Tag: modern monetary theory

–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.

Suggested reading: MOSLER

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

No nation can tax itself into prosperity

–What the Wall Street Journal editors want

An alternative to popular faith

Today (6/26/10), in an editorial titled, “The Keynesian Dead End,” the Wall Street Journal editors said, “. . .$1 in (federal) spending has to come from somewhere, which means in taxes or borrowing from productive parts of the private economy.”

Wrong, wrong and wrong. Federal spending relies neither on taxes nor on borrowing. For today’s monetarily sovereign nations, federal spending neither is constrained nor facilitated by any form of income, either from taxes or borrowing. Federal spending is accommodated by the simple device of crediting bank accounts, which the government can do endlessly. If taxes and borrowing were reduced to $0, this would not affect by even one penny, the federal government’s ability to spend.

Further, “. . . borrowing from the productive parts of the private economy” implies that T-bill purchases somehow remove money from the private economy. In fact, T-bill purchases merely are an exchange of money within the private economy. When you buy a T-bill, your checking account at your local bank is debited and your savings account at the Federal Reserve Bank is credited. (Yes, by virtue of your T-bill purchase, you have a savings account at the Fed.)

No money is lost. It merely is moved from your checking to your savings account. Actually, money is gained, because when the T-bill matures, the money will be moved back to your checking account, plus interest.

The Journal editors also said, “Now the political and fiscal bills are coming due even as the U.S. and European economies are merely muddling along,” as a prelude to several references equating the U.S. with the EU. The editors do not know something so basic as the difference between monetarily sovereign nations and nations not monetarily sovereign. Without this knowledge, any understanding of economics is impossible.

The WSJ editors claim to favor lower taxes, less spending and lower deficits. At various times, the editors also have preached in favor of a stronger army, better schools, federal supervision of banks and other financial firms, better roads, defense of our borders, defense against terrorism, safer food, better retirement, better unemployment insurance, police, health care, rescue from hurricanes, oil spills and other disasters, more jobs, a better environment and a long list of other benefits. (One is reminded of the confused Tea Party platform).

The WSJ editors are like the person who says, I want to eat more, exercise less and lose weight. Let’s be clear. Under the current system, if you cut taxes you increase the deficit, unless you cut spending even more, which means you can’t have the stronger army, better roads et al. Of course, there is one solution, which the editors don’t even consider. If you eliminate borrowing, you can cut taxes without increasing the deficit. Without borrowing, there is no debt or deficit, and as we’ve shown many times previously, government spending does not require government income.

Finally, the WSJ editors said, “The Reagan and Clinton-Gingrich booms were fostered by a policy environment for most of that era of lower taxes, spending restraint and sound money.” Spending restraint?? Have the editors forgotten how Reagan began the largest debt growth in post WWII history, and how Clinton’s surplus introduced the 2001 recession?

I should commend the WSJ editors for one statement: “ . . . much of the U.S. stimulus went for transfer payments such as Medicaid and unemployment insurance . . . “ True, and a perfect reason why taxes ostensibly “for” Medicaid and unemployment insurance should be eliminated. Federal taxes do not pay for federal spending.

The balance of the editorial contained the usual fulmination about the size of the federal debt and deficits, with also, as usual, no facts showing how debt and deficits harm the economy. They end their editorial this way: “With the economy in recession in 2008 and 2009, we argued that some stimulus was justified and an increase in the deficit was understandable and inevitable.”

So, to summarize the WSJ position: Deficits were justified when times were bad; they are not justified when times are good. Today, times are bad and deficits are not justified.

Do you wonder why our politicians are confused?

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

No nation can tax itself into prosperity