–Debt madness in the media

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

The media have made America’s voters insane. Any program designed to stimulate the economy is rejected because it would “add to the debt” (which is the only way to stimulate the economy) or would “be paid for by our grandchildren” (a monstrous lie).

Thus we have the ridiculous situation in which banks are criticized for not lending enough (i.e., for giving the private sector too little debt), while the federal government is criticized for having too much debt. Think, people! Do you really believe the solution to our problems is for the private sector to take on more debt, while the federal government reduces its debts?

On the one hand we have the private borrowers, already overburdened with bad debt, and falling into bankruptcy every day. On the other hand we have the federal government, which can support a debt of any size, and which does not even use tax money to support spending, and which as a monetarily sovereign nation, cannot go bankrupt. Which do you think should take on more debt to stimulate our economy?

It is absolute madness to ask for more private deficit spending and less federal deficit spending. Yet, that is what the media, the politicians and the obsolete economists do.

In the post, Is federal money better than other money, I demonstrated that while reductions in federal debt growth immediately precede recessions, increases in private debt growth also lead to recessions. The media and the politicians, who want more private debt growth and less federal debt growth have it exactly backwards.

Rumor says the Obama administration soon will suggest Fannie and Freddie give “upside down” mortgage holders a break, paid for by the federal government. If true, you will hear a great protest that this will increase the falsely termed “unsustainable” federal debt. The protesters prefer that the private sector bear this debt, which for the private sector, truly is unsustainable.

I’m not sure when it became more “prudent” for the private sector to suffer bankruptcies, than for the federal government to create money, but I pray, for the sake of America, that the media, politicians and sleeping economists come to their senses. This backwards thinking has caused terrible misery, as backwards thinking always does.

Rodger Malcolm Mitchell

No nation can tax itself into prosperity

–There is no wasteful federal spending

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

As usual, some stimulus spending has been criticized because it is “wasteful” and doesn’t create jobs. Here are a couple examples published recently:

$1.9 million spent to photograph ants has created two jobs.. Other ant research stimulus projects: $451,000 has created one job, $276,000 created six one-hundredths of a job, and $800,000 created no jobs. The $144,000 spent to study the behavior of monkeys on cocaine created four-tenths of a job. To study why monkeys respond to unfairness cost $677,000 – and has created no jobs yet.”

I am reminded of former Wisconsin Democratic Sen. William Proxmire, who published his monthly “Golden Fleece” awards for what he considered wasteful spending. He often was criticized for opposing basic research he did not understand, for instance NASA, SETI and the Aspen Movie Map. Many worthwhile, federal research projects have been killed because some politician thought they were frivolous. This is especially true of basic research, where the ultimate benefits are yet to be determined.

The notorious Mansfield Amendment prohibited the Defense Department from carrying out “any research project or study unless such project or study has a direct and apparent relationship to a specific military function.” Such Congressional meddling in research virtually eliminates discoveries based on serendipity.

Whether or not you consider ant research to be wasteful, it is highly unlikely that $1.9 million created only two jobs. Let’s speculate on where that $1.9 million might have gone. Photographers, photographic equipment, rent, researchers, travel, computers, chemistry equipment – all of which helped various businesses and people. Then those businesses and people spent the money they received on things like food, clothing, shelter and transportation, all of which helped more people and businesses. And on and on and on. In a similar vein, the monkey research expenses were paid to people and businesses.

In short, when the government spends money, that money costs you nothing. (Taxes do not pay for the spending of a monetarily sovereign nation.) In fact, that spending adds money to the economy, and that money circulates throughout the economy, stimulating as it goes. Every time the federal government spends, people and businesses benefit, and in turn these people and businesses spend, which benefits more people and businesses. Ultimately, all federal spending creates jobs.

There always will be a politician who tries to look heroic and prudent, by pointing out what he considers to be wasteful spending. While state and local governments, which do not have the unlimited ability to create money, can spend wastefully, it almost is impossible for any federal spending to be wasteful, even in cases where the original expenditure seemed frivolous in some eyes. Even spending for the notorious Alaskan “Bridge to Nowhere” would have benefitted the economy by pumping money into the hands of people and businesses.

Good rule of thumb: The more federal spending, the healthier the economy. Reduced growth in federal spending has resulted in nearly every recession and depression, and increased federal spending dragged this economy out of the recession.

Rodger Malcolm Mitchell

No nation can tax itself into prosperity

–Nonsense from the Committee for a Responsible Federal Budget

An alternative to popular faith

Demonstrating the bankruptcy of the typical debt-hawk position, here are excerpts from a long Email I just received from the Committee for a Responsible Federal Budget, a leading anti-debt advocate.

The current fiscal path of the United States government is unsustainable. For the past forty years, our debt-to-GDP ratio has averaged around 40 percent. This year, it is projected to exceed 60 percent, the highest point since the early 1950s. […] By the end of the decade, debt is projected to be 90 percent of GDP, approaching our record high of around 110 percent after World War II. Things will deteriorate further as the Baby Boom retirement accelerates. Ten years later, the debt is expected to be well over 150 percent of GDP. By 2050, it is projected to be over 300 percent and still heading upward.Though they claim the “fiscal path is unsustainable,” they project all the way to 2050. The lowest (since WWII) Debt/GDP ratio of about 35% came 70 years earlier, at 1979-1980, the end of the Carter administration, which also was the time of the highest inflation


Deficits vs inflation thru 09

[…]It is not at all clear how exactly such a crisis would unfold – what would prompt it or how it would play out. A crisis could occur as soon as this year, or decades from now. It could begin inside or outside the country. The crisis could be dramatic or gradual. It could come from an economic or another financial shock, or even a political surprise.In short, “We don’t know when; we don’t know how; and we don’t know what. Otherwise, we’re sure.”

Experts agree that we will be in a crisis when we can no longer service our debt obligations. However, we will probably never face this scenario.This is the first time I ever have heard a debt hawk make this admission, which the author repeatedly forgets, later in the Email.

There are a number of different crisis scenarios: Scenario 1: The Gradual Crisis – We stay the current course and try to muddle through. Our massive borrowing leads to less capital available for productive private investment, which lowers economic growth.Federal deficit spending adds money to the economy. There is no mechanism by which added money can reduce the supply of capital.

Increasing debt service payments – particularly when interest rates return to normal – squeeze out other areas of the budget. The steady crowding out of government spending on programs that boost the economy, such as spending for education, infrastructure and innovation, will hurt our competitiveness.This crowding out only can happen in a debt-hawk world, where deficits are restricted, either by tax increases or by reduced spending – a self-fulfilling prophecy.

Scenario 2: The Political Risk Crisis – Political calculations trump risk threats. […] As a result, more budget resources are shifted from children to seniors, and from investment in programs boosting future growth. […] creditors lose confidence in U.S. fiscal management. Our creditors increasingly demand large risk premiums on purchases of their debt, sharply lower their purchases of our debt, or, in the worst case, stop buying our debt if the shift occurs suddenly. Credit ratings agencies lower our sovereign credit rating.This neglects the simple fact that since the end of the gold standard, in 1971, the federal government no longer has needed to borrow its own money. Rather than borrowing by creating T-securities out of thin air, then selling them, the government can and should create money directly, and omit the borrowing step.

Scenario 3: Catastrophic Budget Failure – An abrupt crisis occurs. […] at some point financial markets or foreign lenders decide we are no longer a good credit risk, possibly due to debt affordability concerns.Debt affordability? Didn’t you just say,” Experts agree that we will be in a crisis when we can no longer service our debt obligations. However, we will probably never face this scenario.”

“[Creditors] stop buying our debt securities or demand dramatically higher interest rates due to increased perceived risk. […] In the extreme case, the U.S. may not be able to borrow at any interest rate.” Creditors concerned with hyperinflation or even default will not buy U.S. debt.” As we said, the U.S. no longer needs to sell debt. Issuance of Treasury securities could end today, and this would not change by even on penny, the government’s ability to spend.

“Scenario 4: Inflation Crisis – Higher debt is managed through inflation. […] Under strong political pressure, the Fed […] does not raise interest rates despite signs of increasing inflationary pressures. […] Fiscal consolidation will require spending cuts that will hurt safety net programs. Business investment incentives will disappear and tax rates will rise, as policymakers search for revenue. Household taxes rise and government services are reduced.Wait. Isn’t that exactly what you are preaching – spending cuts and tax increases?

Scenario 5: External Crisis -A dollar or trade crisis leads to a fiscal crisis. When the economy recovers in a few years, our current account deficit (which had narrowed during the recession) resumes widening to record levels. […] Capital inflows slow abruptly as investors see better risk-return opportunities elsewhere, decide the risks of the U.S. market are too high […] A sudden stop in lending lowers the dollar, increases inflation and interest rates[…]A widening of the current account deficit means dollars leave the U.S., which if anything, would be anti inflationary.

Scenario 6: Default Crisis – A series of events lead to a default.Once again, you already have said the U.S. will not default.

“[…] Our need to pay higher interest rates increases debt service and crowds out public and private spending. […]Higher interest rates increase the amount of money in the economy which facilitates private spending.

[…}A new administration defaults or attempts to renegotiate our debts. Burned creditors stop buying U.S. debt or demand onerous interest premiums.[…]Again, defaults? You’ve already discussed this impossibility.

Countries that have sufficient domestic savings to finance their debt are less vulnerable than those that must attract considerable foreign capital – such as the United States.Totally false. The U.S. does not service its debt with savings. It creates money, ad hoc, to pay its debts.

“[…] Our large trade deficit outlook is considered unsustainable and a likely crisis flash point.”You already have admitted U.S. has the unlimited ability to service its debts. So what do you mean by “unsustainable”?.

Some top economists argue that the U.S. can “afford” even more debt awhile longer because its debt service will still remain quite manageable. They also expect that the United States can avoid adjustment longer than fiscal policy norms might suggest because the dollar is the world’s reserve currency.The debt service is manageable, not because the dollar is the world’s reserve currency, but rather because the government has the unlimited ability to pay its bills, and does not need to borrow.

“While certain countries are often cited to show that high sovereign debt ratios can be sustained without crisis (Italy, Belgium, Japan now), these countries – unlike the United States – can finance their debt through their substantial domestic savings.Government debt is not financed through private savings. You and I do not pay federal debt with our savings.

Many governments facing similar circumstances to the United States over the next generation have tried to avoid fiscal adjustment by running higher inflation to reduce their debt burden. Though appealing, this strategy hurts the economy and its citizens (particularly those on a fixed income).There ever is a reason for a sovereign nation, in control of its money, to reduce its debt through inflation.

The entire premise of the Committee for a Responsible Federal Budget is that buyers of T-securities control the fate of the U.S., when in fact, the U.S., as the creator of dollars, no longer needs anyone to buy T-securities. This lack of understanding would be amusing were it not for the fact that the government acts on these beliefs.

One of the reasons we have been so slow to exit recession, is the government’s timid stimulus responses. The too little / too late, initial $150 per person mailing two years ago was restricted by debt fear. A $1,000-$2,000 per person mailing at that time, would have ended the recession.

Rodger Malcolm Mitchell

–Fiscal Sustainability Teach-In and Conference

Mainstream economics has led us to an average of one recession every five years. People have been fed obsolete hypotheses for so long and so often, we now have knee-jerk agreement among the media, the politicians and some economists.

But deficits neither are normal nor inevitable. Many prominent economists have discovered a better way to foster economic growth. They will host a conference to discuss their ideas, and you are invited.

April 28th: Fiscal Sustainability Teach-In and Conference
“The Fiscal Sustainability Teach-In Conference will be the important event in Washington on April 28. This will feature important work by honest scholars. It deserves (your)attention, and […] respect.”
— James K. Galbraith, The University of Texas at Austin. [April 19, 2010 via email with permission]
The deficit hawks are at it again: attacking Social Security and Medicare with obsolete economic notions. We offer a counter-narrative to the false but conventional notion that Federal deficit spending is harmful, that it is a burden to the next generation, that deficit spending risks insolvency — basically that the Federal Government Budget is some how analogous to a household budget when, in fact, it is quite different.

The Teach-In Conference on Fiscal Sustainability on April 28th, 2010 in Washington, DC aims to do just that with some real world, honest economics.

We can move beyond the false economic orthodoxy that got us into the current economic mess and that is now being promoted to attack Social Security and Medicare — and harming our nation and it’s people. You can participate.

The tentative program schedule: Interesting topics and excellent presenters as of 04/16/10:

8:30–8:45 AM Welcoming Remarks
8:45–10:15 AM What Is Fiscal Sustainability? Bill Mitchell, Research Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, NSW Australia, and blogger at billy blog

10:15–10:30 AM BREAK
10:30 AM–12:00 PM Are There Spending Constraints on Governments Sovereign in their Currency? Stephanie Kelton, Associate Professor of Macroeconomics, Finance, and Money and Banking, Research Scholar at The Center for Full Employment and Price Stability (CFEPS), University of Missouri – Kansas City, Research Associate at The Levy Economics Institute of Bard College, and blogger at New Economics Perspectives

12:00–12:15 PM BREAK
12:15–1:45 PM The Deficit, the Debt, the Debt-To-GDP ratio, the Grandchildren and Government Economic Policy Warren Mosler, International Consulting Economist, Independent Candidate for the US Senate in Connecticut, and blogger atmoslereconomics.com

1:45–2:00 PM BREAK
2:00–3:15 PM Inflation and Hyper-inflation Marshall Auerback, International Consulting Economist, blogger at New Deal 2.0 and New Economic Perspectives, and Mat Forstater, Professor of Economics, Director of CFEPS, Department of Economics, University of Missouri — Kansas City, Research Associate at The Levy Economics Institute of Bard College, and blogger at New Economic Perspectives

3:15–3:30 PM BREAK
3:30–5:00 PM Policy Proposals for Fiscal Sustainability L. Randall Wray, Professor of Economics, Director of CFEPS at the University of Missouri – Kansas City, and Senior Scholar at The Levy Economics Institute of Bard College; and Pavlina Tcherneva, Assistant Professor of Economics at Franklin and Marshall College, Senior Research Associate at CFEPS and Research Associate at The Levy Economics Institute of Bard College and bloggers at New Economic Perspectives

How you can participate:
1. Contribute to the cost of the Conference — Please click below and make a donation of $50 (or more if you want) to show support. It’s about strength in numbers (the entire budget is under $10,000).
Make Donation
2. Attend the Teach-In — watch these pages for location and other logistical information
3. Spread the word — write a blog post, talk with your friends.
4. Educate yourself — some great introductory resources are:
o Teaching the Fallacy of Composition: The Federal Budget Deficit, by L. Randall Wray
o Fiscal sustainability 101, by William Mitchell
o 7 Deadly Innocent Frauds, by Warren Mosler
o In Defense of Deficits, by James K. Galbraith
o A Quick Summary, by Rodger Malcolm Mitchell

Please do what you can to help bring the truth to light. Deficits are not normal. Social Security and Medicare can survive without benefit cuts.

Every little bit helps. Thank you.
Rodger Malcolm Mitchell