.
N. Cutting the deficit (or debt) will reduce unemployment.
O. Small government is better than big government
P. Friday the 13th is an unlucky day.

So as Congress, led by the Tea Party and freshman senators, marches toward a debt ceiling showdown, we ask again, have we come to the end of empiricism in economics? Have we come to the end of economics?

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

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

We depend on our doctors to understand medicine. When our doctors err, we are injured. So, wouldn’t you be angry if you learned your doctor never had studied medicine, never even wanted to understand basic medical procedures, and instead followed popular superstitions about curing illness?

We depend on our lawyers to understand the law. When our lawyers err, we are injured. So, wouldn’t you be angry if you learned your lawyer never had studied the law, never even wanted to understand basic legal procedures, and instead followed popular myths about laws, myths based not on legal rulings but on jailhouse rumor?

We depend on our politicians to understand economics. When our politicians pass a bad law, we are injured. It can cost our loved ones and us our fortunes, even our lives. So, wouldn’t you be angry if you learned your political representative never had studied economics, never even wanted to understand the basics of economics, and instead relied on popular myths about economics, based not on science, but on street myth?

Doctors and lawyers are jailed for practicing medicine or law without appropriate licences, which can be obtained only after years of difficult study based on strict criteria. But for politicians, there are no criteria. Any lazy, uneducated fool can be a politician, who once elected, can cast votes on bills that will ruin your life.

Politicians arguably have more impact on us than do doctors and lawyers, yet there are no minimum requirements for this vital responsibility. Able to read? Not necessary. Able to reason? No need. Unwilling to learn? No problem. Honesty? Are you kidding?

Monetary Sovereignty, is the very basis of economics. Anyone who does not understand the implications of Monetary Sovereignty, simply does not understand economics. Would you try to practice medicine without knowing what a germ is? Would you try to practice American law without knowing what precedent is? Yet, politicians vote on your economic future without understanding economics. Monetary Sovereignty, is to economics as arithmetic is to mathematics. It is impossible to understand the later without understanding the former.

I have seen no evidence that any of our Senators, Representatives and even the President has the slightest understanding of Monetary Sovereignty, nor willing to expend the energy to learn. Seemingly, they would rather rely on intuition and Tea Party wisdom than on science, as each day they make decisions that harm millions of us.

So we have the spectacle of ignorance threatening to shut down the government via a useless debt ceiling — no not useless, harmful — unless they are allowed to tax us more and/or reduce Medicare, Social Security, national defense, education, health care, medical research, energy research, the ecology, the infrastructure and indeed depress virtually every aspect of our lives. And why? Because these elected representatives either are too political, too lazy or too ignorant to understand the “federal deficit” is not at all like personal deficit, but rather merely is a synonym for “federal money created.”

These elected representatives either are too political, too lazy or too ignorant to understand the “federal debt” merely is the total of outstanding T-securities, which could be liquidated merely by crediting the bank accounts of the holders, a process requiring nothing more than the press of a computer key.

So we, our children and our grandchildren, must pay today, pay tomorrow and pay well into the future for political ignorance and laziness. And all the politicians need to do is read and understand one page at: Monetary Sovereignty,.

If that makes you angry, and you refuse to take it any more, contact them. Do it now.

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

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

House Speaker John Boehner was asked about the probability that the GOP plan to cut $100 billion from government spending would cause federal job cuts: He replied, “Over the last two years since President Obama has taken office, the federal government has added 200,000 new federal jobs. And if some of those jobs are lost in this, so be it. We’re broke. It’s time for us to get serious about how we’re spending the nation’s money.”

Two problems with this:

1. We’re not “broke.” As a Monetarily Sovereign government, the U.S. has the power to pay any bill of any size. No federal check ever has bounced and none ever will (unless this silly Congress fails to raise their silly debt ceiling) – not even during the Great Depression, and not even during the worst recession in recent history, and not even while spending trillions to cure that recession.

In short, John Boehner simply does not know what the heck he is talking about. The man is completely ignorant of modern economics and is using that ignorance to guide the American economy. Visualize the Large Hadron Collider run by Mortimer Snerd (You young folks can look him up.)

2. The GOP repeatedly criticized the Obama initiatives for failure to add jobs, but their own “job-killing” (GOP phraseology) plan receives a shrug and a “. . . so be it.”

Not that the Democrats are without guilt. Obama wishes to “pay for” federal spending by raising taxes on the rich. Two problems with this:

1. In a Monetarily Sovereign government, taxes do not “pay for” spending. In fact, federal taxes have zero relationship to federal spending; the two processes are completely separate, independent and unconnected. The proof: We could eliminate federal taxes without changing federal spending, and we could eliminate federal spending without changing federal taxes. Federal taxes are a relic of the gold standard days.

2. Soaking the rich either is meaningless or harmful, depending on how successful it is. The more taxes collected, the more damage is done. Contrary to popular myth, taxing the rich does not add one penny to the pockets of the poor, in fact, such taxes remove money from the pockets of the poor. (See: Does taxing the rich help the poor? )

So here is what I think will happen, based on what we know now: The economy will grow, albeit slowly, for the next three years, because of projected, large, so-called “deficits” (i.e., money creation), while Congressional ignorance and hubris will cause a continual struggle to maintain spending on beneficial projects.

The poor and the jobless will be the primary losers, as these beneficial projects will be squeezed. Obama repeatedly will play the class-warfare card, using poverty as evidence taxes on the rich should be increased. (Visualize warming the poor by shredding the clothes of the rich.)

After three years, when fiscal “prudence” (i.e., reduced money creation) takes hold, the economy will tank, again. Meanwhile, the right will offer a plan to solve the economic problem: Eliminate abortion and Medicare, and allow everyone to carry a gun. The left also will offer a plan: Raise taxes on everyone making “too much” money and require the states (who really are broke) to absorb more unfunded mandates for the poor.

In answer to the title question, ‘Who cares about jobs?”, Congressmen and Congresswomen do. But, it’s their own jobs, not yours.

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

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

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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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.