Tag: deficits

–Giving life to a lie

An alternative to popular faith

The May 15, 2010 issue of NewScientist Magazine included an excellent piece by James Giles, titled “Giving life to a lie.” I strongly recommend you read it. (See: LIE for the full article.)

It tells how a statement by John Houghton, former chair of the Intergovernmental Panel On Climate Change – “Unless we announce disasters, no one will listen” – supposedly was repeated in three books, 100 blogs and 24,000 web pages.

Despite this widespread circulation and belief, the statement never was made. It was created by conservative columnist Piers Akerman. It was a lie.

The article, with its subtitle, “In the battle for hearts and minds, a plausible falsehood too often trumps the truth,” goes on to explain how a lie can acquire almost universal acceptance. Here are a few quotes: “. . . a falsehood has to have at least a shred of believability.” “Any falsehood can acquire currency … so long as there are enough people inclined to believe it . . . Falsehoods can come to be believed simply because others believe them. . . This is an information cascade, a process described by the economist DavidHirshleifer . . .” “The mainstream media often participates in the cascade … the more often you hear something, the more likely you are to believe it is true.”

Today, the big lie in economics is, “The federal debt is unsustainable” (See: UNSUSTAINABLE ).

The word ‘unsustainable,” means unable to endure. What is the evidence the federal debt cannot endure? That is, what evidence shows the debt cannot continue, cannot continue to grow, cannot continue to be serviced by the federal government, or will cause economic hardship? Amazingly, no such evidence exists. It all is myth.

That is why you never will see such evidence provided by any of the newspaper or magazine articles making the claim, nor will economists provide such evidence. They all merely will make the claim and support it with other claims, also unsupported by evidence (i.e., “The debt is unsustainable. It will cause inflation. It will reduce the availability of lending funds. Our children and grandchildren will pay for it through higher taxes. Nations will refuse to lend to us. Eventually, we’ll be like Zimbabwe.”) As each lie begets additional lies, the entire package becomes impervious to fact. More and more believe it, until it seems to become solid truth – all without supporting evidence.

The U.S. is 225 years old, yet the federal debt has grown about 1500% in just the past 30 years – a truly amazing increase. Despite this unprecedented debt growth, the federal government never has trouble servicing its debt, nor do we have inflation beyond what the government specifically wants (about 2%-3%), nor is there any mechanism by which the federal debt, which actually is the main source of dollars, can reduce the availability of lending funds. Nor do taxes pay for debts, which is how the debt managed to grow so much. In fact, tax rates are lower today than 30 years ago. And, nations do not refuse to lend to us. Nor do we even need nations to lend to us.

Why does this lie, which the most easily obtainable evidence shows to be wrong, have such widespread following and persistence? First, it has the requisite “shred of believability.” We think of the federal government as being like us – an anthropomorphic misunderstanding. If my debts grow too large, they are not sustainable. I might not be able to obtain the money to service them, and I even can go bankrupt. The same can be said of you, your business, your city, county and state. It even can be said of the European Union nations. But it cannot be said of the U.S. government.

I cannot create unlimited amounts of money to pay my bills. Nor can you, businesses nor local governments. Even Greece and Spain cannot, for they are constrained by EU rules. The U.S. government however, has no such constraints, as it proves every day. It can pay any bill of any size, immediately, simply by crediting the bank account of any creditor.

Then there is the collection of taxes. Local governments use taxes to pay their bills, which is why local governments can go bankrupt if taxes do not support spending. The federal government does not use taxes to pay its bills, because it alone has the unlimited power to create money. For that reason, our children and grandchildren will not pay for the debt. No one will. The government pays its debts by creating money, ad hoc.

The notion that federal borrowing replaces private borrowing has a quasi-arithmetic logic about it. “There is only so much money to lend, and if the government borrows it all, the funds will be used up and there will be none left for the private sector.” In reality, lending facilitates more lending. When you lend to the bank, by depositing in your bank account, this does not reduce the bank’s ability to lend. When the government borrows, it merely exchanges one form of money for another. It does not “use up” lending funds. And when the government spends, it creates lending funds.

Many nations often are used as an example of what excessive debts cause: Zimbabwe, WWII Germany, Brazil, Italy et al. But, each had special circumstances, that were unlike those in the U.S. and not directly related to excessive deficits. For instance, in the case of Zimbabwe, wars, corrupt leadership (Robert Mugabe), stealing farm land from owners, loss of exports and other problems caused its economic disaster.

As the media broadcast the lie, and more people came to believe it, the lie became a cascade. It became a truth unto itself, a self evident statement requiring no supporting evidence.

Are you old enough to remember when “Stomach ulcers are caused by emotional stress” was such a self-evident statement. No one doubted it, and no one asked for evidence, until one day it was discovered the vast majority of stomach ulcers are caused by a bacterium (Helicobacter pylori). Even today, some people cling to that original lie about ulcers.

In summary, when someone tells you the federal deficit and debt are too large, ask for factual evidence in the form of data. They will not provide factual evidence. They merely will give you more opinions (inflation, taxes, children, eventually, etc.) also unsupported by data. If you would rather depend on facts than on myth, read through the various posts on this blog, beginning with SUMMARY, and do read that article.

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

No nation can tax itself into prosperity

–A mainstream economist writes about the EU

An alternative to popular faith

Readers of this blog and Modern Monetary Theory blogs know the mainstream economists have been ignorant about the realities of today’s post-gold-standard economy, and this ignorance has caused untold damage, as ignorance always does.

Here is a perfect example. John Cochrane, professor of finance at the University of Chicago, wrote an article titled, “Greek Myths and the Euro Tragedy,” published in the May 18, 2010 Wall Street Journal. His concluding paragraph read:

”The only way to solve the underlying euro-zone fiscal mess (and our own) is to slash government spending and to focus on growth. Countries only pay off debts by growing out of them.. And no, growth does not come from spending, especially on generous pensions and padded government payrolls. Greece’ spending over 50% of GDP did not result in robust growth and full coffers. At least the looming worldwide sovereign debt crisis is heaving “fiscal stimulus” on the ash heap of bad ideas.”

Let’s examine this amazingly clueless article, sentence by sentence: ”The only way to solve the underlying euro-zone fiscal mess (and our own) is to slash government spending and to focus on growth.” By definition, economic growth requires money growth. There is no known mechanism by which a nation simultaneously can reduce net money creation (aka “deficit spending”), while promoting growth.

”Countries only pay off debts by growing out of them.” Wrong. Countries pay off debt by creating the money to pay the debt. Economic growth does not pay for government debt. Countries do not pay debt with GDP or with taxes on GDP. In a monetarily sovereign nation, as is the U.S., taxes do not support spending. Were taxes to drop to zero, the government’s ability to spend would not be affected by even one penny.

”And no, growth does not come from spending, especially on generous pensions and padded government payrolls.” Federal spending does cause growth, which is why every recession and depression in U.S. history has been cured with increased federal spending. As for “generous pensions and padded government payrolls,” this represents money paid to real people, who will spend this money on goods and services to stimulate the economy. Professor Cochrane must believe there is some strange force that will cause reductions in private spending to stimulate the economy.

”Greece’s spending over 50% of GDP did not result in robust growth and full coffers.” Since when is 50% of GDP a magic spending number? Greece’s problems relate to its inability, caused by EU rules, to create money to service its debt. (Greece is not monetarily sovereign.) Spending as a percentage of GDP is irrelevant to causing or to solving its problems, which only can be solved by an infusion (not a reduction) of money.

”At least the looming worldwide sovereign debt crisis is heaving “fiscal stimulus” on the ash heap of bad ideas.” Here is monetary ignorance at its best. Greece is not a monetarily sovereign nation; the U.S. is. Any blanket statement about national debt, that does not take this difference into consideration, is certain to be wrong. The notion that the U.S. could be emerging from our recession without fiscal stimuli, would be laughable were it not so sad. If anything, the stimuli were too little, too late (See April 9, 2008 LETTER )

In summary, Professor Cochrane merely parrots bits and pieces of things he has heard from various (wrong) sources, and with them created an article, stunning in its inaccuracy, but printed by the Chicago Tribune, probably because he is from the University of Chicago, a hotbed of obsolete, mainstream economics. It is their influence and leadership that has resulted in an average of one recession every five years. Is there any way they could have done worse?

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

No nation can tax itself into prosperity

–Words from 2005

An alternative to popular faith

Sometimes the things you say and the things you predict come back to haunt you. And sometimes they don’t.

Here is what I told a group of economists and economics students on June 5, 2005, at the University of Missouri, Kansas City. Five years is a long time. You be the judge and let me know what you think:

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

No nation can tax itself into prosperity

 

–The federal debt is unsustainable — still?

The debt hawks are to economics as the creationists are to biology. Those, who do not understand Monetary Sovereignty, do not understand economics. If you understand the following, simple statement, you are ahead of most economists, politicians and media writers in America: Our government, being Monetarily Sovereign, has the unlimited ability to create the dollars to pay its bills.
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People who don’t know what they’re talking about, but who want to sound erudite, love to use dramatic terms that can’t be disproved. A classic example is “ticking time bomb,” when referring to the federal debt and deficit.

This blog contains three posts (“Federal debt: ‘A ticking time bomb”; “Debt bomb redux”; “More debt bomb nonsense” ) sampling the thousands of times since 1940 (!), the debt has been called a “time bomb.”

The nice thing about “ticking time bomb”: The users never needed to prove or substantiate anything. They didn’t have to say when it would explode or what would make it explode or what would happen after it exploded. They don’t even feel the need to explain why their dire predictions have been wrong, wrong and wrong, every year. They could just use the expression, then stand back, look wise and bask in the adoration.

Well, another description of the federal debt and deficit can be included in the “I know nothing, but I want to look smart” club. This time the term is “unsustainable.” In a previous post I hoped never to see that trite, meaningless term again (See: Unsustainable), but it was not to be. Here are just a few of the uses in the past 28 years.

–February 7, 1982: Ronald Reagan: “[…]rapid, unsustainable expansion of Federal spending and money growth[…]
–December 11, 1983: The New York Times; Editorial Desk:“[…]large and growing deficits are unsustainable. They have to be reduced […]
–1998: Douglas Elmendorf and N. Gregory Mankiw: “Current patterns of taxes and spending are unsustainable.”
—February 28, 2001: George W. Bush:. “Social Security’s spending path is unsustainable in the long run, driven largely by demographic trends.”
–March 3, 2005: Edmund L. Andrews: “Alan Greenspan, chairman of the Federal Reserve, warned on Wednesday that the federal budget deficits were ‘unsustainable,’ and he urged Congress to scrutinize both spending and taxes to solve the problem.”
–February 13, 2006: Paul Krugman: “Last year America spent 57 percent more than it earned on world markets. That is, our imports were 57 percent larger than our exports. It all sounds unsustainable. And it is.”
–05/15/09: Lita Epstein, DailyFinance, “Anyone who understands the U.S. debt picture won’t be surprised by President Barack Obama‘s statement that U.S. deficit spending is ‘unsustainable.’
–4/27/10: Reuters: By Pedro Nicolaci da Costa: “’In the absence of further policy actions, the federal budget appears set to remain on an unsustainable path,’ Bernanke told the 18-member National Commission on Fiscal Responsibility and Reform.”
–5/20/10:Professor Alan Blinder, former member of President Clinton’s original Council of Economic Advisers, and Vice Chairman of the Board of Governors of the Federal Reserve System: “[…]even though everybody knows that the federal budget deficit is on an unsustainable path toward the stratosphere.”

And now, again: 6/10, 2010 The U.S. economy continues a slow, painful recovery, but Congress must prepare to address an “unsustainable” level of debt in the federal budget, Federal Reserve Chairman Ben S. Bernanke cautioned Wednesday.

And again: 6/28/10: House Democratic Majority Leader Steny Hoyer: “Debt is a national security threat. Unsustainable debt has a long history of toppling world powers.”

And again: 7/8/10: The Committee For a Responsible Federal Budget: “The debt of the United States is rising to unprecedented – and unsustainable – levels.”

And again: 11/11/10: Representative Jan Schakowsky: “. . . we have to do something; the debt and deficit are not sustainable. . .”

–11/26/10: Sheila C. Bair, Chairman of the FDIC: “The Congressional Budget Office projects that annual entitlement spending could triple in real terms by 2035, to $4.5 trillion in today’s dollars. Defense spending is similarly unsustainable . . . “

–12/3/2010:Dick Durbin, senior Senator from Illinois (D): “Borrowing 40 cents out of every dollar we spend for missiles or food stamps is unsustainable.”

–2/21/11: Doug Elmendorf, head of the Congressional Budget Office: “The nation’s fiscal path is unsustainable, and the problem cannot be solved through minor tinkering.” If his name sounds familiar in this context, he, along with noted economist, Greg Mankiw, said almost exactly the same thing way back in 1998 [See above]. When do these gentlemen acknowledge that they repeatedly have been wrong?

–5/13/11: Frank R. Wolf, Republican congressman from Virginia: “It may have surprised some people when Standard & Poor’s warned last month that the United States could lose its coveted status as the world’s most secure economy if lawmakers don’t rein in the nation’s unsustainable debt. I have been sounding a similar alarm for almost five years, trying to get the attention of Congress and past and present administrations that America cannot continue on its debt and deficit track . . . ”

–7/25/11: iMFdirect: By Rodrigo Valdés: “By the end of this year, federal debt held by the public will represent 70 percent of the U.S. economy, almost double the 36 percent it was in 2007. The federal fiscal deficit will be 9.3 percent of GDP this year. That, quite simply, is not sustainable.”

All these years, the debt has grown, while remaining not only a ticking time bomb, but also unsustainable. How is that possible? Easy. No one knows what “unsustainable” means. Does it mean the government can’t pay its bills? Does it mean America will go bankrupt? Is there any data that proves the debt can’t be sustained?

There is no such data. The federal government has the unlimited power to pay any bills of any size. No federal check ever has or ever will bounce, not because we’re big or lucky, but rather because the government creates money to pay its bills by reaching into vendors’ bank accounts and crediting them.

Does “unsustainable mean that large federal deficits cause inflation? No, ever since the end of the gold standard in 1971, there has been zero relationship between large deficits and inflation, which seems to be related mostly to oil prices.

The whole notion of federal debt unsustainability is not in accord with fact or possibility.

For 30 years the gurus have told us the debt is unsustainable, without them having the slightest notion what it means. The next time someone tells you the federal debt is unsustainable, you’ll know they have no idea what they are talking about.

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

No nation can tax itself into prosperity