Tag: Free Money

–The “impossible” cure for stagflation

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

Stagflation is economic stagnation or high unemployment combined with high inflation. Here is what a Wikipedia author said. “It is a difficult economic condition for a country, as both inflation and economic stagnation occur simultaneously and no macroeconomic policy can address both of these problems at the same time”

This is one statement with which, both mainstream economists and Modern Monetary Theorists (MMT) seem to agree. I disagree with both.

Economic stagnation, high unemployment and recession all indicate the same fundamental problem: The economy is starved for money. Inflation (wrongly) is felt to be caused by too much money, which is why we experience the universal belief that “no macroeconomic policy can address both of these problems at the same time.”

Stagflation is most likely to occur when oil prices spike. A rapid increase in oil prices causes inflation. It also has a negative effect on production and economic growth. U.S. stagflation could occur, even in the near future, were any major oil producing states, for economic or political reasons, decide to reduce production dramatically.

Debt hawks (aka mainstream economists) would address stagflation with increased federal spending, while simultaneously increasing taxes to “pay for” the spending. The benefits of the increased spending would be offset by the damages of increased taxation. The former adds money to the economy; the later removes money from the economy — equal and opposite effects.

Even today, as we try to recover from the worst recession in decades, debt hawks continue to demand increased taxes to “pay for” spending, not realizing that in a monetarily sovereign nation, taxes do not pay for spending. Simultaneously, the Fed, wrongly believing interest rate cuts stimulate the economy, would lower rates, thereby exacerbating the inflation.

The Fed believes this, because raising interest rates does cure inflation, and for reasons known only to the Fed, they believe inflation is the opposite of recession, so for recessions, they do the opposite. Unfortunately for Fed theorists and for us citizens, the opposite of inflation is deflation, not recession, so doing the opposite doesn’t work.

MMT followers also would increase spending (good) and increase taxes (bad), because they believe taxes control inflation.

In short, MMT and debt hawk economists would follow the same path, an irony lost on both groups, each of which correctly claims the other does not understand current economics.

To cure stagflation, one must deal with two distinct problems – recession and inflation – using two distinct solutions. The solution for recession is federal deficit spending. Money is the lifeblood of an economy. During a recession, an economy suffers from “anemia,” a shortage of money. The treatment for anemia is to increase the blood supply. The government’s deficit spending adds money to the economy, curing the stagnation. Deficit spending can be accomplished by cutting taxes, increasing spending or both.

Then, to cure the inflationary part of stagflation, the government must raise interest rates, thereby increasing the reward for owning money, i.e increasing the value of money.

Increase deficit spending while increasing interest rates: The simple solution for taxation. Why will the government not take these easily administered steps? Because the mainstream economists wrongly belief deficit spending causes inflation, while MMT wrongly believes tax increases control inflation, and the Fed wrongly believes raising interest rates slows the economy.

Until these three groups understand economic realities, please pray we don’t encounter a stagflation, because the government will find it incurable.

Summary of how each group would attempt to defeat stagflation:

Mainstream economics (debt hawks):
Reduce taxes to stimulate economy
Reduce federal spending to cut federal debt
Increase interest rates to fight inflation
(Result: Reduction in federal spending nullifies tax reduction and exacerbates recession)

Modern Monetary Theory:
Increase taxes to fight inflation
Increase spending to stimulate economy
Reduce interest rates to fight inflation
(Result: Tax increase nullifies spending increase and exacerbates recession. Reduced interest rates exacerbate inflation)

Mitchell:
Reduce taxes to stimulate economy
Increase spending to stimulate economy
Increase interest rates to fight inflation
(Result: Tax reduction & spending increase cure recession; interest rate increase cures inflation)

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

No nation can tax itself into prosperity

–The “unsustainable” federal debt lie.

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

You’ll read and hear a great deal now, before the November elections, about how to stimulate the economy. Nearly all of what you will read and hear is nonsense. I’ll quote from a typical article, this by David Kocieniewski, published in the New York Times on September 10, 2010:

“. . . economic research suggests that tax cuts, though difficult for politicians to resist in election season, have limited ability to bolster the flagging economy because they are essentially a supply-side remedy for a problem caused by lack of demand.”

Taxes remove money from the economy. Therefore, tax cuts prevent removal of money from the economy. Functionally, there is no difference between a tax cut and a spending increase. “Supply side” vs. “lack of demand” is economic gibberish.

“The nonpartisan Congressional Budget Office . . . (said) tax cuts for high earners would have the smallest ‘bang for the buck,’ because wealthy Americans were more likely to save their money than spend it.”

This is the “first use” myth – the belief that dollars stop after their first use. What do wealthy Americans (or any Americans) do with money they save? They bank it and invest it. The money instantly goes to such investments as bank accounts, stocks, bonds, real estate, CDs, etc. In short, the money goes to other people and businesses, which borrow from those banks and own those stocks, bonds, real estate, CD, etc.

Then those people instantly either spend, invest or save the money, and it moves into other hands. With every step, a fraction of the money is spent. In one year, an individual dollar may pass through hundreds of hands, which adds up to a great deal of spending. Money never stops moving from hand to hand, a fact the politicians never seem to grasp.

“. . . direct payments to the unemployed and Social Security recipients or reducing the payroll taxes of workers . . . are considered politically untenable with many elected officials reluctant to even utter the word “stimulus” after the $787 billion stimulus.”

Why is “stimulus” a bad word? Because the recession was not completely cured by the stimuli used. Imagine your house is burning. The fire fighters pour water on it. The fire goes down, but not completely out. So the fire fighters stop. “Water” has become a bad word., because the fire still is smoldering. This is the logic that now rules our economy, while your house continues to burn.

“’. . . firms don’t hire based on tax breaks; they hire based on demand,’ said Roberton Williams, a senior fellow at the nonpartisan Tax Policy Center. “So a lot of the tax breaks are likely to be rewarding people and companies for that they were going to do anyway.”

Mr. Williams, it’s not a matter of “rewarding people.” It’s a matter of not removing money from the economy. Personal taxes, business taxes, taxing the rich, taxing the poor – all taxes remove money from the economy. One dollar in taxes removes exactly one dollar from the economy, no matter who is taxed.

“(Predicted) surpluses have now become crushing deficits . . .”

Exactly, what is “crushing” about federal deficits? Has anyone noticed any federal difficulty servicing its debts? Today, we are talking about tax cuts, so who exactly is being crushed? This is classic debt-hawk mythology.

“The specter of a ballooning national debt has led even some of the early supporters of the cuts, including the former Federal Reserve chairman Alan Greenspan, to advocate letting them expire.”

Does this man still retain any credibility? Isn’t he the guy who thought interest rate cuts would prevent the recession?

“‘We don’t think taxes ought to be increased in the middle of a recession for anyone,” (said) Senator Mitch McConnell. . .”

Exactly right.

“The Obama administration dismisses that argument, saying that nearly a third of the cost of the cuts — more than $700 billion during the next decade — would go to the wealthiest 2 percent of Americans.”

Are they ignorant or just playing politics – or both? They want to remove $700 billion from the economy, simply because the first people to touch it would be rich?? What about the second, third and fourth people to touch it?

“One curious omission in the Obama plan is the tax cut proposal that many, including the Congressional Budget Office, believe would do the most to spur hiring: a payroll tax holiday. According to various news reports, Obama economic advisers passed on the idea because they feared it would be too expensive or would deprive Social Security and Medicare of crucial revenue. Administration officials declined to discuss their decision.”

Page 149 of my book, FREE MONEY, asks the question, “Which taxes should be eliminated first.” The answer given: “Eliminate Social Security and Medicare taxes.” I discuss this further at “Ten Reasons to Eliminate FICA”

“Edward D. Kleinbard, former chief of staff of the bipartisan Joint Committee on Taxation, said the reliance on tax expenditures had distorted the budget process because it induced the public to overlook the fact that — unless they are accompanied by spending reductions — tax cuts have the same effect on the deficit as additional spending. . . . The debate has become so unrealistic it makes you want to scream.”

No, what really makes you want to scream is the ridiculous, unsubstantiated, totally wrong belief that deficits are a bad thing – so bad in fact, they are worse than recessions and slow economic recovery. So long as politicians do not learn that not only is deficit spending necessary, but an increasing rate of deficit spending is necessary, we will continue to have a recession on average, every five years.

Heaven save us from them.

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

No nation can tax itself into prosperity

–How the debt hawks continue to help destroy our nation.

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

Thank you debt hawks. You have sowed the wind, and we all reap the whirlwind.

September 8, 2010: (AP)“Obama said the struggling U.S. economy can’t afford to spend $700 billion to keep lower tax rates in place for the nation’s highest earners despite a call by House Minority Leader John Boehner and other GOP leaders to do just that.”

Dear Mr. President,

Either you do not understand economics, or your political desire to foment class warfare has trumped your desire to save America. You remind me of a man who does not believe water quenches fires, so you allow the house of America to burn rather than to receive the water (federal spending) it needs to quench the recession fire.

Think of what you’re saying. “The U.S. economy can’t afford . . .”??? Since when is the federal government the same as the U.S. economy? And please explain why the government can’t afford to help the economy. Is there truly a danger our government, which has the unlimited ability to create money, can go broke? Please explain to America how a monitarily sovereign nation, that creates money at the touch of a button, cannot afford to support the economy. Please explain why you are more worried about a federal deficit (which actually benefits America), than about the lives of the Americans who depend on you.

The house is burning, Mr. President. People are suffering. This is no time to play politics or to follow obsolete, debt-hawk, economic theories. Taxes – all taxes – hurt the economy. Always, always, always. Federal spending – all federal spending – helps the economy. Debt-fear is killing helpless, innocent people, who do not understand what is happening to them.

They voted for you. They trusted you. Put out the fire. Cut taxes. Increase spending. Save the economy.

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

No nation can tax itself into prosperity

–Why I hate affirmative action

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

O.K., I don’t hate the concept of affirmative action; I hate the execution. Think of the way it’s been practiced in the colleges. A minority student may supplant a white student, even if that white student has better academic qualifications. The minority student receives extra points for being a minority. Somehow, it seems fundamentally unfair.

I know. I know. Minorities have been treated unfairly for centuries, and affirmative action doesn’t begin to make up for it. But under the heading, “Two wrongs don’t make a right,” I object to unfair treatment against anyone. And at what point does today’s unfairness balance yesterday’s and tomorrow’s unfairness? Does it ever end?

Further, this execution of affirmative action – giving extra points for being a minority – hurts America, because it lowers college academic standards (unless we flunk them out after letting them in – a terrible thought). Sure, a lot of dumb jocks also are getting in, and I object to that, too. But why exacerbate the flow of under-qualified students to our colleges?

Then, there is the affirmative action in the job market, which also tells employers to give preference to minorities. The same problems exist as with schools. The execution is unfair, and less qualified people are employed at the expense of the majority.

The execution of affirmative action should be changed from substitution to addition. Here’s what I mean. Previously, I’ve suggested paying students a salary, for attending all grades, 1 through 16 and beyond. This would help financially challenged families cope with school costs and encourage attendance. A more detailed explanation is at Salary for Attending School and at Salary for Attending School, 2nd Paper

The program would not cause replacement of more qualified students, but rather add the less financially blessed students to the national college mix. Less academically fit students would go to less academically challenging schools, thus not lowering overall school standards. Further, schools could offer fewer or lower scholarships, the money for which now could be spent on educational improvements.

Similarly, the elimination of the FICA tax would encourage the hiring of lower paid employees. Today, a business paying an employee $30,000 per year currently must pay an additional $2,295 to the government – a significant sum. Without FICA, business could afford to hire more employees, which would ease unemployment among all groups. Or businesses could take that FICA money as profits, which would stimulate the economy, thereby helping to reduce unemployment.

Additionally, more help should be given to small business. That is where minority hiring, promotion and economic growth is most effective. (No ceiling when the owner is a minority) Theoretically, the Small Business Administration (SBA) offers assistance with loans, education, licensing and other legal, financial and operational matters. In actuality, the SBA is underfunded for that mission. I visualize an agency with the resources to hire experienced business people, who could mentor start-up and small business owners, walking them through the entire small business process.

In summary, I favor the motives of affirmative action, but where execution calls for substitution, rather than addition, it is unfair and economically harmful to America. We must think of, and develop, affirmative action efforts that not only help lift the disadvantaged, but do so while lifting the entire economy, and not hurt any of America’s non-minority population.

As always, I’d like your ideas.

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

No nation can tax itself into prosperity