–A reminder about why Modern Monetary Theory (MMT) is wrong about inflation

Mitchell’s laws: Reduced money growth never stimulates economic growth. To survive long term, a monetarily non-sovereign government must have a positive balance of payments. Austerity = poverty and leads to civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
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Thanks to all of you who responded to my post titled “Why Modern Monetary Theory’s Employer of Last Resort is a bad idea.” Your responses were informative and thought provoking.

That post touched on one of the two primary differences between Monetary Sovereignty and what popularly (though perhaps erroneously) is known as Modern Monetary Theory (MMT).

Today, Cullen Roche published a very short and very good post about the Employer of Last Resort (ELR) discussion, and its role relative to MMT. While early founders of MMT believed ELR to be central to the basic concept, I suggest it is at best peripheral, and really more of a hypothetical departure.

MMT (and Monetary Sovereignty – MS) have the same center, the unlimited ability of a Monetarily Sovereign government to control its money supply and to pay any bill of any size, an ability monetarily non-sovereign governments do not have. The U.S. acquired this ability in August 15, 1971, when it went completely off any gold standard.

The center of MMT and MS is merely a factual description of the real workings of a monetary system. (Unfortunately, that “center” does not have its own, unique name, a situation that creates misleading arguments.)

From this factual description, you can create hypotheses about problems and solutions involving, for instance, full employment, inflation control, the income gap and economic growth. These problems and solutions are not mutually exclusive. They are so intertwined that each affects all the others creating classic “unanticipated results” scenarios.

It is human nature, when addressing any problem, to look first at the simplest, most direct solution:

Employment too low? Hire people (the ELR solution).
Inflation? Cut the deficit (the debt-hawk solution).
Income gap? Tax the rich (the Democrat solution).
Economic growth? Trade protectionism. (The populist solution)

Climbing straight over the peak of a mountain may be the simplest, most direct route, but not necessarily the best way to get to the other side. That simplest, the most direct solution can actually be counter-productive. In the previous post, I described why, though ELR is the (seemingly) simplest, most direct solution for unemployment (simply hire ’em), it may not be the best solution. This is one area where MS differs from what is called MMT.

That all is discussed in the previous post and this is a prelude to what I really wanted to remind you about, in an attempt to draw a distinction between MMT and MS.

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The other area of difference is the prevention and cure of inflation. Perhaps the most fundamental equation in all of economics is: Value (or Price) = Demand/Supply. Increase the Supply of money or decrease the Demand for money, and the Value of money goes down, i.e. you get inflation.

For adherents of MMT, inflation is a matter of money supply. Thus, inflation is to be prevented and cured by regulating the creation and destruction of dollars. MMT suggests that federal taxes be increased when excessive (above a target rate) inflation appears. In fact, according to MMT, that is a fundamental purpose of taxes – providing value to fiat money.

I agree and disagree. There is no question that removing dollars from the U.S. economy would help prevent/cure inflation, by giving greater value to the remaining dollars. Scarcity increases value. But, I have strong concerns about this approach.

While, in theory, tax increases can prevent inflation, in actual practice, tax changes would be inefficient and damaging. They are far too slow (When will they be collected?), far too political (Which taxes?) and not incremental (How much?). Perhaps most importantly, tax increases remove dollars from the economy, thereby leading to recessions.

Although the federal government has managed to control inflation, federal taxes have not been the controlling device. Interest rates have. That is, while MMT hypotheses have focused on supply, the Fed, in the real world, has focused on demand – successfully. Further, there is no historical relationship between high interest and low GDP growth. On the contrary, there is a slight relationship between high interest rates and high GDP growth.

In an April, 2011 post titled

How Monetary Sovereignty differs from Modern Monetary Theory — simplified, I described the difficulties with using taxes to give value to money, or more specifically, to combat inflation.

All of you who’ve not read that post, please do so. You will see that using taxes to prevent/cure inflation runs headlong into serious operational and political difficulties. The devil truly is in the details.

I’ll close with this thought: The “devil-in-the-details” problem seems endemic to economics, where far too many thought leaders have not had much personal experience with reality.

Those who believe changing taxes to fight inflation, do not understand political reality. Similarly, those whose experience finding, evaluating, hiring, training, directing, motivating, moving, rewarding, supervising and firing employees is limited or non-existent, see no operational or political difficulty with an ELR program.

They think of people as homogeneous “buffer stock.” They do not understand reality.

Having personally found, evaluated, hired, trained . . . etc., etc. thousands of employees during my 50+ years as an owner of several businesses, I have seen the details and met the devil. And he is one mean, unforgiving bugger.

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

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No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports

#MONETARY SOVEREIGNTY

–Why Modern Monetary Theory’s Employer of Last Resort is a bad idea.

As I frequently have mentioned, Monetary Sovereignty (MS) shares many fundamentals with Modern Monetary Theory (MMT). There are differences however, among which are the prevention and cure for inflation and one of the tenets of MMT, called “Employer of Last Resort” (ELR).

(Sorry for all the acronyms, but they save typing.)

This post discusses ELR. MMT would like the federal government to become the ELR. There is a bit of history for this in the Great Depression’s Works Project Administration, which employed many people during the depression. However, WPA was not an ELR in the way MMT suggests, which is to offer a job to anyone who wants one.

Monetary Sovereignty has several questions about the MMT version of ELR:

1. What are the jobs? Many reasons for individual unemployment, including:
a. Unavailability of a specifically desired job
b. Unavailability of jobs that pay “enough.”
c. Unavailability of jobs near home
d. Job seeker’s lack of qualifications or over-qualifications for available jobs
e. Job seeker’s personal background, including age, education, personality, illness, criminal history, etc.

2. Where are the jobs being offered? Unemployed people can be found in every city, every county and every state. Is it possible to offer appropriate jobs for every unemployed within a reasonable distance from every location?

3. What does each type of job pay? Income needs are different for different people in different locations. Working takes time away from job-seeking, so people, requesting help from ELR, elect to reduce efforts to find a better job. If the jobs pay too little, do they extend poverty? If they pay too much, do they encourage sloth and/or compete with private companies?

4. What mental and physical skills are required? ELR probably would pay more for jobs requiring certain mental and physical skills than would less demanding jobs. Can ELR jobs be matched to every type of mental and physical skill?

5. Who supervises each type of job? How will ELR hire supervisors for every type of job, from blue collar to white collar, in every location? And how will ELR supervise those supervisors? Who will make the rules and set the criteria?

6. Who hires? Similar to #5, who will evaluate and hire employees for every type of job in every location.

7. Why are people fired, a who does the firing? What are the criteria? Who supervises? What happens to people who are fired for any of the dozens of reasons why people are fired, from insubordination, to lack of attendance, to inability? Are they given another job?

8. How does this affect private companies that provide the same products and/or services being provided by ELR agencies?

Providing money to the unemployed would stimulate the economy, but I suggest the MMT device for providing money – i.e., providing a job – would create a giant bureaucracy filled with bully straw-bosses, plus jobs that provide neither satisfaction nor opportunity for meaningful growth, and jobs that interfere with the job-hunting process. It would doom us to a nation filled with non-productive equivalents of fast food servers and Walmart greeters.

Rather than attacking unemployment directly, by offering government, make-work jobs, I suggest the government stimulate the overall economy (via increased federal deficits), enabling the private sector to offer more jobs. A stimulated private sector will provide more meaningful and economically beneficial jobs than will a government bureaucracy offering jobs to anyone who wants one.

Because you adherents of MMT have given much thought to ELR, I welcome your comments. I admit to the possibility I may have overlooked a key issue.

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

#MONETARY SOVEREIGNTY

–The other reason federal income taxes should be eliminated

Those, who understand even the basics of Monetary Sovereignty, know a Monetarily Sovereign government does not need an outside source of the sovereign currency it has the unlimited power to produce. By way of example, I have awarded dunce capsto certain economics experts, who do not understand the basis for all economics, Monetary Sovereignty.

I am “sovereign” in these dunce caps. I do not need to borrow any. I do not need to collect dunce caps as a tax on recipients. I can create all I wish, any time I wish. I create them by the very act of awarding them.

Identically, the U.S. federal government is sovereign in U.S. dollars. It does not need to borrow any. It does not need to levy taxes to obtain dollars. Uniquely, the federal government creates all the dollars it wishes, any time it wishes. It creates them by the very act of awarding them, i.e. spending them.

Although, federal taxes may have some value in directing certain aspects of the economy, they are unnecessary as a source of federal spending funds. If we eliminated all federal taxing (and borrowing) tomorrow, this would not affect by even one penny, the federal government’s ability to spend. Federal taxes simply remove dollars from the economy and destroy them.

(No, they are not recycled by the government. They are not used or saved by the government. They are destroyed — lost forever.)

And, there is yet another problem with federal taxes, specifically income taxes. They waste one of the most precious commodities the citizens of a nation own: Time.

Forbes, Janet Novack, Forbes Staff, 1/05/2011
Tax Waste: 6.1 Billion Hours Spent Complying With Federal Tax Code

National Taxpayer Advocate Nina E. Olson multiplied the IRS’ own estimates of how much time taxpayers spend collecting data for and filling out each individual tax form by the number of forms filed to estimate that Americans (both individuals and businesses) spend 6.1 billion hours a year complying with the code. That’s the equivalent of more than 3 million workers toiling away full time, all year. By way of comparison, the Federal government employs the equivalent of 2.1 million full-time civilian workers and Wal-Mart, the nation’s largest private employer, has 1.4 million workers in the U.S., although not all are full time.

That’s 6.1 billion unpaid hours. Not only are millions of Americans unemployed, so earning no money, but the federal government requires Americans to do 6.1 billion hours of unpaid work.

About 60% of individual taxpayers now pay CPAs, enrolled agents, H&R Block or other services to prepare their returns while another 29% use software, such as Intuit’s TurboTax. According to a recent IRS study, the median individual taxpayer (as measured by income) spent $258 in 2007 for tax prep, up from $220 in 2000, in constant, inflation-adjusted dollars.

In summary, the federal income tax is worse than unnecessary. It is costly in terms of both time and money — a useless, harmful exercise.

So what is Ms. Olson’s suggested solution?

Olson called for Congress to fashion reform by beginning with a clean slate—eliminating all $1.1 trillion in annual tax deductions, credits and other tax expenditures, and then adding back only those where “a compelling business case can be made that the benefits of providing the tax incentive through the tax code outweigh the tax-complexity challenges that special rules create.”

In contrast to the deficit panel chairmen, who proposed eliminating tax breaks to both dramatically lower rates and raise an extra $80 billion a year, Olson urged Congress to enact a revenue neutral tax reform for its own sake to produce a system that is “simpler, more transparent, and easier and cheaper for taxpayers to navigate.”

Yikes. First she wants to cost the economy $1.1 trillion. Then she wants Congress to replace some of the lost deductions with new deductions. This is a solution?

In essence she is saying, “We have a purposeless, anti-stimulus process that removes more than $2 trillion from the economy every year. Further, it is a massive time waster. So my suggestion is to continue stealing $2+ trillion from the economy every year, but ask Congress to make the process simpler.”

How about this: Let’s begin to eliminate taxes, and stop taking trillions out of the economy. My suggestion is to increase the standard deduction by $10,000 every year. This gradually would simplify the process by each year making more people eligible for “post-card” returns.

Remember, politicians do politics. So, don’t expect the politicians known as “Congress” to simplify a 100% politically-created monster known as the tax code. It’s like expecting termites to stop building mounds.

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

#MONETARY SOVEREIGNTY

–EU demands that Spain weave the rope for its own hanging.

Yahoo News, 12/30/11
Spain must stick to deficit-cutting schedule: Rehn

BRUSSELS (Reuters) – It is essential that Spain keep on track in correcting its excessive deficit, Olli Rehn, the EU’s economic and monetary affairs commissioner, said on Friday. “I regret the sizable fiscal slippage relative to the 2011 budgetary target,” Rehn said in a statement.

“It is all the more important now that Spain remains fully committed to the fiscal consolidation path and stays determined to correct its excessive deficit by 2013 as scheduled.”

Spain’s new government said on Friday that this year’s budget deficit would be much larger than expected, and it announced surprise tax hikes and wage freezes. Rehn said he welcomed Spain’s package of policy measures as “a very important step to shore up public finances and reassure financial markets”.

The European Commission would carry out a detailed assessment of the larger-than-expected slippage and the budgetary impact of the new package once it received all the details, he said.
(Reporting by Barbara Lewis; Editing by Leslie Adler)

Tax hikes and wage freezes. Tax hikes remove money from the economy; wage freezes limit consumer spending. Could there be a more misdirected path toward economic recovery? The best analogy is applying leeches to cure anemia.

But what else can Spain do? Its government is helpless. They voluntarily surrendered the single, most valuable asset any nation can have: Their Monetary Sovereignty. They no longer can create sovereign currency to pay their bills, as they have no sovereign currency. They are monetarily non-sovereign. They are drifting in the sea, and the EU refuses to toss them a life preserver.

Why the world (including the U.S. Congress, the President, the media and the old-line economists cannot learn from Spain’s (and Greece’s and Italy’s) experience is mystifying. Our leaders would like to make America monetarily non-sovereign, i.e. unable to create our sovereign currency via deficit spending. Why? Because they believe a Monetarily Sovereign nation is just like you and me. They cannot understand the fundamental differences between federal finances and personal, kitchen-table finances. Our leaders think deficits are bad, and don’t understand deficits are necessary.

They see, right before their eyes, what happens to monetarily non-sovereign governments, including the U.S. states, counties and cities. They are unable to pay their bills. Illinois, with large debt, is months in arrears. The U.S., with large debt, has no trouble at all, paying its debt.

And yet, this evidence makes no impression. It’s as though they say, “Despite all the evidence provided by astronomy, biology, geology, plate tectonics and physics, I believe the world is 5,000 years old, and you can’t change my mind.”

They see, right before their eyes, that Japan is not bankrupt, despite a debt/GDP ratio well above 200%, yet continue to predict disaster if the U.S. debt/GDP ratio reaches 100%.

They see, right before their eyes, how recessions occur when federal deficit growth slows, and how recessions are cured when deficit growth increases, yet continue to speak against deficit growth.

They see right before their eyes how inflation has not been related to deficit growth, but continue to claim federal spending will cause inflation.

They see the equation, Federal Deficits – Net Imports = Net Private Savings, and though understanding that increases in private savings are necessary for economic growth, they rail against deficits.

They see the equation, Gross Domestic Product = Federal Spending + Private Investment and Consumption + Net exports, and though wanting GDP growth, they cannot assimilate the fact that this requires Federal Spending Growth.

They discuss the fact that raising taxes slows an economy, yet don’t seem to understand why this is so. (Taxes reduce the deficit, taking dollars from the economy.)

They saw that on August 15, 1971, how President Nixon took us off the gold standard, because the U.S. was in danger of not being able to pay its bills. They saw that taking us off the gold standard made it possible for us to pay our bills. Yet they continue to espouse exactly the same economic beliefs, as though this momentous date, August 15, 1971, never happened.

What manner of people are these, who lacking any historical evidence, continue to claim that reduced money creation, or even money supply reduction, will grow the economy and cure unemployment?

Spain will suffer. Greece will suffer. Italy will suffer. Soon the rest of the euro nations will suffer. And the U.S. will suffer, if the debt hawks have their way. But if by some miracle, America’s leaders begin to understand the differences between Monetary Sovereignty and monetary non-sovereignty, we can grow as never before. We once again can create, then live, the American dream.

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

#MONETARY SOVEREIGNTY

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