Taking Big Government outside the box. Separating money creation from money direction. Part II

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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In the previous post, I speculated that concerns about “big government” had less to do with size than with control. (Suggestion: Read that post, before reading this one.) Those who abhor big government face the difficult task deciding which federal initiatives to eliminate, for every federal expenditure benefits some group. Eliminating benefits neither is popular nor appropriate for a great nation. There may be a solution to that dilemma.

Many people equate big government with “Big Brother,” the dictator in the book “1984,” whose motto was, “Big Brother is watching you, “ and who controlled every aspect of people’s lives. I suggested the concerns about big government would be allayed, not by reducing the physical size of government, but rather by reducing its control over us. In the previous post, I had said:

Visualize a new nation, called “Freedom.” The Freedom federal government creates dollars, which on a per-capita basis, it distributes to each state, each county, each city and each person. There would be no federal, state or local taxes. The states, counties and cities would get all their money according to a formula, and spend the money they receive according to their local requirements. The people would spend the money according to their personal desires.

The solution to big government is not to do away with the services government provides, but rather to transfer responsibility for implementing those services to state and local governments, while the federal government continues to pay the bill.

Let’s say in year 1, the federal government were to give each state $2,500 per state resident, while transferring to each state $2,500 worth of financial obligations currently funded by the federal government. There would be no net effect on the federal deficit, but the states would take control over $2,500 per capita of funding now controlled by the federal government. This would have no effect on the federal deficit.

Assume, in addition, the government were to give each state an additional $1,500 per resident, which the states could use for debt reduction, tax reduction or for new initiatives, at each state’s option. This would increase the deficit $1,500 per capita. The U.S. has about 310 million people, so that $1,500 gift would total about $465 billion. The federal government estimates it will spend about $3.9 trillion in 2011, so that $465 billion would add a net of about 12% to the federal budget, bringing the federal budget up to $4.4 billion.

In year 2, assume the federal government were to transfer an additional $2,500 in per capita obligations to each state, while giving each state $5,000 ($2,500 to cover existing obligations and $2,500 for the additional obligations). Again, there is no net effect on the federal deficit. In addition the government again gives each state a gift of $1,500 per resident.

Assume the federal government continues to follow this procedure each year.

What does this accomplish? At the end of 10 years, the federal government will have transferred to the states control over nearly $8 trillion worth of federal spending. Further, depending on how the states decide use their annual $1,500 per resident gift, some can be debt-free, or tax-free or both.

The above example assumes a steady $1,500 per capita gift from the government. What if, instead, the government provided a steady 12% increase as a gift to the states. By the end of 10 years, the states would receive about $4,600 per resident. The table below shows the per capita debt, deficit and taxes for several states. You can judge how additional annual support from the federal government might affect these states.
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Fiscal year 2007; Debt Rank
All Figures are Per Capita
State Debt Rank
1 Massachusetts
2 Alaska
3 Rhode Island
12 Illinois
23 California
48 Georgia
49 Texas
50 Tennessee

(Source: Center on Budget
Policy Priorities)
Debt –|– Deficit
$10,546 -|- $1,171
$ 9,630 -|- 0
$ 7,944 -|- 428
$ 4,256 -|- $543
$ 3,151 -|- $922
$ 1,204 -|- 320
$ 1,011 -|- 144
$ 677 -|- 161

State Tax Collections Per Capita Rank
(Tax Foundation)
1 Alaska $12,295
11 Massachusetts $3,359
12 California $3,224
25 Illinois $2,489
45 Georgia $1,891
47 Texas $1,856
46 Tennessee $1,859

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Each state would acquire the option to eliminate its deficit, reduce its taxes, reduce its debt and/or create new state initiatives for the benefit of its citizens.

In summary:
-The above approach could reduce the power of “big government” to rule our lives, since “small government” would acquire the finances to assume many big government initiatives.
-States could become healthier financially, while providing more services to their citizens.
-Any reduction in state debt would reduce states’ interest cost, thereby speeding the elimination of debt, reduction of taxes and increase in citizens’ money ownership.
-Any reduction in state taxes would add to the dollars owned by the private sector, increase each state’s GDP, reduce unemployment and increase each state’s average standard of living.
-The federal government, being Monetarily Sovereign, has the money-creating, legal power to support any additional per capita spending, subject only to inflation. The deficit increases are well within the levels of previous, non-inflationary deficit increases, so are unlikely to cause inflation, which in any event can be prevented/cured via interest rate control.

This would mark the end of big government control, while not giving up the benefits of federal spending.

One caveat: Every state has different financial circumstances, different needs and different spending philosophies. So transferring each federal obligation to each state, will not affect the states identically.

Comments?

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

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

–Taking Big Government outside the box. Separating money creation from money direction.

One central myth forms the foundation of the right wing / left wing debate — a myth that energizes the right wing against “Big Government” — and that myth is the belief that dollar creation inevitably requires dollar control.

Few people are opposed to Big Government per se; instead, they oppose what they believe Big Government does, namely take away our personal freedoms. Consider the objections to “Obamacare.” Yes, there are the usual budget concerns expressed by those who don’t understand Monetary Sovereignty, but the more visceral objections have to do with the potential for “Big Government” to rule our lives.

Sarah Palin’s fictional “death panels” were her woolly-headed attempt to scare voters about the loss of their personal freedom. Her “Mama-bear” persona speaks to personal control and freedom. The debate about mandatory purchase of health insurance is a debate about freedom. The gun-control debate is more about freedom than about guns. The abortion debate devolves to a disagreement about personal freedom’s boundaries. The Patriot Act’s bitter debates have had to do with personal freedom.

America fought the Revolutionary war for freedom. The Boston Tea Party was about freedom, as is the current Tea Party. Americans are born into a cowboy, can-do, independent mind-set. President Obama tapped into it with his “Yes we can” mantra. John Wayne is an American icon, because he symbolized personal freedom. “Socialist” is a powerful epithet, because to many Americans, “Big Government” is a synonym of “Big Brother,” the all-seeing, all-controlling, monster entity that will turn us each into a helpless robot, taking away our freedoms.

And it doesn’t have to be that way.

Yes, the federal government has the infinite ability to create dollars, limited only by inflation. That is a fact. But the mere production of dollars does not need automatically to confer power over those dollars. The federal government could retain its ability to create the dollars, while being stripped of its ability to direct most of those dollars.

Visualize a new nation, called “Freedom.” The Freedom federal government creates dollars, which on a per-capita basis, it distributes to each state, each county, each city and each person. There would be no federal, state or local taxes. The states, counties and cities would get all their money according to a formula, and spend the money they receive according to their local requirements. The people would spend the money according to their personal desires.

Federally directed spending would be limited to national defense (the military, CIA, FBI et al and the few other instances where state control would be inefficient). All other initiatives – transportation, communication, ecology, education, food inspection, police, fire protection, health care, justice, would be paid for by the Freedom federal government, but directed by the states and local governments.

Where state and local governments disagreed about some mutually important question (for instance water rights, air space, pollution, etc.) some form of arbitration could be established to settle the issue. Where greater efficiency can be attained by combining jurisdictions the states and local governments could create mutually appropriate ad hoc entities.

In essence, what I have described is something resembling the 13 original colonies, sovereign as to most laws, but hanging together for mutual protection. The Freedom states, counties and cities tell their federal government: “You create the money and give it to us; we’ll decide how to spend it.”

The argument over “Big Government,” is not so much about “bigness” as it is about control. While Americans enjoy the benefits of federal spending, they chafe under federal control of spending. What if we were to separate the money creation from the money control, having the federal government continue creating dollars, while the local governments control their use? Now some may believe that “He who pays has the say,” but I wonder whether that is necessarily true.

Thoughts?

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

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

–What federal budget cuts will mean to you, your kids and your grandchildren

As a readers of this blog you probably have learned about Monetary Sovereignty. You know that the federal government has the unlimited ability to create dollars, limited only by inflation. You also know that neither taxes nor taxpayers nor borrowing pay for federal spending. In fact if taxes and borrowing were eliminated, this would not reduce by even one dollar, the federal government’s ability to spend. So long as inflation can be controlled, federal spending is stimulative to the economy. This all is absolute fact, not opinion or hypothesis.

On point, here is an article by Lori Montgomery and Shailagh Murray, Washington Post Staff Writers, Wednesday, February 9, 2011. I’ll quote from it, then translate.

Republican leaders unveiled a list of proposed cuts in government spending Wednesday that would strike hardest at priorities of the Obama administration, such as high-speed rail, scientific innovation and a wide array of clean energy programs.

Translation: Despite the fact that these initiatives would take not one dime from you taxpayers’ pockets, we have decided your children and grandchildren do not need high-speed rail, scientific innovation and clean energy.

“Never before has Congress undertaken a task of this magnitude,” House Appropriations Committee Chairman Harold Rogers (R-Ky.) told Republican lawmakers at a caucus meeting Wednesday morning. “You will be voting on the largest set of spending cuts in the history of our nation.”

Translation: Although federal spending is proven stimulative, we in Congress wish to starve the economy of money, so we have decided to do so, big time.

House conservatives were unappeased, however, and vowed to offer a plan to cut spending by at least $10 billion when the measure come before the full House for consideration next week. It was not clear whether the conservative Republican Study Committee would propose a lists of cuts to specific programs, as the Appropriations Committee has done, or whether it would simply instruct the White House to cut spending across the board, allowing it to avoid the sometimes painful specifics.

Translation: We heroically will pander to the far right by starving the economy of money, but we don’t want to take the blame for the horrendous results. So we will force the White House to do it. Then we can point fingers. Clever, huh?

House GOP leaders endorsed the Appropriations cuts but were vague about the details. House Speaker John A. Boehner (R-Ohio) said the package of reductions would fulfill “our pledge to the American people that we will cut spending. All of this will help create an environment where we’ll have more jobs in America.”

Translation: See, it’s this way: Removing money from the economy somehow encourages businesses to hire more. We’re not sure how that works, but so long as no one is asking, we’re not telling.

House Majority Leader Eric Cantor (R-Va.) told reporters Wednesday morning that excessive federal funding has “been a big inhibitor to investment and job growth.”

Translation: Like Boehner and the Tea Party said, adding money to the economy inhibits investment and taking money from the economy is stimulative. We know that doesn’t make sense, but is that important?

The list of cuts . . . (would include) Obama’s high-speed rail initiative and the AmeriCorps volunteer program, one of President Clinton’s signature creations.

Translation: Our kids don’t need high-speed rail. Walking is healthful. And sure, AmeriCorps members address critical needs in communities all across America, for instance: *Tutor and mentor disadvantaged youth, *Fight illiteracy, *Improve health services, *Build affordable housing, *Teach computer skills, *Clean parks and streams, *Manage or operate after-school programs, *Help communities respond to disasters, *Build organizational capacity

But the Tea Party tells me none of those things are important, and who am I to argue about details? I just say what they tell me.

The list takes direct aim at Obama’s innovation agenda, slashing the budget of the Office of Science by 20 percent. Elite science labs in Tennessee, California and Illinois are bracing for furloughs and possibly layoffs.

Other Republican targets include arts and cultural funding through the Corp. for Public Broadcasting, the Smithsonian Institution, the National Archives and Records Administration, the National Endowment for the Arts and the National Endowment for the Humanities. All of the entities are routinely included on GOP lists; federal subsidies for the CPB would be effectively eliminated under the House proposal, fulfilling a long-standing conservative pledge to cut federal ties with NPR and public television.

Funds for minority business development, family planning and conservation programs would also be axed. Despite the persistently high unemployment rate, job training funds would be reduced by $2 billion. Community health centers, which serve a large number of low-income uninsured people, would lose $1 billion in funding. And more than $200 million would be trimmed from maternal and child health grants, which provide funding for immunizations as well as assistance for blind and disabled children.

Translation: Oh, quit your whining. Just a bunch of bleeding heart stuff. Name one thing on the list that benefits our children, our grandchildren or America. Who cares about them, anyway. The important thing is to:
a. Beat Obama. b. Pander to the Tea Party. c. Remain ignorant about economics. So please, don’t bother us with facts. We have our priorities.

I hope this translation clarifies things.

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

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

–How Populist Jim DeMint and USA Today help trash the economy

It’s amazing to me that voters continue to elect phony-baloney, populist politicians. These are the guys who know little to nothing about the subject at hand, but do know how to read the polls. So if the people want “A,” by heaven, the populist politician will promise them “A+,” even if it hurts the people who elected him. And voters buy that snake oil, year after year.

I was reminded again, of this human foible, when I read an article written by populist Senator Jim DeMint, South Carolina. He knows the voting public does not understand the difference between personal financing and federal financing. So, rather than educate the people, he preys on them, like a street corner con man.

Populist Jim says:

A country that doesn’t ever balance its budget will go bankrupt. That’s not a threat. It’s math.

Populist Jim hasn’t the vaguest idea about economics, or more specifically, about Monetary Sovereignty, the foundation of economics, but that doesn’t stop him from pontificating about economics and voting on economics-related bills. Fact: The U.S. government has the unlimited ability to create dollars to pay its bills, and has had this ability since August, 1971. It’s impossible for the U.S. to be unable to pay its bills. Jim, that’s math.

Populist Jim continues:

Endlessly borrowing more money to spend more money is a ruinous economic strategy . . .

Fact: We have “borrowed” (i.e., created T-securities out of thin air, then exchanged them for dollars we previously created out of thin air) almost $14 trillion according to your own numbers, an increase of 3,000% since 1971, and we are no closer to being “ruined” than we were back then. With all that debt increase, have any federal checks bounced? Even during this recent recession, with massive federal stimulus spending, is the government ruined? No? So Jim, what are you talking about?

Oh, by the way Jim, federal debt no longer is necessary. It’s a relic of the gold standard days, when the government’s ability to create dollars was restricted by gold reserves. Today, we could stop creating T-securities, and this would not reduce by even one penny, the federal government’s ability to pay its bills. If we simply stopped creating T-securities, the so-called “debt” would disappear. You see, federal debt is not a result of federal spending; it’s a result of T-security creation. No T-securities = no debt, and the government could spend forever.

Ah, but here’s Populist Jim’s best part:

A balanced budget amendment is sorely needed now, because the debt is rising bigger and faster than it ever has, like a wave cresting with more force and power as it approaches land.

Wow, that Populist Jim sure is poetic. He’s a regular street corner preacher man. Facts: By definition, a large economy has more money than does a small economy. So to grow from smaller to larger, an economy must have a growing supply of money.

But a balanced budget precludes a growing money supply. Even worse, the effects of population growth, trade deficit and inflation mean that with a balanced budget, each year the per capita supply of real money declines. And this is why, not just reductions in debt, but even reductions in debt growth repeatedly have led to recessions and depressions.

Populist Jim ends with:

A vote to increase the debt ceiling without any plan to cut spending is a vote to bring the debt even closer to crushing the economy. Congress must balance the budget now. Or, it will bust.

Let’s see, now. Populist Jim says he wants to cut $2.5 trillion from the budget. So . . .adding money crushes the economy, but taking money out of the economy helps it? How does that work, Jim?

Ah, he doesn’t know. He just tells South Carolina voters what his polls tell him they want to hear. The facts and the people who will suffer be damned. It’s economics by polling. What’s frightening is you people in South Carolina don’t have a monopoly on Populist Jims. They are in every state, spewing the same misinformation, just to get elected. And the voters are suckered by them. That – not the federal debt, but rather, the legion of Populist Jims – is why this nation is in trouble.

But wait. Why am I surprised? Jim’s article appeared in the February 8th USA Today, in which the featured editorial said:

The fact is that governments – like businesses and families–have to weather good times and bad. In good times, they should be building up surpluses. When a recession strikes, they can then pump money into the economy . . .

Hello? Look around you, USA Today. What do you think the federal government has been doing, if not pumping money into the economy – and without building up surpluses. Monetarily Sovereign governments are not like businesses and families. If even the editors of the most widely read newspaper in America, don’t have a clue about Monetary Sovereignty, how can the voting public be expected to understand it?

Darn, this is frustrating.

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

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

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