Tag: deficit

–Three Equivalent Standards: Gold, Euro and Dollar

An alternative to popular faith

A gold Standard, indeed any Standard, consists of two parts: An asset (gold) and a system. Of the two, the system plays the leading role.

In any Standard, the system requires that for every unit of currency a country issues, that country must own a fixed amount of the chosen asset. The fundamental purpose and effect of a gold Standard, or of any Standard, is to restrict the ability of a nation to issue money.

Gold has been a popular asset with attractive attributes. It’s consistent, malleable, permanent, pretty and scarce. But, other assets can be part of a Standard, for instance: silver, platinum, copper, wheat, the euro. The euro?

Yes, nothing says the asset in a Standard must be a physical substance. The only necessary attribute is some degree of scarcity. Today, much of Europe is on a “euro Standard.” This means that to spend money, each nation first must obtain euros. The fact that the money and the euros are identical is irrelevant. Rather, the necessity of owning euros restricts each nation’s issuance of money. This restriction is the key to any Standard.

The United States abandoned the gold Standard in 1971 because it restricted the issuance of dollars. The U.S. found itself unable to obtain enough gold to fund its growing economy. It easily could have been unable to service its debts, i.e. gone bankrupt. With the elimination of the gold Standard, the U.S. government demonstrated it is able to service any size debt, while creating unlimited money to fund economic growth.

Today Greece finds itself in the same restricted position. Being on the euro Standard, Greece is now unable to create sufficient currency to fund its growth, and having been forced to borrow, now faces the (unlikely) prospect of bankruptcy. The EU has ordered Greece to reduce its debt supply (aka money supply) by raising taxes and reducing expenditures – a prescription for recession and depression.

Any political entity that cannot create money eventually will be unable to service its debts, and faces economic stagnation and ultimately, bankruptcy. American states, counties and cities are on the “dollar Standard.” Unlike the federal government, they cannot spend money without obtaining dollars. Over time, all must obtain money by raising taxes and/or cutting expenditures, both of which have a depressing effect on their economies.

To save the state, county and city economies, the U.S. federal government increasingly must support local spending. Roads, bridges and dams are local initiatives, once the financial responsibility of local governments, that will need to be funded by the federal government. Education, local transportation, infrastructure, health care and anti-poverty programs also will require federal support to prevent local economic disaster or bankruptcy.

The federal government, because it can create unlimited money without taxation, ultimately will fund the vast majority of local programs, the key political question being: Who will have the power to direct these programs, local agencies or the federal government? The anti-“big government” people do not take this reality into consideration.

Just as the American states, counties and cities can, must and will be supported by the U.S. government, the members of the EU can, must and will be supported by the only entity with the unlimited power to create money: the EU itself.

Eventually, it will become apparent that forcing EU nations to raise taxes and reduce spending only will serve to make economic growth impossible. At that point, the EU will assume the money-creation role for the euro. Thus, the euro will force a de facto “United States of Europe,” well before formal treaties are ratified.

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

–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

–Et tu, Wall Street Journal?

An alternative to popular faith

The average person doesn’t understand the difference between federal government finances, state government finances and personal finances. The same could be said of most politicians and most editorial writers.

But one expects more of the Wall Street Journal, whose editors are, after all, immersed in finance all day long. So it was saddening to read WSJ’s March 1, 2010 editorial titled “Back to the ObamaCare Future.”

The editorial begins, “Natural experiments are rare in politics, but few are as instructive for ObamaCare that Massachusetts set in motion in 2006.” Do you detect the problem? The WSJ thinks a state-run, health-care program provides a learning template for a federally run program, despite the crucial differences in ability to fund programs. (States’ access to money is limited; the federal government’s access is unlimited.)

The WSJ properly criticizes Governor Deval Patrick for wanting to set hospital and doctor rates. Why does the governor want to do that? So he can cut the rates. You see, the Massachusetts program is running a deficit (of course), so rather than committing political suicide by raising taxes, the governor wants to assure worse health care by discouraging doctors and hospitals from operating profitably in his fair state.

The editorial continues, “The administered prices of Medicare and Medicaid already shift costs to private patients, while below-cost reimbursement creates balance-sheet havoc among providers.” Yes, that’s right. Medicare pays too little, which forces our most talented doctors into boutique programs, where annual fees run anywhere from $50 to $5,000 (or more?) Eventually all the best doctors will be unaffordable to the very people Medicare is supposed to help. And smaller hospitals will disappear. This because of federal price controls.

The editorial continues, “It doesn’t even count as irony that former Governor Mitt Romney (like President Obama) sold this plan as a way to control spending.” Sure, states need to control costs, but why doesn’t President Obama understand the difference between state spending and federal spending?

Let’s see if we can clarify the difference: Taxpayers pay for state spending. Taxpayers do not pay for federal spending. Can I make it any simpler?

Because states do not have the power to create unlimited amounts of money, they must rely on taxes and borrowing. Eventually, the ability to borrow runs out, and everything falls on the taxpayer. Ultimately, there is a direct relationship between state taxes and state spending.

The federal government does have the power to create unlimited amounts of money, and so does not need to rely on taxes. It does not even need to borrow (See: https://rodgermmitchell.wordpress.com/2009/09/10/it-isnt-taxpayers-money/)

The biggest problem with Medicare (and Social Security, for that matter) is that it’s limited by FICA collections. Medicare is a version of federal price controls, which WSJ properly criticizes. Government price controls always are damaging. As WSJ said, “. . . hospital rate setting in the 1970s and 1980s . . . didn’t control costs . . . and it killed people.”

If government medical rate setting doesn’t work, and in fact kills people, please tell me again how the universal health care plan is designed to save money.

And if the federal government has the unlimited ability to create money, without ever charging the taxpayer, please tell me again why the universal health care plan is designed to save money.

Oh, the unnecessary damage the debt hawks have caused — not just financial damage, but human damage — and all for refusing to acknowledge that federal deficits not only are beneficial, but necessary for a growing economy.

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