Tag: GDP

–Japan, Ireland, Greece: Facts vs. Mainstream Economists

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

The mainstream economists never change, but my hope is if I continue to demonstrate the inconsistencies of mainstream economics, eventually the word will get to the politicians, the media and the public. Here is a quick sampling of 10/26/10 AP articles:

“TOKYO — Japan’s Cabinet approved an extra budget to help finance $63 billion of stimulus spending aimed at spurring the country’s lackluster economy as it battles deflation and a strong yen.”

The CIA’s World Factbook 2010 shows Japan’s Debt/GDP at 189%. According to mainstream economics (aka debt-hawk economics), that Debt/GDP ratio should force a terrible inflation on Japan, and its debt should be “unsustainable.” But Japan is battling deflation, and seems to have so little difficulty “sustaining” its debt. And it will spend an additional $63 billion. See the disconnect?

The same source lists the Debt/GDP ratio for the U.S. as 53% (More recent data from the Treasury shows this to be 66%), far lower than Japan’s. Yet, the debt hawks claim – without any supporting data — the U.S. federal debt must be reduced by raising taxes and/or reduced spending, either or both of which will injure the economy.

But wait, there’s more. According to mainstream economics, all that borrowing should have forced Japan’s interest rates up, which should be bad for economic growth. But Japan’s benchmark interest rate is 0%, as low as it has been in 5 years. The reason: Japan’s benchmark interest rate is not market-derived; it is set by the Japanese government, just as the U.S. Fed Funds rate is set by the Fed.

“DUBLIN — Ireland’s government said it must slash euro15 billion ($20.8 billion) from its annual budgets in a four-year plan designed to bring Europe’s highest deficit back within EU limits.”

The EU demands that its nations have a Deficit/GDP ratio below 3%. However, as Ireland reduces stimulus spending, GDP also will fall. So, Ireland must chase a moving target, in which reductions in the numerator cause reductions in the denominator. Visualize a dog chasing its tail, and you have the EU mainstream economics version of Ireland.

“ATHENS, Greece — Greece’s central bank governor says the government must not relent in its planned deficit-cutting efforts but warns against further tax increases, which would deepen the recession.”

Just so we understand, tax increases will “deepen the recession” (by removing money from the economy), but deficit cuts, which also will remove money from the economy, are O.K.???

And this is what the science of economics has become.

There are two and only two solutions for Greece and Ireland. Either,
1. Return to Monetary Sovereignty by re-adopting your sovereign currency
or
2. Have the EU create a true United States of Europe whereby the EU would supply euros to its member nations as needed.

There are no other solutions. Oh yes, and stop demanding that your member nations commit economic suicide.

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

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”

–Elect me and I will build America

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

Since this is the season for campaign promises, here are mine. When you elect me, I promise to: (O.K., I’m not running for office, but this is what I would do.)

Reform Congress

I will work to end the Senate filibuster rule. I find the notion of one person being able to thwart the will of Congress and the American people, and to prevent the appointment of federal judges and other federal personnel, to be repugnant. It’s a bad rule.
.

Improve Social Security and Medicare

1. I will end FICA. This is the worst tax in America for reasons explained at FICA . Briefly, it’s a regressive tax that discourages hiring and discourages spending, and has no function. The federal government does not use FICA taxes.

2. I will reduce the retirement age back to 65 (early retirement at 62).

3. I will stop taxing Social Security benefits. Only a government mentality could pay people benefits, then tax the benefits. It makes as much sense to tax SS benefits as it would to tax Medicare benefits, i.e. no sense at all.

4. I will pay everyone, man or woman, married or single, who begins to claim benefits at age 65, the same Social Security benefit, regardless of prior earnings. Under the current system, the people who need benefits most are paid the least.

5. I will increase Medicare payments to doctors and hospitals to equal the current levels paid by private insurance companies. The current Medicare payment levels discourage doctors from accepting Medicare, and discourage young people from entering the medical profession.

6. I will include long-term care as part of Medicare. Current long-term care policies as too expensive for lower income people.

7. I will eliminate all “donut holes” and other similar limitations from Medicare Part D (drug coverage). I will cover all drugs, generic or branded, from day 1.
.

Rescue the States, Counties and Cities

The primary reason the states, counties and cities are in such bad shape: They are not Monetarily Sovereign. Mathematically, inflation and population growth make long-term survival on taxes alone, impossible for any monetarily non-sovereign government. Such governments must have money coming in from outside, via exports and/or federal assistance. I will pay each state $10,000 per person in the first year, then $5,000 inflation-adjusted each year thereafter.
.

Cut Income Taxes

I will cut income taxes from the bottom up. Each year, I will increase the standard deduction by $10,000. At the end of the first decade, the standard deduction would be $100,000, and the vast majority of taxpayers will file their taxes on a postcard. (This will impact charities, all of which except faith-based, should be supported by the government, anyway.)

I will eliminate business taxes. The economy is business. Taxing business = taxing the economy, exactly the opposite of what a growing economy needs.
.

Support Education

I will pay all students a salary for the job of attending school. (See: Salary 1 and Salary 2 and Salary 3 ).
.

Spend Liberally on Research and Infrastructure

I will offer federal support to a myriad of science research and development projects – medical, physical, military, energy – together with rebuilding our aging roads, bridges and dams. Under my watch, we will go back to the moon and on to Mars.
.

Raise Interest Rates

If any debt hawks have read this far, they undoubtedly are foaming at the mouth about the federal debt being “unsustainable” (nonsensical for a monetarily sovereign nation) and inflation. There is no post-gold standard relationship between federal deficits and inflation, (See: Inflation) And federal deficit spending reduces unemployment (See: Unemployment ) there is a distant point, when federal spending could be sufficient to cause inflation. So, I will take peremptory action to increase the value of money, by increasing interest rates.

This will strengthen the dollar, providing us with more imports of better goods and services at lower prices. (See: Stronger dollar )

Higher rates also will be stimulative, as it will force the federal government to pay more interest on its debts, thereby adding money to the economy. See: Interest

On a related subject, I will increase FDIC to $1 million, to protect more Americans’ savings.

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So that’s a good start for my first year in office. What do you think? Do I have your vote?

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

No nation can tax itself into prosperity

–Do you know what you want? Deficits vs. exports vs. stronger dollar vs. inflation

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

Here is a little test for you. Check all you believe will help the U.S. economy:
|__] 1. Reduced federal deficits
|__| 2. Increased exports (positive balance of trade)
|__| 3. Stronger dollar
|__| 4. Low inflation

Actually, it’s not so “little” a test. Many lay people, including most politicians and media people, would check all four. But you, being smarter, realize that #2 and #3 are incompatible. A stronger dollar makes our exports more expensive, while making imports cheaper. So to achieve increased exports or even a positive balance of trade, the dollar must weaken. This comes as a great disappointment to those who equate “stronger” with better. Sorry.

Now we get to the tricky pair: #1, reduced federal deficits vs. #2, increased exports. Who doesn’t want those?

Federal deficit spending increases the number of dollars in the economy, which many people reject because of fears about inflation. Ironically, these same people want increased exports – a positive balance of trade – which also increases the number of dollars in the economy. In short, federal deficit spending and exporting essentially are identical.

In the first case, the federal government buys, and pays with dollars, for goods and services. It is the customer. In the second case, foreigners buy, and pay with dollars, for goods and services. Foreigners are the customers. In both cases, dollars are added to the U.S.economy.

Admittedly, there is are differences. First, unlike exports, federal deficit spending adds to the federal debt, which most people mistakenly believe adds to our tax burden. However, because spending by a monetarily sovereign nation is not constrained by taxes, or any other income, there has been no historical relationship between tax collections and deficits, no will there be. See: Summary, numbers 9 and 9a. Your grandchildren will not, and actually cannot, pay for deficits. So this supposed “difference” amounts to a non-difference.

Second, while federal deficit spending adds to the world’s supply of dollars, our positive balance of trade does not. So, which is better? A growing economy requires a growing supply of money. So, any amount of inflation, plus population growth requires increases in the nominal supply of currency, just for GDP to remain level, let alone grow. Because the dollar is the world’s reserve currency, world GDP growth requires ongoing growth in the world’s supply of dollars. So, on balance, federal deficit spending is more beneficial to America and to the world, than is U.S. exporting.

Returning to the four questions, above, I suggest that this would be the ideal mix for America and the world:

1. Increased federal deficits, for world economic growth
2. Reduced exports (negative balance of trade), to supply the world with dollars.
3. Stronger dollar, for more imports, providing us with better goods and services at lower prices
4. Modest inflation, to stimulate present demand for goods and services.

Sadly, the U.S. federal government wants to do the opposite –reduce deficits, increase exports and reduce the value of the dollar — and that is just a sampling of reasons why we fall into a recession, on average, every five years. With a record like that, why do Americans believe what their leaders tell them?

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

No nation can tax itself into prosperity

–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