–Charles Krauthammer’s scary misinformation on Social Security Friday, Mar 11 2011 

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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Recently, the noted commentator, Charles Krauthammer, wrote an article titled, “Et tu, Jack Lew?” In this article, he said:

The Social Security trust fund is a fiction. If you don’t believe me, listen to the OMB’s own explanation (in the Clinton administration budget for fiscal 2000 under then-Director Jack Lew, the very same). The OMB explained that these trust fund “balances” are nothing more than a “bookkeeping” device. “They do not consist of real economic assets that can be drawn down in the future to fund benefits.”

In other words, the Social Security trust fund contains – nothing.

I was amazed. Krauthammer actually gets it? He’s right, of course. There are no dollars in the so-called “trust fund,” simply because FICA, and indeed all federal tax money, is destroyed upon receipt. This is one of the features of a Monetarily Sovereign government. It has the unlimited ability to create money, so it has no need to store money.

But alas, Krauthammer’s understanding was not to be, for in the very next paragraph he said:

Here’s why. When your FICA tax is taken out of your paycheck, it does not get squirreled away in some lockbox in West Virginia where it’s kept until you and your contemporaries retire. Most goes out immediately to pay current retirees, and the rest (say, $100) goes to the U.S. Treasury – and is spent. On roads, bridges, national defense, public television, whatever – spent, gone.

Wrong, wrong, wrong. Our Monetarily Sovereign federal government does not spend tax money on anything. In fact, there is no relationship whatsoever, between federal taxes and federal spending. This has been true since 1971, the end of the gold standard, and Krauthammer et al have not yet noticed the most influential economic change in our lifetimes. Today, even were federal taxes to fall to zero, this would not affect by even one dollar, the federal government’s ability to spend. (This is not the case for the states, counties and cities, which are not Monetarily Sovereign and so do spend tax money.)

Krauthammer goes on to say:

In return for that $100, the Treasury sends the Social Security Administration a piece of paper that says: IOU $100. There are countless such pieces of paper in the lockbox. They are called “special issue” bonds.

Special they are: They are worthless. As the OMB explained, they are nothing more than “claims on the Treasury [i.e., promises] that, when redeemed [when you retire and are awaiting your check], will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures.” That’s what it means to have a so-called trust fund with no “real economic assets.”

Wrong again. Federal spending is not financed by raising taxes or borrowing.

When you retire, the “trust fund” will have to go to the Treasury for the money for your Social Security check.

Yes, the Treasury will do what has been doing and is designed to do: Create the dollars to pay Social Security benefits.

So when (Office of Management and Budget Director Jack Lew) tells you that there are trillions in this lockbox that keep the system solvent until 2037, he is perpetrating a fiction certified as such by his own OMB. What happens when you retire? Your Social Security will come out of the taxes and borrowing of that fiscal year.

No, federal taxes and borrowing do not fund federal spending. Both could be eliminated, and the federal government could continue to spend trillions. Yes, there can be inflation implications, but the federal government neither needs nor uses tax money for anything.

Think about it. If you had a money-printing press in your basement, and had the unlimited ability to print money, would you borrow the money you previously had printed, and could continue to print, forever? Would you ask for tax money so you could pay your bills? Would you have any unpaid debts? Would creating money cause a “deficit”?

Krauthammer’s (as well as politician’s, other media writers’ and mainstream economists’) confusion comes from three sources:

1. Prior to 1971, when the federal government was not Monetarily Sovereign, it did spend borrowed and tax money.
2. The states, counties and cities, being monetarily non-sovereign, do spend borrowed and tax money.
3. You and I and all businesses, are not Monetarily Sovereign. We do need a source of income before we can spend.

In short, Krauthammer et al, do not realize the federal government is completely different from all the monetarily non-sovereign entities. He confuses federal “debt” and federal “borrowing” with personal debt and personal borrowing.

So when your Social Security benefits are cut needlessly, you’ll understand why. It’s the Krauthammers of the world, ignorant of economic reality, who are driving our economy. And this indeed is scary.

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

No nation can tax itself into prosperity, nor grow without money growth.

MONETARY SOVEREIGNTY

–Why Robert J. Samuelson wants to cut Social Security, Medicare and Medicaid. Monday, Mar 7 2011 

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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Robert J. Samuelson is a weekly columnist for The Washington Post, writing on political, economic and social issues. His column usually appears on Wednesdays. Add his name to the long list of economics writers who are ignorant of Monetary Sovereignty, the basis of all modern economics.

In a March 7, 2011 column titled, “Why Social Security is Welfare,” he makes the following comments:

Recall that Social Security, Medicare and Medicaid, the main programs for the elderly, exceed 40 percent of federal spending. Exempting them from cuts – as polls indicate many Americans prefer – would ordain massive deficits, huge tax increases or draconian reductions in other programs. That’s a disastrous formula for the future.

Yes, Robert, not cutting Social Security, Medicare and Medicaid would “ordain” (?) deficits. However, because the U.S. now is Monetarily Sovereign, there is zero connection between deficits and taxes. For your benefit, Robert, I’ll say again what you as an economics writer already should know: “Federal taxes do not pay for federal spending.”

And so far as those draconian reductions in other programs, why do you believe a nation with the unlimited ability to create dollars, needs to cut spending, when inflation is nowhere in sight?

Here is how I define a welfare program: First, it taxes one group to support another group. . .

Robert, now repeat after me until you get it: “Federal taxes do not pay for federal spending.” State taxes do pay for state spending, and city taxes do pay for city spending. The states and cities are not Monetarily Sovereign. But, federal taxes do not pay for federal spending. In fact, FICA could be eliminated, and this would not reduce by even one penny, the federal government’s ability to support this program – even were benefits doubled.

Since the 1940s, Social Security has been a pay-as-you-go program. Most benefits are paid by payroll taxes on today’s workers.

Things have changed markedly since the 1940’s, and Robert has not kept up with the changes. In August, 1971, one of the biggest economic changes in our lives occurred. We became Monetarily Sovereign. At that instant, Social Security ceased being a “pay-as-you-go” program, because FICA no longer supported benefits. In a Monetarily Sovereign nation, tax dollars are destroyed upon receipt. They do not, and cannot, support federal spending.

Think about it, Robert. Why would a government with the unlimited ability to create dollars, need to use taxes to pay for anything? It makes absolutely no sense. Sadly, Robert still lives in a gold-standard (aka “flat-earth”) world.

Annual benefits already exceed payroll taxes. The gap will grow.

Yep, the difference between FICA collections and benefits will grow. More net money will be created. This will stimulate economic growth. So what is the problem?

No doubt people would be outraged (by benefit cuts). Having been misled, they’d feel cheated. They paid their taxes, why can’t they get all their promised benefits? But the alternative is much worse: imposing all the burdens on younger taxpayers and cuts in other government programs. Shared sacrifice is meaningless if it excludes older Americans.

No, shared sacrifice is meaningless if it is purposeless. There is absolutely, positively no reason to cause widespread human misery by cutting Social Security, Medicare and/or Medicaid benefits. Causing misery out of sheer ignorance is unforgivable.

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

No nation can tax itself into prosperity, nor grow without money growth.

–What will help the poor? Taxes vs. Spending Monday, Dec 20 2010 

The debt hawks are to economics as the creationists are to biology. Those, who do not understand monetary sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.
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Now that the new tax bill has passed, three related issues will remain in the news:

1. Will tax reductions cause inflation? (In the unlikely event they do, the Fed will prevent/cure inflation by raising interest rates)

2. Will tax reductions bankrupt Social Security and Medicare? (No. Because the federal government is Monetarily Sovereign, federal spending is not constrained by taxes. If FICA were reduced to $0, this would not affect by even one penny the federal government’s ability to support Social Security and Medicare. Tax reductions cannot bankrupt the U.S. or any of its agencies.)

3. Should taxes on the rich be increased as soon as the current law expires? That is the question discussed in this post.

Some people favor higher taxes on the rich, because they believe this somehow will help the poor. The concept is that by taxing the rich, we close the “gap” between rich and poor, and this closed gap benefits the poor.

I discuss this “gap” further at Closing the Gap and at A Partial Solution for the Gap.

I strongly empathize with the desire to aid the poor. But bringing down the rich is not the way. Whether Bill Gates has $50 billion or is brought down to “only” $10 billion, does not affect the poor. We have had 90% top tax rates, and that did nothing to help the poor. In fact, increasing taxes on anyone, rich or poor, removes money from the economy, which slows the economy. Slowed economic growth always hurts the poor more than the rich, as witness the most recent recession. Who was hurt most, the rich or the poor?

As I mentioned, the federal government does not spend tax money. Unlike state and local governments, which are not Monetarily Sovereign, the federal government spends money it creates ad hoc. If the wealthy were taxed at the 99.99% rate, this would not increase by even one cent, the federal government’s ability to spend, i.e. to help the poor.

The poor benefit most when the economy is growing fastest, because that increases the availability of jobs and money. So to help the poor, we must stimulate the economy. That is, if we want to help the poor, we very simply should help the poor. The Federal government could:

–Increase Social Security benefits.
–Initiate free universal health care insurance.
–Increase unemployment benefits.
–Pay a salary to all students. ( SALARY)
–Eliminate FICA. (FICA)
–Increase the standard deduction on income taxes.
–Allow home rent to be tax deductible.
–Increase food stamps.
–Pay states and cities to reduce sales taxes

There are many ways to help the poor. We should focus on that, not on punishing the rich, which may provide some emotional satisfactions, but does not provide financial benefits to anyone. Let me see some of your ideas for helping the poor.

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

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”

–Worried about your children and grandchildren paying the federal debt? Thursday, May 20 2010 

An alternative to popular faith


     The debt hawks claim to be concerned about your children and grandchildren, but their proposals actually will punish your heirs. The debt hawks say future taxpayers will pay for today’s federal deficit spending. This is factually wrong. Unlike state and local governments, the federal government does not spend tax money. It, in fact, destroys the tax money sent to it, and it creates new money, ad hoc, when it credits the bank accounts of creditors. Federal spending is not limited by, or related in any way to, federal taxes. Thus, taxpayers never have, nor ever will, pay for federal spending.

    What the debt hawks fail to mention is that their solutions (raising taxes and cutting federal spending) to this non-existent problem will impoverish you, your children and your grandchildren. Here is a sampling of debt hawk proposals. Read them carefully, and think about each proposal’s effect on current and future generations.

Retirement:
    Raise the normal retirement (Social Security) age to 68
    Reduce scheduled Social Security benefits
    Reduce Social Security spousal benefits
    Increase taxes on Social Security benefits

Health care:
    Tax insurance benefits
    Tax employees for employer-paid premiums
    Cut Medicare payments
    Cut Medicaid payments
    Raise Medicare premiums
    Cut spending on graduate medical education
    Raise the Medicare retirement age (again)
    Cut federal Medicaid funding to states

Jobs:
    Do not enact a new jobs bill

More taxes; higher taxes
    Raise taxes on higher incomes
    Increase the inheritance (“death”) tax
    Increase the gas tax
    Enact a VAT tax
    Increase the payroll tax (FICA)
    Eliminate the mortgage interest deduction
    Eliminate state and local tax deductions
    Tax life insurance benefits
    Eliminate EITC (Earned Income Tax Credit for low and moderate income workers
    Eliminate the $400/person making-work-pay credit
    Eliminate the “American Opportunity” college tax credit
    Add and excise tax on high-cost health plans

Military and Security:
    Reverse the “Grow the Army” initiative (fewer paid soldiers)
    Reduce purchases of weapons systems
    Reduce veterans’ income security benefits
    Reduce Homeland Security spending

Aid for the poor:
    Cut food stamps
    Cut average unemployment benefits
    Cut temporary assistance to needy families (TANF) program
    Cut funding for adoption and foster care

Education:
    Cut federal funding of K-12 education
    Cut school breakfast programs
    Cut funding for the education of disadvantaged and disabled children

Infrastructure:
    Cut federal highway funding
    Cut funding for bridge repair

Research & Development:
    Cancel NASA missions to the moon and Mars

States and Cities:
    Cut mass transit funding
    Cut federal funding to the states and cities

This is the world — a world of higher taxes and fewer benefits — the world the debt hawks propose for you, your children and your grandchildren.

And what is the federal debt the debt hawks worry over? The federal government spends by crediting the bank accounts of its vendors. Every credit demands a debit, and this debit on the government’s balance sheet is called “debt.” It more properly should be called, “money,” because the way the government creates money is by crediting bank accounts. That balance sheet merely is a score sheet, showing how much money the government has created.

You don’t owe it, nor do your children and grandchildren. It’s just a score sheet.

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

No nation can tax itself into prosperity

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