Tag: money

–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 trade deficit myth

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

WASHINGTON (AFP) 10/14/10: The US trade deficit ballooned in August as the gap with China hit a fresh record, official data showed Thursday, suggesting further weakness in the economic recovery.

The Commerce Department said the August trade deficit rose nearly nine percent from July to 46.3 billion dollars. That was far worse than economists predictions of a 44.5 billion dollar gap. […] “The ongoing, American job-destroying leakage of national wealth to China confirms the House’s wisdom in passing the anti-currency manipulation bill last month,” said Alan Tonelson, a research fellow at the US Business and Industry Council.

“President Obama finally needs to wake up as well, urge Senate passage, and help American businesses and their employees fight foreign protectionism,” he said.

Look at the pejorative words used to describe the trade deficit: “Ballooned,” “weakness,” “far worse,” “job-destroying,” “leakage of national wealth,” “foreign protectionism.” Sounds like we are one step from financial disaster, and the trade deficit is pushing us there.

But what does “trade deficit” mean? Simple: It means foreign countries send fewer of our dollars to us, than we send to them. Where did the dollars we send to foreign countries come from? We created them out of thin air. And were did the dollars foreign countries send to us come from? We created them too, also out of thin air.

The U.S. is monetarily sovereign, meaning the U.S. federal government has the unlimited ability to create dollars – as many as it wants, whenever it wants. Given that unlimited ability, why would we care how many U.S. dollars foreign governments send us?

Further, our imports help supply us with the world’s best, cheapest, most convenient, most desirable goods and services, else we wouldn’t import them. We get the best of everything, and all we have to do is give the world our dollars, which we create at the touch of a computer key. So what’s the problem?

“But,” you say, “all this importing destroys American jobs.” Oh, really?

First, let’s be honest, it really isn’t jobs we want. We want money. Not that Americans are lazy, but for the vast majority of people in this world, jobs merely are a means to an end, and the end is acquisition ability.

So when we bemoan unemployment, we really bemoan lack of income. Unemployment and employment figures should be replaced with acquisition-ability figures. If domestic unemployment were 90%, but every man, woman and child had the financial ability to acquire everything he/she wanted, we would be a wealthy country. (Think of a nation with all the citizens living on generous, guaranteed pensions, and all the work being done by foreigners – something similar to an extreme Saudi Arabia.)

Today, the problem is not that the economy is starved for jobs. The problem is that the economy is starved for money. Ironic isn’t it, when you consider that our own government can create all the money we need.

Second, the main inhibition of job creation is not foreigners working for low wages and receiving “strong” money. The main problem is taxes. We want our businesses to be more competitive, so what do we do? We tax them.

We want businesses to hire more people, so we make them pay a FICA tax on every single hire. And we make them pay a tax on the profits they otherwise could use for expansion and hiring.

Then we tax the employees, so they have less to spend on goods and services. And we want more investment, so we tax the profits on investment. And when the federal government is finished taxing, the states levy more taxes, and the counties levy even more and the cities levy more, yet.

And when every American is taxed, taxed and taxed again, we blame foreigners for ruining our economy.

Rather than railing against foreign protectionism, our first step should be to cut taxes – especially since the federal government, the unlimited creator of dollars, neither needs nor uses tax money.

If the federal government immediately would eliminate FICA, and support Social Security and Medicare by deficit spending, the recession would end, today. And if the federal government would send each state a flat amount of money according to population – say $10,000 per person – we would have instant prosperity for all states, counties and cities.

Trade deficit merely means sending more dollars overseas than “overseas” sends to us. This leaves us “starved” for dollars, and all the while we are the sole creators of dollars. Does this make sense?

And oh yes, deficit spending has not caused inflation since we went off the gold standard in 1971. Not only are we a long way from inflation, but inflation easily is cured. So let’s not use phony fears of inflation as an excuse for keeping those economy destroyers called “taxes.”

Oh, you don’t believe me about inflation? Well consider this. The effect of exports is to bring dollars into the U.S. economy, which is identical with what federal deficit spending does. So if you like exports, you should like federal deficit spending, for exactly the same reason.

“The fault is not in our foreign neighbors, but in ourselves.”

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

No nation can tax itself into prosperity

 

–Replace the euro

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

In a previous post, –The solution for France and the other Monetarily Non-Sovereign Governments (MNSGs) – I commented on France’s difficulty in resolving union pension demands with the European Union requirement of financial austerity. I suggested that as long as France remained monetarily non-sovereign, there would be no resolution to this dilemma, and France would face bankruptcy, along with it’s EU partners.

A reader, Tom Hickey agreed, while reminding me of Keynes WWII suggestion that the world adopt a quasi “super euro” called the “bancor.” Under the heading, “They never seem to learn,” the bancor was one in a long list of attempts to eliminate monetary sovereignty, with the ostensible goal of facilitating trade, but with the underlying goal of preventing inflation. It was yet another scheme to create one, uniform currency in a multi-nation world. It was a “standard,” and as such, it was similar to the gold and silver standards of yore, and to the current “euro standard” and the “dollar standard” (under which the U.S. states, counties and cities labor).

If there is one rule fundamental to the science of economics, it is this: A growing economy requires a growing supply of money. So, any time you create a standard, you also must create a method for each political entity to grow its money supply. The EU forgot this.

Subsequent to Keynes’s ill-conceived bancor idea, the U.S. dollar became the world’s “reserve” currency, without the baggage of being an official or fixed standard. Nations wisely retained the power to control the supply of their own currency and the exchange rate with the dollar, a reasonable process.

However, as always happens in economics, there was a perceived problem, and that perceived problem was called the “Triffin dilemma.” Going back to the fundamental rule of economics, a reserve currency must increase in availability, which the Triffin dilemma requires U.S. to run trade deficits fulfilling world demand for dollars. And trade deficits lead to the dreaded federal deficits – at least dreaded by debt hawks.

Although all money is debt, some economists and all politicians tell us that anything containing the words “debt,” “deficit” or “negative” – as in federal debt, federal deficit, trade deficit, negative balance of payments, current account deficit – are to be much feared, despite no rational reason for such fear. So, our saying the current world financial system requires America to run trade deficits, is tantamount to economic blasphemy, though trade deficits actually benefit America.

This is explained in more detail at Trade Deficit Myth, but briefly, trade deficits supply us with scarce goods and services in exchange for the dollars we create at the press of a computer key.

In short, the European nations would have been far wiser to support the U.S. dollar as their trading currency, while using their monetarily sovereign power to buy as many dollars as they wished – a system used by most other nations, worldwide. Instead, they voluntarily surrendered their monetary sovereignty for a mythical financial prudence. They made a pact with the devil, and now pay the price.

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

No nation can tax itself into prosperity


–“How to Slash the State: 14 ways to dismantle a monstrous government, one program at a time”

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

The November 2010 issue of reason.com contains an article titled, “How to Slash the State: 14 ways to dismantle a monstrous government, one program at a time”

It’s a thoughtful article, but only if you believe the federal government should be smaller, the federal deficit should be lower and taxpayers pay for federal spending. Unfortunately, there is no evidence to support any of these three beliefs. In fact, all the evidence points to the need for ever increasing federal deficit spending, i.e. money creation. (A growing economy requires a growing supply of money.) Also, in a monetarily sovereign nation, taxes do not pay for federal spending (though taxes do pay for state and local spending, as the states, counties and cities are not monetarily sovereign).

Further, some of the “dismantling” they suggest is more like shifting, because some of the suggestions merely push expenses from the federal government (which has unlimited money) to state and local governments (which are having great difficulty paying their bills) – a terrible idea.

Nevertheless, here are the ideas, with my comments.

1. Overhaul Medicaid
“stop the matching grant funding process, in which states receive federal money for each Medicaid dollar they spend” or “scrap the program entirely in favor of a temporary assistance program that doesn’t create long-term dependency.”

The first part of the suggestion shifts more burden to the struggling states, which are not monetarily sovereign, and so cannot create unlimited money. The second part of the suggestion goes under the heading, “These Medicaid recipients aren’t really poor; they are lazy. If we stop giving them help, they’ll go to work.” That simply is nuts.

2. Bring the Troops Home
“. . . a swift and total deoccupation . . . probably would save “$50 billion to $70 billion in fiscal 2011 and perhaps $80 billion to $100 billion a year in 2012 and beyond.”

I’d like to see the troops come home, but not for financial reasons. I have no idea why we’re in Afghanistan, but saving money is a foolish way to manage a war. It kills soldiers.

3. Erase Federal Education Spending
“. . . the federal education budget is full of cuttable programs. If eliminating the entire Department of Education is politically impossible, then the programs with the most tenuous relationships to raising student achievement need to be the first to go.”

This falls under the “make government more efficient” heading. Sure, who can argue with that, but again, it’s not a money thing. It’s an effectiveness thing.

4. Slash State Budgets
“ . . . lawmakers have been living way beyond their means for far too long.”

Not sure what this has to do with the federal government, but I love it. Any specific ideas?

5. End Defined-Benefit Pensions
“ . . . public servants of the future should be put into 401(k) plans like the rest of us, with responsibility to contribute to and manage their own retirement nest eggs.”

This would mean federal employees would receive less money, which would be anti-growth. I agree however, for state and local government employees, as the state and local governments spend taxpayer money.

6. Declare Defeat in the Drug War
“To enforce drug prohibition, state and federal agencies spend more than $40 billion and make 1.7 million arrests every year. This effort wastes resources that could be used to fight predatory crime. . . While imprisoned (as half a million of them currently are), drug offenders cannot earn money or care for their families, which boosts child welfare costs.”

I agree, but again not for money reasons. Prohibition didn’t work in the 1920’s. I can’t imagine why the public and the politicians think it will work, today. Prohibition caused crime in the 1920’s. It causes crime, today. The war on drugs is a perfect example of how the government and the public are incapable of learning from experience.

7. Cancel the Federal Communications Commission
“. . . just about everything the FCC does is either onerous, constitutionally dubious, ineffective, or all three.. . . its role as broadcast censor . . . The best alternative is a world in which spectrum is freely tradable private property rather than a government-managed resource, interference is treated as a tort, and no one worries about whether their next on-air word will result in a seven-figure fine—in other words, a world with no FCC at all.”

The FCC’s role as public scold is useless – actually harmful. The Internet has eliminated the prohibition against swear words, as today one easily can find the most pornographic videos. Fining CBS for Janet Jackson’s 1 second breast reveal, while every sexual act imaginable is available on the Internet, is just plain silly. But, the limited public bandwidth has to be managed to prevent monopolies.

8. Uproot Agriculture Subsidies
“They distort markets and spark trade wars. They make food staples artificially expensive, while making high-fructose corn syrup—the bogeyman of crunchy parents, foodies, and obesity activists everywhere—artificially cheap. They give farmers incentives to tamper with land that would otherwise be forest or grassland. They encourage inefficient alternative energy programs by artificially lowering the price of corn ethanol compared to solar, wind, and other biomass options. School lunches are jammed full of agricultural surplus goods, interfering with efforts to improve the nutritional value (and simple appeal) of the meals devoured by the nation’s chubby public schoolers.”

I agree. Any time the federal government subsidizes an industry, it controls that industry. So you have bureaucrats determining what food is best. While those agriculture subsidies are stimulative, in that they add money to the economy, they distort the market.

9. Unplug the Department of Energy
“. . . more than half of the department’s $26 billion budget ($16 billion) was devoted to managing . . . facilities that make and dispose of materials used for nuclear weapons. . . If Congress and the White House must pursue the development of alternative energy via social engineering, a far more effective alternative to allowing DOE bureaucrats to pick technology “winners” would be a tax on conventional energy. The boost in energy prices would at least encourage inventors and entrepreneurs to get to work.”

All taxes hurt the economy. Taxing energy would tax us all, as we all use energy. The federal gasoline tax has accomplished nothing but take money out of the economy. It certainly has not reduced the consumption of gasoline. It has been an economic cost. This falls under the heading: “If something is harmful, do it again, only more so.” Once again, a failure to learn from experience.

10. Dismantle Davis-Bacon
“. . . which requires all workers on federal projects costing more than $2,000 to be paid the “prevailing wage,” which typically means the hourly rate set by local unions. . . . born as a racist reaction to the presence of Southern black construction workers on a Long Island, New York, veterans hospital project.”

I agree. See #8. It’s another example of the federal government distorting the market, this time the labor market.

11. Repeal the Stimulus
“. . . as of early September, 18 months after the stimulus was passed, an estimated $301 billion remained unspent. That money should be banked, not wasted . . . deficit spending has crowded out private investment.”

A demonstration of financial ignorance. There is no way federal money can be “banked.” And there is no way deficit spending can “crowd out” anything. This is a myth. Without deficit spending, we would be in the deepest depression one could imagine. Of all 14 suggestions, this is the most ignorant.

12. Spend Highway Funds on Highways
“ . . . just to maintain the Interstate Highway System at a decent level is $10 billion to $20 billion per year. . . . lesser highways should all be the states’ problem.”

In other words, transfer the cost from the federal government, which can afford it, to the state governments, which can’t. And how does this help the taxpayer?

13. Privatize Public Lands
“Letting the states manage this land instead would take up to $5 billion a year off the federal books. . .One Forest Service contractor in Arizona recently offered to take over six state parks targeted for closure amid budget cuts. The concessionaire would collect the same visitor fees the state charges today while taking the operations and maintenance costs off the state’s books entirely. Further, the company would pay the state an annual “rent” based on a percentage of the fees collected, turning parks into a revenue generator instead of a money eater.”

In the very few cases where a private company could do this, profitably and under federal supervision, it could be a good idea. Now let’s talk about the other 99% of the public lands. Get real.

14. End (or at Least Audit) the Fed

It’s not explained how auditing would cut federal spending. Bernanke warned that opening the Fed’s books would diminish the central bank’s political independence. I believe him. Imagine relying on Congress to make quick economic decisions. These people can’t decide to go to the bathroom without the threat of filibuster. Let’s face it. The most dysfunctional of all federal agencies is Congress.

In summary, most of these suggestions simply are foolish or would not save taxpayers anything. A couple have some value, not because they “save” money, but because they are good governing policy. All are based an the false assumption that federal spending should be reduced.

Think of the economy as a child and money is its food. Today, the child is starving. To make the child healthy, we must feed it. As the child grows, it will need an increasing amount of food. Yes, if you overfeed the child, it will become fat (inflate), but we are a long way from that. The debt hawks want to starve the child, and then always are surprised when it becomes ill.

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

No nation can tax itself into prosperity