Tag: taxes

–David Malpass: Less money = more money

An alternative to popular faith

On May 26, 2010, the Wall Street Journal published an article by David Malpass*, which began : ”When Ronald Reagan became president, the world had too much inflation, i.e. too much money chasing too few goods. Economists argued for higher taxes to sop up extra demand. Instead Reagan chose to cut tax rates to encourage more output and pursued an strong dollar policy. The result was more goods and better balance between the supply and demand for the dollar. The malaise ended 18 months into his administration, with inflation declining gradually for nearly 20 years. We now face a different, equally severe problem – too much government spending and debt.”

See anything wrong with this? Forget, for a moment, the inaccurate definition of inflation (“Too much . . . too little . . .” See: INFLATION ) and think about the overall substance of the paragraph. He begins at the right place (Cutting tax rates) and ends at the right place (encourages more output), but wanders aimlessly and illogically in between.

First, there is no way cutting tax rates can end inflation, simply because cutting tax rates increases the supply of money, and increasing the money supply never has been considered disinflationary by any economist. However, because cutting tax rates increased the money supply, this did encourage output. So, all right, Malpass may have been a bit confused, but at least he arrived at the right conclusion. More money = more production.

But then, in the article, he wanders off again, claiming: “[…] too much government spending and debt.” Huh? After WWII, the Reagan administration began the greatest debt growth in U.S. history, and it was this debt growth that created the mighty engine of economic growth in the 1980’s.

Malpass spends the rest of his article decrying the federal deficit and debt he helped create (“nosebleed levels,” “debt the size of the Grand Canyon”), and even throws in a couple of non sequiturs about bill length (“health care reform . . . a whopping 2,700 pages,” “financial reform . . . 2,000 pages”), while as usual with debt hawks, not providing any evidence whatsoever that federal debt and deficits have an adverse effect on our economy.

He claims the debt and deficit are “starving small business of capital” without telling how an increase in federal money creation could starve anyone of money, and he finishes with this telling statement: “[…] true leadership requires . . . reducing government spending substantially enough to convince the private sector to invest again.”

So, he wishes us to believe that if the government pays less money to soldiers, military equipment manufacturers, doctors, nurses, hospitals, road and bridge and dam builders, farmers, poor people, teachers, home builders, railroad personnel, security-related firms and to all the other businesses selling to the government, the private sector somehow will have more money for investment.

And once again, this is the way our leaders have managed to guide us into an average of one recession every five years.
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*David Malpass was deputy assistant treasury secretary in the Reagan administration, and is president of Encima global LLC, and a Republican candidate for U.S. Senate in New York.

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

No nation can tax itself into prosperity

–What can save California?

An alternative to popular faith

California is broke and billions in debt. It’s unlikely California can pay its debts with tax increases and/or spending cuts, either of which could destroy the state’s economy. Tax increases and spending cuts always cause national recessions; the same would likely happen to California.

The best solution for California, and for all the other states in financial trouble, is to have the federal government step in with the necessary billions, which it easily could do. The government merely would credit California’s checking account at the Federal Reserve Bank, and debit its own balance sheet — a step it can take as easily, as repeatedly and as endlessly as the Rose Bowl scoreboard changing a score.

However, that won’t happen under current circumstances. The debt hawk belief that federal deficits are a problem, makes such support politically toxic. There are, however, two events which could force the federal government’s hand: Bankruptcy or disaster.

If California were to announce it planned to declare bankruptcy, businesses world wide would be threatened with ruin. Remember, California is one of the largest “nations” in the world — reputedly the 8th largest ( CALIFORNIA ) ahead of Russia and Spain. The federal government could not ignore such a threat, and would have to pay some or all of the bills, by a direct infusion of money.

Or, it could delay the inevitable, by lending California money ala Greece. (Loans to GM and Chrysler et al do not provide a model, because California cannot lop off large sections of its business and turn away from its citizens as companies can. So such loans, or even loan guarantees, just would put California deeper in debt.)

The other “solution” for California, though having terrible human consequences, would be to undergo a sufficiently large disaster, the most likely being a huge Los Angeles, earthquake, perhaps in the 8.0+ range. The government would declare LA County, perhaps even Southern California, a disaster area, and step in with the billions necessary to rebuild. Many of those billions would spread around the state, allowing the economy to recover.

Yes, FEMA didn’t rebuild New Orleans as it should have, but Louisiana doesn’t have California’s political clout, with only 9 electoral college votes compared to California’s 55.

I don’t know whether Governor Schwarzenegger has begged hard enough for federal support. Perhaps he is waiting for “the Big One.”

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

No nation can tax itself into prosperity

–Open letter to Pat Widder of the Tribune

An alternative to popular faith

Ms. Patricia Widder is on the editorial board of the Chicago Tribune. For 15 years I have been trying to educate the Tribune about the realities of federal financing. To date, I have failed. Here is my latest attempt.

Dear Ms. Widder

Your 5/12/10 editorial, “Greece and us” makes a false comparison. The U.S. is a monetarily sovereign nation; Greece is not.

All nations borrow in their own currency and pay back in their own currency. Monetarily sovereign nations (Canada, Australia, China et al) have the unlimited ability to create their currency, to pay their debts. Greece and the other EU nations do not have this ability. That lack of ability to create money, not the amount of their debts, is the cause of their financial problems.

Every nation that lends to the U.S. has two accounts with the Federal Reserve Bank: a checking account and a savings account. To begin the lending process, the nation first must put U.S. dollars (not any other currency) into their checking account. Then, they use those dollars to buy T-securities, which are kept in their savings account. That is when the Fed debits their checking account and credits their savings account.

When the T-securities mature, the Federal Reserve merely debits the nation’s savings account and credits its checking account, plus some extra for interest. The Fed can do this endlessly.

Greece, not being a monetarily sovereign nation, resembles not the U.S., but Illinois and California, which also are not monetarily sovereign. To make a comparison between U.S. and Greece is as misleading as comparing the U.S. with Illinois and California. The states can go bankrupt; the U.S. cannot.

Your call for less federal spending and higher taxes, under the euphemisms, “[…]scale down what they demand from the government and accept the need to pay for what they get” repeatedly has led to recessions and depressions.

You are confusing U.S. federal financing with personal financing. We, the people, also are not monetarily sovereign.

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

No nation can tax itself into prosperity

–Open letter to John Mauldin re. his myths

      John Mauldin is President of Millennium Wave Advisors, LLC (MWA) which is an investment advisory firm registered with multiple states. He also is a registered representative of Millennium Wave Securities, LLC, (MWS) an NASD registered broker-dealer. He is the author of Thoughts from the Frontline, a blog at Mauldin.
      Recently, Mr. Mauldin wrote an article for his blog, and I wrote to him with a critique, as follows:

5/9/10
Mr. Mauldin:

      This note is sent to you in the spirit of helpfulness. Your article titled “The Center Cannot Hold,” quoting G. Cecchetti, M. S. Mohanty, and Fabrizio Zampolli contains several widely quoted, commonly believed myths. For example:

      Myth: “Long before we get to the place where we in the US are paying 20% of our GDP in interest (which would be about 80% of our tax collections, even with much higher tax rates) the bond market, not to mention taxpayers, will revolt. The paper’s authors clearly show that the current course is not sustainable.”
      Fact: Federal borrowing no longer (after 1971) is necessary nor even desirable. See: How to Eliminate Federal Deficits

      Myth: “A higher level of public debt implies that a larger share of society’s resources is permanently being spent servicing the debt. This means that a government intent on maintaining a given level of public services and transfers must raise taxes as debt increases.”
      Fact: Society’s resources do not service federal debt. See: Taxes do not pay for federal spending.

      Myth: “And if government debt crowds out private investment, then there is lower growth.”
      Fact: This also commonly is stated, “Government debt crowds out private borrowing” and government debt crowds out private lending.” There is no mechanism by which federal spending can crowd out investment, borrowing or lending. On the contrary, federal spending adds to the money supply, which stimulates investment, borrowing and lending. See: Why spending stimulates investment

      Myth: “A government cannot run deficits in times of crisis to offset the affects of the crisis, if they already are running large deficits and have a large debt. In effect, fiscal policy is hamstrung.”
      Fact: This is the strangest myth, since running deficits in a time of crisis is exactly what the U.S. government has been doing. It would be true of Greece and the other EU nations, but not of then U.S., Canada, Australia, China and other monetarily sovereign systems. See: Greece’s solution

      Myth: “[…] the current leadership of the Fed knows it cannot print money.”
      Fact: This myth is even stranger than the above “strangest” myth, since printing money is exactly what the Fed does. See: Unsustainable debt.

      Myth: “As frightening as it is to consider public debt increasing to more than 100% of GDP, an even greater danger arises from a rapidly aging population.”
      Fact: The famous federal debt/GDP ratio is completely meaningless – a classic apples/oranges comparison – that neither describes the health of the economy, nor measures the government’s ability to pay its bills nor has any other meaningful purpose. See: The Debt/GDP ratio

      If you would like to see more common myths about our economy, go to: Common economic myths

Rodger Malcolm Mitchell