–How President Obama’s National bipartisan Commission on Fiscal Responsibility and Reform could destroy America

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

Parade Magazine, in its 7/4/10 “Intelligence Report”, printed an interview by Steven Beschloss and Janet Kinosian titled, “Can These Men Fix the Deficit?” The men are Erskine Bowles, a former White House chief of staff, and Alan Simpson, a former Republican Senate whip. Today, Messrs. Bowles and Simpson are co-chairs of President Obama’s National bipartisan Commission on Fiscal Responsibility and Reform.

Here, with my comments, are what they said:

BOWLES: “If we don’t solve the (federal) debt problem, we will be paying $1 trillion in interest in 2020. That’s money we can’t spend on Social Security, Medicare, education, infrastructure or innovation to make sure America is competitive in a global economy.”

RMM: “Of course, he’s dead wrong. America is a monetarily sovereign nation. Future spending is restricted neither by past spending, by debt, by deficits nor by tax collections. That $1 trillion in interest will function as an economic stimulus. This is classic cognitive inconsistency. Mr. Bowles believes the government cannot do what he sees with his own eyes, the government actually doing, i.e spending trillions on stimulus plans, despite debt that has grown more than 1,500% in only 30 years. In addition to cognitive inconsistency, he suffers from anthropomorphic economic disease – the mistaken belief that the government’s finances are like yours and mine.

BOWLES: “We’re looking at how we can reduce discretionary spending – things like education, transportation, the military, homeland security – and mandatory spending which includes Social Security, Medicare and Medicaid. We also need to raise revenue.”

RMM: He believes that cutting back on education, transportation, the military, homeland security, Social Security, Medicare and Medicaid, while raising taxes, will “make sure America is competitive in a global economy.” The notion would be laughable if it weren’t so dangerous.

SIMPSON: “We’re not going to cut Social Security – we’re going to stabilize it. None of the ideas that have been presented will affect anyone over the age of 58.”

RMM: “Stabilize” is political double talk for, “We are going to cut Social Security for everyone 58 and younger.”

SIMPSON: “As it is, it (Social Security) can’t sustain itself.”

RMM: Ah, the old (and false) “unsustainable” claim.

BOWLES: “We’re going to work our hearts out succeed.”

RMM: In their world, “Fiscal Responsibility and Reform” are code words for austerity, which always causes recessions and depressions. Heaven help us from those who have power, yet cannot learn.

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

No nation can tax itself into prosperity

–Some thoughts on closing the financial gap.

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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Whether for moral or for practical reasons, most of us would like to see the large gap between the rich and the poor reduced. But how? We could try the “Robin Hood” approach: Take money from the rich and give money to the poor. The progressive income tax code already is a take-from-the-rich device. Taxes on highest earners could be raised even further, as President Obama wishes to do. But, all taxes remove money from the economy. So if higher tax rates were effective money collectors, they would slow the economy, which ultimately hurts then poor.

Taxes could be increased on inheritances and on high-end purchases (furs, jewelry, boats, luxury cars, expensive homes). But, this too removes money from the economy, and past attempts have impacted the businesses supplying these luxury goods, which has impacted employment. The property of the rich simply could be confiscated and distributed to the poor. This has been attempted in several countries, most recently in Zimbabwe, to disastrous results for the poor.

All things considered, take-from-the-rich does not seem to be an effective device for closing the gap between rich and poor.

Alternatively, the federal government can deficit spend. This can lift the poor, though it probably does not close the gap, as it would lift the rich, too. We could eliminate FICA, which falls most heavily on the lower-paid employed, though this also would help the rich who own the businesses paying FICA. We could raise the minimum income for federal taxing. This would help lift the poor, but help the rich business owners by giving the poor more spending money. We could increase federal assistance to Medicaid, food stamps, “affordable” housing, etc. This would help lift the poor, and also help the rich owners of pharmaceutical companies, groceries, builders, etc.

In all, perhaps no attempt to transfer money directly from the rich, or directly to poor, does much, if anything, to close the wealth gap. Giving money to the poor helps the rich. Taking money from the rich, hurts the poor. And the gap remains.

If the gap is to be closed, the poor themselves may have to close it, and I suspect the device is education. Of all the differences between rich and poor, perhaps none is more important than level of education. Today, primary and secondary education are available free to everyone. Sadly, the quality of this education differs markedly, between rich and poor. A college education and an advanced degree are not feasible for a poorly educated child, and despite scholarships, they are not affordable for most poorly financed families.

Affordability might be accomplished if the federal government were to pay for college just as the states and cities pay for primary and secondary education. Even then, some parents want their children to go out into the working world, to bring back support for the family, which can doom the child to a life of menial labor. This problem might be addressed by offering federal support to families who allow their children to attend college. Universal college might put all young people on a more even footing, and help close then financial gap.

There have been many attempts to address differences in educational quality among primary and secondary schools, with NCLB (No Child Left Behind) being the most obvious. The program has supporters, detractors and difficulties. Many teachers’ unions resist quality evaluations. Many families do not have an educational ethic. Many children come from dysfunctional families and neighborhoods. The problem is not just one of poor schools. It is a community-wide problem, requiring a community-wide solution.

School administrators must be given the power, the motivation and the know-how to bring principals, teachers, parents and students — the entire neighborhood population — together as one cooperative force to improve educational quality. Private schools, magnet schools and some religious schools demonstrate that education of the poor can be improved.

The problem is difficult and far beyond the scope of this post and the expertise of this writer. But, assume we could create a nation of outstanding primary and secondary schools, motivated families and free colleges. Let’s say we could close the financial gap. Is this economically wise? That is, would our economy grow better, and would our population live better, happier, more rewarding lives overall, if there were little or no gap?

I hope to write more about this, and meanwhile I welcome your thoughts.

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

No nation can tax itself into prosperity

–Less debt . . . oh, wait. More debt.

An alternative to popular faith

The 6/30/10 editorial in the Chicago Tribune, titled, “Enough debt, already,” had me confused. At first I thought they meant private debt. After all, consumers now deal with mortgages they can’t handle and credit cards charging 20% or more interest. And business profits, or lack thereof, won’t support much more debt without increased consumer buying. Consumers and businesses are going bankrupt in droves, so at this stage of the recession, “Enough debt, already” seems like good advice for the private sector.

But no, that is not what the Tribune meant. They wanted less federal debt and more private debt. The federal government has the unlimited ability to pay any debt of any size. It is a government that neither needs nor uses tax money to pay its debts. Yet the editors say, “. . . the U.S. has gone way, way down the path toward unsustainable debt . . .”

Will the government be unable to service its debts? No, that cannot happen. So, what makes federal debt “unsustainable”? The Tribune editors never say. However they call for more lending to business, despite the fact that growing business debt can be unsustainable. To make matters worse, the Tribune cheers the restriction on unemployment checks to those people who would have used those checks to buy things from businesses, thereby stimulating business. (“Unemployment checks extending up to 99 weeks instead of the usual 26 add more indebtedness.”)

The editors correctly say, “The U.S. economy is hungry for credit,” not realizing this means the U.S. economy is hungry for money, and federal deficit spending is the government’s method for adding money to the economy. The editors lament, “Washington already has bequeathed to our descendants a nation debt of $13 trillion,” – an untrue statement – and simultaneously wants to bequeath to our descendants added business debt. (Who do they think pays for business debt?)

To summarize: The Tribune editors oppose debt creation by the one entity that can afford unlimited debt service, but advocate more debt for the over-extended private sector. They support looser lending standards, so that less qualified businesses can go deeper into debt. They oppose increasing regulations on lenders, the same lenders whose unsupervised, profligate lending triggered the recession. They favor the end to federal stimulus plans, which would add the money they say the economy needs. And they hope the economy will recover — somehow.

Clearly, economics is not the Tribune editors’ forte.

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

No nation can tax itself into prosperity

–Salvation for Europe?

An alternative to popular faith

Readers of this blog understand the difference between a monetarily sovereign nation (which has the unlimited ability to pay its bills, even without taxing or borrowing), such as the U.S., Canada, Australia, Japan, et al, vs. the European Union nations which have not had this ability, because of EU rules.

In previous posts I predicted the EU’s demise, and now that has been coming true. The PIIGS (Portugal, Italy, Ireland, Greece and Spain) are the most indebted of the EU nations, and not having the unlimited ability to service debts, they are the most threatened. If nothing is done, all EU nations will go bankrupt.

But, if hints in the news media are correct, something may be done. Rumor has it that the European Central Bank (ECB), which does have the unlimited ability to create euros, may buy enough debt to keep members afloat. That would bring the ECB a step closer to the U.S. Treasury in function, and (without being overly dramatic) save the world.

The parallel continues. The fifty U.S. states are like the EU nations in that they too cannot create money at will (See: SAVE CALIFORNIA). They can survive, because the federal government pumps in money, via such federal payments as road building, military spending, etc. The same is true of U.S. counties and cities. All need money input in excess of taxes.

If indeed the ECB begins to function like the U.S. Treasury, the EU nations’ solvency problems instantly will disappear, depending upon how much aid the ECB provides. Sadly however, this will not end the debt-hawks tragic misunderstanding of money, so expect to see continuing cries for “austerity,” which will hamstring the EU’s economies, as the debt-hawks have hamstrung ours.

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