fiscal policy

Myths, Scares, Lies, and Deadly Innocent Frauds, Updated: Part Three

Joseph M. Firestone — Thu, 22 Dec 2011 11:44:04 -0500

(Author's Note: This post updates Part Three of a series reviewing Warren Mosler's book: The 7 Deadly Innocent Frauds of Economic Policy. The updating is prompted by a post by Hannah at DailyKos offering a “. . . a Review Sort of” of Warren's book.

Hannah's post begins by stating Warren's “7 deadly innocent frauds” (DIFs), and then goes on to point out that they are not innocent and to make a number of claims about Warren's beliefs which clearly indicate that she neither read his book, nor researched his actual positions stated frequently on his web site, nor bothered to note Warren's economic truths that his book counterposes to his DIFs. So, in this series, and because of the importance of his easily accessible book, I'm presenting a more detailed discussion of the frauds and the corresponding truths.)

In the previous two posts

in this series I've examined four ideas that Warren Mosler has called “deadly innocent frauds,” (difs) and that others have variously referred to as myths, scares, and lies. Three of the difs -- that Government deficits create a debt burden for future generations, take away non-governmental sector saving, and that social security is broken are all “deadly innocent frauds,” supporting the idea that deficits must be avoided, even if we have to suffer through extreme economic downturns to avoid them. These frauds, like the fourth dif that Government spending is operationally limited by the need to tax and borrow, all serve to reinforce the idea that Government can’t do anything about a bad economy without doing more harm than good.

The contrapuntal truths that: Government can create money, and is not operationally limited by the need to tax and borrow; there is no debt burden on future generations that limits production or consumption; deficits don’t subtract from, but add to non-governmental savings; and Government checks including Social Security checks don’t bounce; all reinforce the idea that Government deficit spending is not to be avoided, but, on the contrary is something we can and need to do to avoid the economic and human waste of unnecessary economic recessions and depressions. In this final part of the series, I'll review the remaining three of Warren Mosler's difs and discuss their political implications.

Beware the Trade Deficit?

Mosler's fifth dif is:

“The Trade Deficit is an unsustainable imbalance that takes away jobs and output.”

The normal arguments for this dif, in my view, are that if other countries give us more in goods and services than we give them, then we 1) build up unsustainable monetary debts and 2) lose jobs and outputs because we are not producing those goods and services here in this country. As trade imbalances accumulate over time, our monetary debt grows larger and we, as a nation, lose industries that have been producing the goods and services we get from abroad, and therefore continue to lose jobs and output until, eventually, we may become de-industrialized and our workers, in increasing numbers find themselves out of jobs, careers, and all that depends upon them.

Warren Mosler opposes this line of argument by noting that “the real wealth of a nation is all it produces, plus all its imports, minus all its exports.” This is basic economics. But it's important to stop for a moment and reflect on why it makes sense.

Real wealth is the sum total of valued goods and services possessed by an entity. It is not money, which is only the medium of exchange. We produce goods and services, i.e. real wealth. We also import goods and services, also real wealth, from abroad. But when we export real goods and services, what we are doing is sending real wealth abroad. So we are subtracting from our net real wealth when we export.

So why export, one might ask? For some nations, it's because they need the foreign currency they would gain from exporting in order to import. But what happens when other nations want to export to a specific nation so badly that they let that nation import even though it doesn't have their currency to pay for it, and they allow it to owe them for what it buys in their own currency? This, of course, is the enviable situation of the United States and other nations that are sovereign in their own currencies.

So, specifically for the United States, the answer is that they are giving us real wealth on credit, and agreeing that we can pay them for that wealth using our own currency at some future time. Which means, in other words, that they are sending us their wealth, and are agreeing that we can pay for it with a medium of exchange that our Government can create at will, and that is not real wealth, but only a warrant, backed only by the value of the current and future economic output of the United States of America.

As Mosler says: “. . . a trade deficit increases our real standard of living. How can it be any other way? And the higher the trade deficit the better!” Or to put this in terms of his counterpoint to the fifth dif:

”Imports are real benefits and exports are real costs. Trade deficits directly improve our standard of living.”

So, the greater our trade deficits, the more wealth other nations are shipping us, without us having to ship them real wealth in return. Well, what about the monetary debts that are accumulating say, obligations to China, and others? Those debts are all in US currency. And we, or our children, can make as much of that as we want without producing anything to send to China in return. So where is the debt burden, and the unsustainability in these accumulating debts?

The answer is that there is none. Well, what about the problem that by our importing goods and services from China in such a profligate way, we are hollowing out our own industries and productive capacity, and destroying jobs and the lives of our workers over here? Isn't this an unsustainable burden on us? I think there are two points to be made about this. One made by Warren Mosler and one of my own.

Warren's is that we can always use fiscal policy to develop new industries and to keep our people working so that we are using our full productive capacity to create wealth, while also importing whatever China or other nations are willing to export to us on credit. So, to amplify his view, the fact that we accept imports that drive us out of certain industries doesn't have to mean de-industrialization or unemployment here. It's all up to us.

We can take foreign imports at the expense of domestic productive activity, or we can take them, and ramp up our own economic activity in areas where there are no imports that are less expensive than what we can make ourselves. In particular, in our current situation there is all kinds of work to be done in re-building our infrastructure, re-inventing our industries along green lines, fighting climate change, cleaning up the environment, and educating our ourselves.

If other nations can free our labor force to do this kind of work, while they export to us various goods and services on credit, then we only get richer and suffer not at all. To have things work this way however, we have to have a fiscal/economic policy that will keep our people working and moving forward, we cannot afford to have periods in which people are unemployed when there is important work to be done.

My own point about the possibility of long-term unsustainable burdens, or at least negative consequences from a trade imbalance is that imports of certain kinds can, indeed, be harmful to the United States. But the harm, in this case, doesn't come from the short-term economic effects of those imports on productive activity, which remain beneficial, but rather from their effects on certain other values, such as our ability to provide for our national security, or our ability to produce certain components such as computer chips that are important to industry and manufacturing across the board, or our ability to keep our environment clean, or our energy foundations strong, regardless of the choices made by external parties to continue or refrain from trading with us, or their choices about what they want us to pay fpr products we cannot provide for ourselves.

To the extent that, because of imports, we lose the capability to manufacture certain materials and products, and need to rely on other nations for these, that may not be friendly to us in times of conflict. We allow these imports to hurt our military self-sufficiency and also, our industrial and economic self-sufficiency. While I haven't studied this link between imports acquired on credit, and a declining industrial foundation for supporting military capability, closely, I have the impression that the trends since the 1980 have been toward increased external contracting of military production, and the weakening of our industrial base in national security-related areas of manufacturing. In addition, the more the industrial capacity to make computer chips and other products is shifted overseas, the more reliant we are on continued favorable trading relationships with other nations who may not always be friendly, to maintain our own economy.

The significance of this point is that while the general economic principle that “Trade deficits directly improve our standard of living”, is correct, nevertheless with respect to certain products and industries we may not want to follow this principle because of political, security, moral, or long-run economic considerations, even though we know that not doing so will cost us economically in the near term, at least.

Do We Need to Save First to Accumulate the Funds for Investment?

Mosler's sixth dif is

“We need savings to provide the funds for investment.”

To see what's wrong with this dif, we have to pay attention to the difference between macro and micro levels of the economy. At the individual level, saving is one way for someone to accumulate enough money to make a capital investment. It's not the only way since individuals can also seek and get grants and loans for investment, but, nevertheless saving money and later using it for investment is a very common pattern and clearly underlies this dif.

At the macro level, however, savings get us into the Keynesian paradox of thrift. Since if spending doesn't equal all income, some of what is produced in the economy will remain unsold. Thus, at the macro level savings detract from consumption and create a slackening of demand, which, turn, can lead to less profits and investment and future production of wealth, and greater unemployment, unless there are compensating factors.

One possible compensating factor is using credit. When someone saves, someone else can absorb the slack demand created by savings, by borrowing money in order to consume existing products. If that happens to the same extent as savings, then economic output is fully consumed. Another possible compensating factor for savings in lifting demand is Government deficit spending which immediately adds to private sector savings, that, in turn, can be consumed, and so lift demand. Regardless of these compensating factors, however, we can see that, whatever the situation at the micro or individual level, at the macro or societal level, savings has a depressive effect on economic activity and investment, which is why we have ourselves a dif here.

The counterpoint to this dif is that far from savings being necessary for investment,

“investment adds to savings.”

To see why this is true, we have to reflect on what nominal capital investment really is. Namely, it is the use of money to produce instruments or tools, that play a part in producing valued goods and services (i.e. real wealth). Since this is the case, the investment in the capital goods comes first, and these goods are then used along with paid labor to produce output. But it takes time to produce output. So before there is output, there is labor, and pay for the labor, which can't be used to consume the output because it is not yet there. So, the pay given to labor leads to savings, until those savings can be consumed by spending them on the future output.

This reasoning may seem a little convoluted because workers receiving pay can consume any number of other things even though the immediate products of their labor are not yet available. But viewed from the macro perspective, somewhere in the system, the time lag between production and consumption has an effect resulting in those earning money saving for goods and services that they want which are not yet available. So, the counterpoint that

“investment adds to savings”

holds.

Warren Mosler points out that belief in the dif that “we need savings to provide the funds for investment”, is very damaging because it has led modern economies to divert real resources away from productive sectors of the economy to the financial sector. And he says that this dif:

” . . . drains over 20% annually from useful output and employment- a staggering statistic unmatched in human history.”

In fact, government deficits are much less inflationary in the US than they would otherwise be, because they are compensating for the slack demand created by increasing diversion of resources to the financial sector. Pension funds, IRAs, and other tax advantaged savings institutions, are harmful to the macroeconomy because their net effect is to remove a substantial part of the aggregate demand we need to fully consume our industrial output and our imports. Then we need greater private sector credit expansion and Government deficit spending to fill the gap created in aggregate demand by our misplaced emphasis on savings because we think it is necessary for investment.

Nor, is this all the damage done to our economy. In addition, the existence of “massive pools of savings,” has led to the creation of a sub-industry of thousands of pension fund managers and more thousands of brokers, bankers, and financial managers to service them. In itself this is a great diversion of people and human resources away from the productive portion of our economy, to the segment devoted to financial manipulation.

Public Sector Deficits and Taxes

Mosler's final dif is yet another one directed at the harm caused by Government deficit spending. It is:

“higher deficits today, mean higher taxes tomorrow.”

While there is a good chance that this is often literally true, it is not true because, as deficit hawks would have it, we need to have the higher taxes to pay borrowed money back to reduce the national debt. Instead, we may well have higher taxes because we need them to moderate a booming economy that, in part, resulted from greater Government deficit spending.

In other words, if Government increases spending to create greater demand in the private sector, and to create the conditions where our output and imports can be consumed, and we have full employment, then we may reach the point where we begin to see demand-pull price inflation in the economy. At that point, higher taxes ought to be imposed by the Government to prevent over-heating of the economy. In other words, Mosler's counterpoint is:

”Higher deficits today when unemployment is high will cause unemployment to go down to the point we need to raise taxes to cool down a booming economy.”

So, while the dif suggests that the burden of debt repayment resulting from deficits, is a bad thing; the counterpoint suggests that there will be higher taxation only after our economic woes are over, and everyone is experiencing prosperity, a good thing, and a price we may all be willing to pay, except those among the 1% whose greed and lust for control and extreme inequality knows no bounds.

Conclusion: Why The 7 Deadly Innocent Frauds of Economic Policy is So Important

The common thread in the three difs I've discussed in this part, is that they're all beliefs that counsel false economy and that, to the extent we follow them, lead to less national prosperity and wealth than we would otherwise enjoy. The sixth and seventh difs both lead to less economic activity and higher unemployment; and the fifth dif, in effect, counsels us to forgo opportunities to increase our national wealth through trading. The seventh dif, also, is like the first four in that it is another support for deficit hawkism, and a counsel against deficit spending, that is sorely needed in a time of slack demand and high unemployment.

Taking all 7 of Warren's difs together, we see the outline of an ideology whose effect is to cripple American potential in both the immediate and the longer term. The 7 difs together constitute a 19th century economic ideology appropriate for a nation with a commodity monetary system, rather than a 21st century economic ideology appropriate for a nation with a fiat monetary system. Partisans of this ideology often call it neoliberalism. But there is nothing “liberal” or progressive about it. Instead, it is an instrument of elite control, emerging oligarchy, and impoverishment of the 99%.

On the other hand, Warren's 7 truths counterposed to the 7 deadly innocent frauds, together lead us to an economic ideology that fully supports progressive actions to solve existing problems and to collaborate through the Government to realize the equality of opportunity and the right to a decent life that is very American's birthright. His 7 truths tell us that we can have full employment, provide for our children and grandchildren making life better for them, strengthen out entitlement safety net protecting the old and the sick, enjoy real wealth other nations are prepared to send us, enjoy savings at the micro-level while we have investment at the macro-level, pay more in taxes only when the economy is operating at full capacity and we can afford it, and do all of this without worrying about our government becoming insolvent.

All we have to do to make these things happen is to cast aside the false beliefs of neoliberalism and embrace the economic wisdom of the MMT deficit owls, and Franklin Delano Roosevelt's economic bill of rights. As someone once said “the truth will make us free,” if only we have the courage to put aside our fears of some new thinking and embrace it. What do we have to lose? The neoliberal things we're doing aren't working. We may as well try MMT-based economic and fiscal policies and reach, once again, for human progress.

Modern Monetary Theory: The Last Progressive Left Standing

Joseph M. Firestone — Tue, 14 Jun 2011 01:36:22 -0400

The headline progressives are in full retreat. They have found out the hard way that their bleeding heart pleadings -- 'yes, the financial markets might destroy us, but how can we cut this or that worthy cause' -- don't cut it. They have fallen into the out of paradigm world that takes it as gospel that the U.S. is at imminent risk of becoming . .

Spare Me the “Middle Ground” Please!

Joseph M. Firestone — Fri, 10 Jun 2011 20:06:24 -0400

In a debate at FiredogLake about Modern Monetary Theory (MMT) perspectives on the so-called deficit/debt crisis and the idea that there is no long-run deficit problem, powwow, a perspicacious commenter and occasional blogger at MyFDL, suggests that while MMT offers useful perspectives on how the monetary system works, and he also agrees that more deficit spending in the present employment crisis will not lead to forced, as opposed to political default, he still believes in a “middle ground” position about the advisability of extensive deficit spending and the MMT claim that deficit spending cannot force us into eventual insolvency, saying:

However, unlike, apparently, the MMT academy, I am not so sanguine about what the future holds in that department, and think that discretion is the better part of valor here, such that we should not be living, as a nation, as though money really does grow on trees, and will do so indefinitely.

In a later comment and in reply to my pointing out that the claim that insolvency caused by economic rather than political factors isn't possible for Governments sovereign in their own currencies, according to the MMT paradigm, powwow stated a number of considerations which I'll reply to here n dialog form

Working off admittedly-limited research, and focusing in particular on this ‘painless or necessary deficits’ question (while recognizing that the operational facts are that all the government does to “create money” these days is to push a button on a computer keyboard), here’s a tentative impression I’m receiving about the MMT federal money debate:

I perceive some MMT proponents to be trying to reframe an extraordinary period in American history – a time of historically-high government deficits and debt, but historically-low interest rates for government borrowing – as the “new normal,” in a way that’s beginning to remind me of the sense I had during the peak of the housing boom. I didn’t know the major contributing factors that created the housing boom (the Wall Street pressure for ever more loans to repackage and ‘collateralize’, etc.), but I was positive that the situation was simply not sustainable. Meanwhile, a cottage industry of players was describing what has turned out to be an abnormal, short-lived period of great excess as the “new normal” for the American housing market and economy.

I agree with you about the housing boom, I, too, had the feeling that it was unsustainable. However, the reason why I thought that was because the boom was based on a private debt bubble, and those building debt had only a limited capacity to continue or spiral it upward. Sooner or later, their credit worthiness would be questioned by lenders, and when that happened the whole house of cards would collapse.

However, the deficits MMT is talking about are accompanied by public debt instruments and the Government issuing them has an unlimited capacity to create/spend the money it needs to meet whatever debt obligations it has. So, however, large the public debt gets, the capacity of the Government to issue more debt is unimpaired, unless political factors intervene. When viewing private debt vs. public debt, it's important to recognize that these are very different, as argued here, here, here, and here.

Also, it needs to be emphasized that running deficits isn't the same thing as issuing debt. Congress, again, now requires that Government first issue debt when it wants to deficit spend. But Congress can change that rule at any time, so that deficit spending could continue, but now without debt. In addition, The Executive Branch now has the capability to issue jumbo platinum coins of arbitrary face value. If it chose to issue such coins and deposit them at the Fed, the profits from coin seigniorage could close the gap between tax revenues and government spending, technically erasing all future deficits, while allowing the Government to completely pay down the national debt over time. If this method were used, net financial assets would still be added to the non-Government economy when the Government spends, because, unlike taxation, coin seigniorage produces revenue and erases deficits without destroying cash reserves.

The housing boom was proven to be primarily a confidence game, with little real justification for its years of existence (which, upon collapse, generated a lot of pain for those at the bottom, but little for those at the top who drove it, and finally ended it). Can’t the same be true of the present ‘seemingly-painless-government-debt’ era of the wider American economy? As with the housing boom, there are heavily-invested players with enormous incentives to keep the game going, who are working overtime to prevent a change in the status quo.

I'm not entirely sure what's meant here, but I think that Government deficit spending won't generate demand bubbles and eventual collapses as long the Government doesn't deficit spend beyond the productive capacity of the economy to absorb the aggregate demand deficit spending has created. So, I think this is the demand-pull inflation issue. MMT opposes deficit spending beyond full employment, and proposes that excessive aggregate demand be contained through taxation.

But just as suddenly transformative and unpredicted as the Lehman bankruptcy was for the Wall Street home mortgage game, probably few can know or predict with precision what factor might suddenly change present circumstances enough to make us wish we’d stopped unnecessary deficit spending by our government long before now.

I already wish we hadn't done much of our deficit spending because of bad effects of the spending itself. For example, I'm against corporate welfare programs and spending on the wars in Afghanistan and Iraq. But, I think you're suggesting that there is something about Government deficit spending itself that has bad effects, apart from the content of this spending, and that under certain unknown and relatively unpredictable circumstances these “Black Swan” bad effects can become highly visible and dominant.

I won't say that there's nothing to the idea of falling victim to a Black Swan, but surely to refuse to take action by spending what we need to to solve our major national problems for fear of encountering a “Black Swan” that might collapse our system, isn't a good enough reason to accept the status quo on our myriad problems, on grounds that we'll spend so much that we'll expose ourselves to those novel conditions we can't even imagine.

Don't get me wrong, I'm all for being careful and watchful for any emerging “Black Swan,” and by “looking for trouble” constantly with any MMT-inspired policies. But I'm not for inaction while: our labor force degrades from unemployment, our educational system continues to deteriorate, our health insurance system causes close to 60,000 unnecessary fatalities per year, our infrastructure continues to decay, our safety net is continuously weakened, and other very serious problems go untreated.

In the end, even if ‘money growing on trees’ were to become the accepted definition of the spending power of the federal government, I’d probably be in the camp of those insisting that we need more than the free will of our representatives, plus endless “free” money at their disposal (or at the Federal Reserve), to keep our federal government in check, even if the bills Congress ran up, or the spending they ordered, was done with money manufactured out of thin air, that never needed to be accounted for in any way.

I don't like the “money grows on trees” metaphor here as well as I like Warren Mosler's “scorekeeper” analogy. Like the scorekeeper, the Government never can run out of points to give to the players in the economic game, unless, of course, Congress constrains the scorekeeper.

As it is with the scorekeeper, the Federal Government neither has nor doesn't have any points (or USD). What it has instead is the authority to create points (dollars) in the non-Government sector through spending, and also, in the Government's case, to destroy them (through taxing or selling debt instruments). These days when the Government creates dollars, it typically costs it virtually nothing, because it's done electronically; and that also holds true when it destroys dollars.

So, finally, I agree with you that we need more than “free money” and Congressional free will to “keep the Government in check.” But I also think that this is beside the point of whether the MMT paradigm is correct in its analysis of fiscal sustainability and fiscal responsibility. Keeping the Government in check is a matter of getting greater accountability from our representative system of Government, whatever economic ideas we are subscribing to. Right now that system isn't working well to represent working and middle class people, and I think we need to develop new institutions that will help us to keep the old ones in check. But that doesn't mean that we should acknowledge artificial bounds on Government spending when people are suffering, economic lives are being destroyed, and sick people are dying and dying quickly for want of health insurance. If this Hooverian austerity period goes on much longer, we are looking at wasting the lives of a generation of young Americans, at unknown cost to the viability of our democracy. We need that wasting to stop. We need to use the full power of Government spending to create sustainable economic growth.

Middle grounds often sound like a good idea theoretically. But in reality they can be incredibly costly because the cautious,compromising approach they require often means accepting the very outcomes one is trying to avoid. So, for example, we see those who fear Social Security insolvency and a severe cutback in benefits in 2037 advocating cuts to Social Security that will bring the reality of reduced benefits right now. Similarly this Administration's cautious, moderate, middle ground, “bipartisan” approach to economic stimulus, along with its willingness to accommodate Republican and Blue Dog stimulus measures and its insistence that the Recovery Act be kept under $900 Billion in deficit spending over two years, pretty much guaranteed the inadequacy of the Recovery Act as a means of ending the job crisis. The middle ground position failed to solve the jobs problem, and along with other foolish “middle ground” measures has left us on the brink of a double-dip recession now.

We've seen an even more foolish “middle ground” approach, in the health care reform area. The bill that emerged certainly was “middle ground” all the way. No deficit spending. No public option. Medicare savings from waste. Mandates following RomneyCare in Massachusetts. Plenty of Republican giveaways to the private insurance companies included in Amendments. Complete avoidance of the idea of Medicare for All.

The result is a big failure, which thus far had failed to stem the tide of fatalities, foreclosures, and bankruptcies due to health costs and lack of insurance, and which is vulnerable to complete repeal before it even becomes operative. In this Administration, the cost of middle ground approaches to problems has been horrific. I'm afraid the term “middle ground” has a negative connotation for me. It doesn't mean reasonable. It doesn't mean useful. It doesn't mean solutions. It means incoherent. It means failure to accomplish what could have been accomplished because people assumed that doing something, anything, is better than waiting until one can do something that might actually solve a problem. “The perfect is the enemy of the good.” Well, the bad, the incoherent, and the unworkable is the enemy of the good too. So, let's have no more of that!

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

The Importance of Being Alan: A Response to Alan Simpson's Conservative Defenders

Daniel Marans — Fri, 27 May 2011 16:03:03 -0400

Try as they might, conservatives cannot rescue Fiscal Commission Co-Chair Alan Simpson from self-marginalization. But while Simpson’s revealing gaffes remain a welcome political gift for opponents of Social Security and Medicare cuts, his staying power in elite policymaking circles only attests to the sad and distorted state of our nation’s fiscal debate—and the powerlessness of mainstream America within that discussion. That Simpson was probably the most prominent Republican President Obama could find to chair the Commission, is just the latest sign of how Democrats have had to define “moderate” down to slightly-left-of-nutjob.

Charles Blahous, a conservative Social Security expert, and public trustee of the Social Security trust funds, tries to undo the damage done to the Fiscal Commission’s credibility by Ryan Grim’s conversation with Fiscal Commission Co-Chair Alan Simpson. While some of the points he makes are valid, all fail to restore confidence in Simpson as a prominent voice on Social Security policy, or the fairness of the process by which the Fiscal Commission developed its recommendations.

Here’s the rundown. Grim found Simpson cursing out AARP, calling Social Security a “Ponzi scheme,” and claiming that life expectancy was 63 when Social Security was created at an event hosted by the Investment Company Institute, a financial industry trade group.

Grim caught up with Simpson and challenged him on the life expectancy statistics. It turns out, Grim noted, that according to the Social Security Trustees, life expectancy if you reached age 65 was 79.7 years for women and 77.7 years from men. Overall life expectancy was lower because of high infant and childhood mortality rates that medical advances have since been largely eliminated. Contrary to Simpson’s implied argument that Social Security was intended to cover very few people, the life expectancy statistics at age 65 confirmed that it served a very real segment of the population.

Simpson responded with confident disbelief, saying, “Just because a guy gets to be 65, he’s gonna live to be 77? Hell, that’s my genre. That’s not true.”

Chuck Blahous defends Simpson, claiming that Simpson was clearly confusing life expectancy at any age with life expectancy at age 65. In any event, Blahous argues, Simpson’s point stands that overall increases in life expectancy have made Social Security’s finances unsustainable. Simpson’s statement does not discredit the Bowles-Simpson [Fiscal Commission] recommendations, because the “Commission” used SSA’s estimates of both kinds of life expectancy, regardless of what Simpson said. Finally, the ongoing 1983 increase in the normal retirement age from 65 to 67, Blahous says, does not account for the full increases in life expectancy.

But Blahous’s argument doesn’t hold water. In the first place, He gives Simpson far too much of the benefit of the doubt. What Simpson intended is not 100 percent clear; what he said is. And even then, what he intended is probably 99.9 percent clear. Simpson was evidently not familiar with the distinction between life expectancy at birth and life expectancy at age 65, and displayed a stubborn aversion to confirming the facts when he was presented with an account that did not square with his own.

It is really the latter aspect of the interaction, in which Simpson showed a total lack of intellectual curiosity, or openness to the possibility that he might not be familiar with the statistics being presented to him. If it were an aberration for Simpson that would be one thing, but unfortunately, Simpson has a long record of hostility to facts and people that challenge his glib pronouncements on Social Security. As head of the Fiscal Commission, he repeatedly derided critics who presented him with inconvenient information about the program’s finances (see Lawson, Alex), and was dismissive of Americans who rely on Social Security (see Carson, Ashley, and “cow with 310 million tits”).

More recently, Zach Carter heard Simpson parroting the oft-repeated myth that because Social Security had 16.5 workers for every 1 retiree in 1950, and only 3 workers for every retiree today, it is now de-facto unsustainable. In fact, the program had a 16-to-1 worker-retiree ratio in 1950 because of the addition of millions of farm, domestic and self-employed workers that year, who had not yet begun receiving benefits. Ten years later it was 5-to-1, and by 1975 it was at the 3-to-1 ratio it has now. More importantly, since 1961, as the number of workers supporting beneficiaries got smaller, Social Security’s tax rates and base have both more than doubled, going from 3% to 6.2% (on the employee side), and $30,000 to $106,800 (both current dollars), respectively.

As for Blahous’s argument that increases in the retirement age have failed to accommodate the financial impact of growth in life expectancy, he is comparing apples and oranges. As he concedes, growth in life expectancy is not the largest contributor to Social Security’s projected long-term shortfall (the decline fertility and increase in income not covered by the cap are the biggest causes). What Blahous doesn’t mention is that life expectancy’s financial impact is so insignificant that it could be entirely balanced by miniscule revenue increases. As Monique Morrissey of EPI explains, in her excellent paper, Beyond Normal: Raising the Retirement Age is the Wrong Approach for Social Security, longevity gains could be offset by a 0.01% increase in the payroll tax, phased in over 60 years from 2025 to 2084.

I disagree with Blahous that the Commission’s proposal must be considered independently of Alan Simpson. The Commission has been irrevocably discredited by Simpson’s record of ignorant and insensitive remarks. Blahous is correct that the Commission staff, who no doubt did the bricks-and-mortar work of running the numbers for the recommendations, know the correct numbers on life expectancy. But the Commission’s—or, more accurately, Erskine Bowles and Alan Simpson’s—proposal, has earned gravitas in the media and in Congress (where a group of Senators is using its proposal as the basis for a bipartisan deficit deal), at least in part by virtue of the distinction enjoyed by the two men who headed it. As evidenced by the location of his very encounter with Grim, Simpson continues to be an active spokesman for a center-right brand of deficit reduction, and use his perch to mischaracterize Social Security and other programs.

The practical implications of Alan Simpson’s leadership are two-fold. First, his constant repetition of exaggerations and myths about Social Security has no doubt contributed to the constant drumbeat of fear that has characterized debate over the deficit in general, and Social Security in particular. When the President’s Republican appointee as chair of the Fiscal Commission can spew such misinformation about Social Security and is received as “brave” and “honest” on all of the major television networks, is it any wonder that the public believes Social Security is “broke,” “not gonna be there,” and responsible for our debt?

More importantly, Simpson represents just what it means to meet Republicans on their terms in the current political climate in Washington. When President Obama, a Democratic president, appointed Simpson to be the Republican face of a blue-ribbon Fiscal Commission, Simpson was hailed for his spunk and wit, and willingness to “tell it like it is.” Without a Republican figure like Simpson who was willing to agree to cutting tax loopholes, which angered Grover Norquist, it is likely that a bipartisan Commission would not have been able to exist. But beyond ticking Norquist off, and not embracing the Ryan budget wholesale, Simpson is not especially “moderate.” And neither was the Commission he headed, for that matter. The composition of the Commission’s proposal was two-thirds cuts and one-third revenue increases at a time when tax rates on the wealthiest Americans have reached their lowest levels since the 1950s. Is it really worth courting moderates like Alan Simpson who are liberal only when compared to Grover Norquist and Paul Ryan?

In denouncing Simpson, we must also reject the logic of bipartisan appeasement that empowered him. Rather than work with Republicans to reduce the deficit on their unfair and ultra-conservative terms, we should stand our ground, knowing that the public stands with us.

A Silver Bullet for the Debt Crisis

Potomac Oracle — Thu, 12 May 2011 13:42:06 -0400

Yes, Mr. President There is a Silver Bullet for Our Debt Crisis.

“The Civil War quickly exposed the weakness of a money system based on banker’s promises: as almost any crisis does. That war also highlighted a system that functioned in or out of crisis – a money system controlled by government. The Greenback demonstrated that government-issued fiat money served the commercial, industrial and fiscal needs of the nation even in the midst of warfare. Moreover, our government limited the issue of interest free money to the authorized amounts, in contrast to bankers’ capricious issue of their paper notes.”(Zarlenga, p. 477)

Mr. President—Prosperity and Progress are Built upon the Foundation of Debt Free Currency

I highly recommend that your administration mount an educational campaign to inform Americans of the fact that they have an alternative to tax increases and spending cuts as policy choices for managing the deficit. That alternative is to issue sufficient debt free currency to fund debt and debt service as part of the budgets of the more than 55,000 political jurisdictions in America.

We’ve successfully done this in the past; 17th & 18 century Colonists used debt free Scrip for one hundred years much to the chagrin of London bankers who eventually forced gold into our system of legal tender. That singular act gave rise to the Revolutionary War. Our forefathers then issued their own currency...Continentals and won the War and our Independence from the Crown despite its criminal counterfieting of billions of this Colonial Currency.

Lincoln refused to accept offers by Eastern Bankers who wanted to charge 26% to 35% interest for a $150 million loan. In 1862 President Lincoln and the Congress issued a limited amount of debt free Greenbacks. Greenbacks were constitutionally valid as legal tender and served as a preferred medium of exchange. They were considered money by providers of goods and services who accepted them as payment from the government and offered them as payment for commercial bills. Greenbacks won the Civil War, reignited America's industrial revolution and served as interest free money through 1912. And, would be our currency today were it not for the Federal Reserve charging the Federal government interest on every dollar it needs to fund its budget.

The New American Dollar:

Americans need to understand that this nation owes approximately $80 trillion in principle and interest payments and unfunded liabilities to all creditors, domestic, foreign, intergovernmental, etc. That sum is represented by Federal Reserve Notes, Treasury Bills, Bonds, and subordinate debt instruments. This Treasury issued debt represents what the "Good Faith and Credit" of the United States is obligated to pay to creditors at some future point. The crushing national and individual costs of this enormous obligation can be entirely eliminated by restoring to government currency sovereignty managed by the Colonists and Lincoln.

With sovereignty restored your Administration can fund principle and interest owed to all of the above named creditors, you would require Treasury to issue debt free currency. The new legal authority would allow Treasury to create electronic credit and debit accounts denominated in the new currency. You would request and Congress would authorize $80 trillion New American Dollars, (NA$80Tr) interest free, provided as needed through Treasury and not the Federal Reserve. The costless availability of the new currency would eliminate concerns over when to replenish the unfunded liabilities of all political jurisdictions.

Inflation would be completely avoided,

1.Congress would instruct Treasury to redeem, upon presentation/verification, all debt instruments.

2.Treasury would, after making payments, immediately liquidate/void these representations of money/credit/debt
rather than rolling them over, as is current practice.

3.Accomplishing #2 above leaves the total supply of money unchanged, therefore, no inflation.

4.Federal taxation of corporations and individuals would be phased out since we would no longer need to borrow
and pay interest on our own "fiat" money.

5.State and local governments would purchase goods and services with the new currency which eliminates the need
to tax corporations and individuals. Unless those jurisdictions had citizen consent to enter into debt agreements
through the issuance of municipal bonds, etc.

6. Because the Federal government would be the sole issuer of money, commercial banks would move immediately
to a 100% reserve. Thus there would be an annual cap on the amount of currency the Federal Government prints
and distributes to the 54,000 plus political jurisdiction which comprise America and its territories.

Debt free currency is the “Silver Bullet Solution.” A debt free currency controlled by society not a handful of privileged individuals whose profit maximization principles exclude the general welfare and progress of all the people. Capitalism’s principles should not be applied to the public sector via the accretion of debt and debt service. There should be no interest charged on “fiat” funds provided to serve the Commons.

Moreover, the people should control the quantity of money supplied into this economy not the private banking cartel which, as we have seen throughout our history, capriciously manipulates the quantity of money in society whenever it wishes.

Educating America about the above alternative should be the most important function of your Administration during this “deficit crisis.” This "Silver Bullet Solution" for public control of the supply of money eliminates entirely the crushing burden of taxation and deprivation of needed services. It opens the door to funding the nation's priorities; maintaing social safety net programs, fully funding renewable energy alternatives, restoring national infrastructure, funding single payer health coverage, maintaining full employment, supporting unfettered medical research, developing new manufacturing industries, and deploying national security resources unconstrained by debt ceilings.

Why Pay Interest on Our Own "Fiat" Money?

Modern monetary policy requires income taxation for its acceptance and survival. A nation required to borrow must have a stream of revenue with which to pay service on its debt. Since governments are not profit making entities they must devise a ruse (income taxation) to assure creditors that payment of debt service will not be interrupted.

In the absence of interest charges (at all levels of political jurisdictions) on funds provided as payments for goods and services, there then would be little if any need for corporate or individual income taxation.

It cannot be repeated too often that the two major reforms of current monetary policy are driven by the fact that:

1. Government, is not a private-for-profit corporation, and should control the quantity/supply of money for the purpose of supporting societal objectives, not the objectives of profit maximization.

2. There should be no interest charged on funds created by the Federal Treasury and distributed to the 54,000 plus political jurisdictions and federal government agencies. Interest on these funds occurs only when they are deposited in private sector financial institutions by those who receive payment from the public in exchange for goods and services provided. These commercial banking institutions then earn income from lending operations and other financial services.

We, as a society, must develop priorities and constraints on funding seperate from conventional wisdom's budget deficit constraints and attendant mirror games.

Mr. President you’ve said on a number of occasions that we need, “…bold, imaginative approaches to confront the myriad challenges of this generation.” I believe the above recommendation and its benefits satisfy that dictum. We have witnessed the inadequacy of current policies. They leave us further constrained by debt here at home and abroad. Significantly, a continuation of current monetary policies would increase the multiple levels of pain suffered by most Americans.

A purposely limited amount of debt free currency was the perfect medium of exchange/legal tender to see the North through the successful conclusion of the Civil War, and reignite America's Industrial Revolution. We need this form of currency now to restore America's sovereignty, and our independence from the tyranny and capriciousness of a privately owned central bank.

How say you Mr. President??

Tell President Obama and Everyone Else: There's No Deficit Problem

Joseph M. Firestone — Fri, 15 Apr 2011 20:34:43 -0400

Over the past year, in an attempt to head off the austerity program gaining steam in Washington, DC, I've blogged the truth about the deficit/debt problem on many occasions. That truth is that there is no deficit/debt problem, and that deficits and debts, no matter how large they may be, don't affect the ability of the United States to create more money.

So, there is not and cannot be a solvency problem, unless Congress refuses to do its duty and appropriate dollars to pay the Government's bills. Of course, if the Government spends beyond what's necessary to add enough aggregate demand for the US to get to full employment, then demand-pull inflation will result from the excess spending. But 1) we've got a long way to go until we reach that point; and 2) the inflation issue not a debt/deficit/solvency issue.

So, the solvency issue needs to be taken off the table for discussion, and certainly as a basis for action, and austerity programs and long-term deficit reduction plans like those of Paul Ryan and the Administration. In addition, our erstwhile leaders need to all get off their high horses about fiscal responsibility, fiscal sustainability, "biting bullets," "having adult conversations," and other such nonsense, and face up to their real responsibility which is spending enough, in the right way, to give every American who wants to work a job at a living wage with decent fringe benefits. Until they do that, they are the ones who are being fiscally as well as morally irresponsible.

So far, my efforts to send this message to our politicians don't appear to have gotten through. So, I want to try again. This time by trying a twitter campaign. A little while ago, I tweeted:

The US can't run out of money, unless Congress refuses to make it! #nodeficitproblem

I'm going to continue this effort by tweeting all the reasons I can think of why the US has “#nodeficitproblem.” If you agree with me, please hep me tweet the truth. Let's get “#nodeficitproblem,” trending!

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

It's All In the Framing and That's Terrible

Joseph M. Firestone — Thu, 14 Apr 2011 02:05:10 -0400

While some progressives are happy with the President's speech on the budget; others are suspicious, recognizing the President's repeated pattern of offering words that are reassuring to progressives while later acting to work against the general principles he asserts in a major speech. As Bernie Sanders is saying: “the devil is in the details.”

It surely is. But also, the devil is in the framing of the issues and the negotiation to come. And if the framing is done in such a way that the definition of the problem already implies an unfavorable solution for the middle class, American workers, the poor and the vulnerable, then I'm afraid the outcome is a predetermined defeat. So let's look at the framing in the form of a number of assertions made by the President during his speech.

Our nation has had to borrow money.

Reply: No! Our nation has borrowed money. That it did so was a choice made by Congress. It could have spent without borrowing. It did not do so because Congress required the Treasury to issue debt instruments whenever it wanted to deficit spend. So, the existence of the national debt today is Congress's fault. It's existence from now on will be Congress's fault too, because they refuse to give the treasury permission to spend without issuing debt.

Every national debt projection, or debt-to-GDP ratio projection, made by CBO, OMB, or the many private organizations supported by Peter G. Peterson and other deficit hawks is conditional on Congress continuing to mandate debt issuance. And every one of these projections can be invalidated if it ceases to do so.

A little credit card debt doesn't hurt

Government debt is not credit card debt. It is not even remotely like credit card debt. First, the interest rate is far lower than it is on credit card debt. Second, credit card customers don't get to set the interest rates they pay. The Government, however, has that power and can drive these rates down to close to zero, if it follows that policy. Third, credit card customers can't create the money they use to pay their debts, but the Government can.

Fourth, credit card debt is a liability for a household that lowers a household's net worth, but Government debt, while a liability, doesn't lower the US Government's net worth, because what value can you place on the authority to make the money you need to pay off Government debt? Fifth, credit card debt doesn't create any new financial assets in the private sector, but Government debt issuance, coupled with deficit spending does add net financial assets, making the private sector richer.

But now we have a debt problem, we should have started to save more and go into debt less to provide for the future.

Tell me, how can an entity like the US Government, which at any point in time has exactly the same constitutional authority to create/spend new money appropriated by the Congress as at any other point in time, meaningfully save up money to use in the future? Does Mr. President really think that Treasury piles up its Dollar bills and saves them in a storehouse against the time that it will have to spend?

Give me a break! The Treasury always spends in the same way. It spends by marking up private sector accounts or sending checks, and it does so by using its authority to spend Congressional appropriations. Getting its money from a storehouse of saved US Dollars never enters into the process.

Let's be clear. You and I can save money for the future. Nay, we must save it, or we risk not having any. But our Government is different. It has different powers from ourselves. It has no need to save for the future, even though it may have a need to destroy money it has previously created, or to create new money when it wants to spend.

We could actually see the possibility of paying off the debt in 2000

Sorry to have to tell you this Mr. President, but, there was no possibility of paying off the whole national debt by continuing to run surpluses after Clinton. Why? Because assuming the current account balance ranged from -3.5% to -5.0% of GDP during that repayment period, for the Government to run surpluses it would have been necessary for the private sector to run deficits, thus accumulating more and more debt, year after year until the debt was paid down to zero. The reason for this is that the macro-economy conforms to the following simple accounting identity, which I'm sure, that both you, and Republican whiz kid, Paul Ryan, should have no trouble understanding given your reputed mathematical ability and his. The identity is:

The Private Sector Balance + The Government Balance = The Current Account Balance

So, for example, if the Current Account (external trade) Balance is going to be negative, let's say -3.5% of GDP, and the Government Balance is intended to be a surplus of 2% of GDP, then the Private Sector Balance will have to be -5.5%, a big private sector deficit. Right now the private sector is looking to decrease its debt and is running something like a 6% surplus. So, how can the private sector handle such a deficit?

Well, there's only one way. It can increase its debt. How many years do you suppose the private sector would be able to increase its debt, before the debt bubble created by this would force the banks to suddenly contract credit, cause a crash and undermine economic activity? Maybe two, may be three? As it was, the Clinton surpluses ended up handing off a recession to Bush 43 in 2001. What do you suppose would have happened if Bush had withdrawn 5.5% of GDP in net financial assets from the economy over the next two years?

Yes, it's true. The whole idea that the national debt can be paid off by running surpluses primarily constituted from tax revenues is a false idea; one that can never be achieved without driving the economy into a very deep depression. Both Mr. Obama and Mr. Ryan have to learn that if the Federal Government runs a deficit it, and if the current account balance is neutral (zero), then that ADDS net financial assets to the private sector. On the other hand, if it runs a surplus, and the current account balance is neutral, then that subtracts net financial assets from the private sector.

Then we had those tax cuts, and wars, prescription drug program, not paid for. If we hadn't had those tax cuts, and that program we'd be in great shape.

Our budget deficits might have been much less; but there's no reason to believe that the Crash of 2008 wouldn't have happened, and if it had our economy would still be in terrible shape now.

Now that the economy is starting to take off we have to live within our means, reduce our deficits and pay down our national debt.

We always have to live within our real means including our available resources, and our real productive capacity with all that entails; but one of our “means” is our ability to create financial resources at will by spending/creating Federal money. And that “means,” our capability to create/spend high-powered money, is wholly unaffected by our past deficits and the accumulated national debt. So we neither have to reduce our deficits, nor to pay off our national debt. These requirements are myths, lies, and fairy tales, depending on the motivations of the politicians who tell them. Our politicians need to stop telling them.

Even after our economy recovers, our Government will still be spending more than it takes in. That means we'll have to borrow from China.

It's true that our Government may be spending more than it takes in even five years from now. But it is not true that we will have to borrow from China. Whether or not we do borrow, will depend on whether the Congress still requires that we issue debt instruments when we deficit spend. If they don't, then Treasury can spend Congressional appropriations by marking up accounts in the private sector without issuing new debt, since it has the Constitutional authority to do so.

It is also misleading to suggest that spending more than the Government takes in is a problem. If the economy has a current account balance of -3.5% GDP, and we want the private sector to save 6% or so, then, to maintain full employment, the Government will have to run a deficit of 9.5% of GDP, and that deficit level will be normal, unless we want less than full employment, a smaller current account deficit, or a smaller private sector surplus.

The interest payments on the national debt will go to $1 Trillion per year.

Mr. Obama, who is friends with Warren Buffett, clearly believes that the Bond markets control interest rates on Treasuries. Mr. Obama, however, is wrong! Governments can drive down interest rates to near zero if they want to. Japan has already shown that. But, there are also people who have explained how to do that. If their strategies don't work and interest rates begin to rise, then the Federal Government can just stop borrowing money, spend without debt, and never have to worry about rates on debt instruments again.

People will doubt our ability to pay back our debts, and lead to rising interest rates for all of us.

Again, the markets don't control the interest rates. We do!

We have to discuss where to cut to solve these problems.

We should always be discussing where to cut, because many of our programs are not creating real value. But there's no deficit or debt problem. So, there's nothing we have to cut in order to solve it.

Everything has to go onto the table.

No. It doesn't. Successful programs don't have to be on any table, because there is no money problem. On the other hand, much of what we do is counterproductive, so it, including our current war efforts must be ended immediately.

Social Security isn't the cause of the deficit but it has some problems going forward which require changes.

The only problems Social Security has are are people who see the program as needing to be funded by a regressive tax. The payroll tax should be ended, and Social Security should be funded out of general revenue with its payments automatically guaranteed every year by Congress. Social Security benefits should be expanded. The full benefits retirement age should once again be lowered to 65, and we should then look at reducing the age to Belgian levels. We do not lack the money to do this. All we have to do is to do it, and see how well it works for the economy.

If our recovery speeds up we can make better progress than indicated here.

That would be great if it does speed up. But barring much more deficit spending it won't do that. This is just the logic of the macro-economic identity again. With a negative current account balance and attempts to save 6% of GDP, we need to continue 10% or more of deficit spending to get out of this mess. If we try to force austerity levels, then private savings will fall lower and lower, and economic activity will decline again in the private sector.

2014 trigger: If projections don't get better then we can get more spending cuts and more tax revenues then.

We can. But, first, the projections being referred to are OMB or CBO projections. These projections are unreliable even three years out, much less 15 years out. But if, by 2014, they look bad, then it will be even more necessary at that time to forget about austerity, and do whatever it takes to get people back to work.

This is a shared sacrifice plan.

Huh? When will the banksters and Wall Street traders have to share the bonuses they got from banks bailed out with Federal money? When will the ratio of CEO compensation to average employee compensation go back to 50-1 levels from the present outrageous 350- 1 levels. Take the money back from the banksters and health care CEOs. Then talk to us about shared sacrifice.

Apart from that, however, shared sacrifice is fine when sacrifice is necessary. But no sacrifice is necessary here. We do not need to sacrifice because we are not running out of money. We do not need to sacrifice because otherwise we won't we be able to borrow from the bond markets, simply because we never have to borrow from them. If we do want to let them borrow, and they become obstreperous, then just borrow enough to cover only 50% of new deficit spending, and let the rest just go out without bonds issued in correspondence. If we do that, we'll soon find the bond market people screaming for risk-free Treasuries at whatever rate we want to offer them.

We need to make changes in health care to ensure that we don't have continued inflation in health care costs.

Well, that's certainly true. But it's also true that the President is unwilling to advocate for and pass measures that would bring inflation in insurance costs down. The best method of doing this would be to pass HR 676, Medicare for All. This would create a relationship between the providers and the Government known as monopsony, a market in which there is a single buyer and many providers, and would put the Government in the position of seeing to it that Medical costs could not increase more than the general rate of inflation. That's the no-nonsense approach to solving the cost problem in medical care. When we will see that from Mr. Obama? Probably never!

We can still have the American Dream

The question is whose version of the American Dream are we talking about? Is it the dream of FDR's Second New Deal, or Teddy Kennedy's dream of truly universal health care and an end to poverty, or is it the free market dream of the libertarian? Given the President's reinforcement of the oligarchy that caused the Crash of 2008, his refusal to pursue the fraudsters who tanked the economy and created the mortgage crisis, his ineffectiveness in creating a regulatory structure that can prevent another crash, his current pursuit of austerity when what is needed is much more stimulus; all make it abundantly clear that he cannot help us to pursue any of these versions of the American Dream.

It is sad, but true, that his framing of the issues today makes it clear that he will impose at least enough austerity in his effort to find common ground with the Republicans that millions more American's will suffer in the years to come. This is obvious because our problem is not deficit and debt reduction, and the solution is not austerity. The problem is that we need a full employment economy and the solution is a program that will create those jobs as directly and surely as possible, without relying on the expectations or confidence of huge private companies speculating in global markets to produce them.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

Attention Democrats: Don't Be Fooled, Bowles-Simpson Plan=Ryan Budget-Lite

Daniel Marans — Wed, 13 Apr 2011 13:13:08 -0400

Liberals don't like the prospect of the Bowles-Simpson plan becoming the starting point of deficit reduction talks, because it is too centrist to offer Democrats a strong bargaining hand. But if you look more closely, it's far worse than that. Bowles-Simpson is Ryan-lite.

Their plans fit together like two pieces of a jigsaw puzzle. Where one skirts the specifics, the other fills in. Bowles-Simpson would cap health care costs but proposes few specific ways of doing it. Ryan fills in the specifics with his plan to voucherize Medicare and block-grant Medicaid.

On Social Security, Bowles-Simpson have a very detailed, very unbalanced, and very regressive plan. Contrary to the hopeful spin of some liberal bloggers, who claim it would at least increase benefits for the poor, their Social Security reforms would cut benefits for 60% of the very poorest workers. Click here, here, or here for a complete breakdown of their plan.

Ryan sidesteps specific Social Security proposals, showering praise on Bowles-Simpson instead, claiming them as a model for Social Security "reform." It's as if Bowles and Simpson saved him the trouble of having to do it himself.

In turn, Bowles and Simpson had some kind words about Ryan to say themselves. They called his budget "a serious, honest, straightforward approach to addressing our nation's enormous fiscal challenges," and specifically praised him for including a "process for Social Security reform in his budget to set the program on sound footing." Their minor, slap-on-the-wrist caveat that he should have offered more revenue increases is buried at the bottom of their press release praising him. The implication is, "It's not ideal, but we'd live with it."

The remaining features of the Bowles-Simpson plan recommendations that supposedly make it more "balanced" than Ryan's budget are either so paltry as to be laughable, rely on pure political fantasy, or would fall disproportionately on the middle class.

• Laughable defense cuts: They recommend a little more than $100 billion in cuts in defense spending over ten years. Gates already has implemented $100 billion in cuts. They come nowhere near close to Barney Frank and Ron Paul's nearly $1 trillion in cuts.

• Reagan-style tax reform: They'd reduce income tax rates and make up the difference by closing loopholes. This is the same logic Reagan used to cut taxes in the mid-80s: "Flatten the rates, broaden the base." It resulted in net revenue decreases, because wealthy individuals and corporations sent armies of tax lawyers to create new loopholes and defend existing ones. What reason do we have to think it would work differently now? Maybe the milquetoast nature of the tax proposals is why guys like Tom Coburn signed on to begin with. Explaining his vote for the plan, Coburn called the tax part of the Bowles-Simpson plan, "Reagan on steroids"

• Middle class tax hikes: For example, revoking the mortgage interest deduction, and raising taxes on gasoline, while good policy, would fall on middle class homeowners and consumers at a time when they are already unprecedented financial stress.

Why Do “They” Want To Limit Our Sovereignty In Our Own Currency?

Joseph M. Firestone — Tue, 12 Apr 2011 15:20:27 -0400

One of the most emotional issues in American politics is the sovereignty of the United States itself, and its independence from foreign powers, interests, other nations and their ruling elites, and emerging globalizing elites who place their own interests against the nation interest of America and its people. The issues of fiscal sustainability and fiscal responsibility should be discussed from the viewpoint of our national interest, not from the viewpoint of abstract financial ratios, or supposedly critical indicators that generate a lot of sound and fury signifying nothing.

When we look at fiscal policy in the United States from the viewpoint of our national interest, among the first things we must consider is maintaining the national sovereignty of the United States. Most Americans want the United States to remain autonomous and independent, and to not be subject to the economic control of any foreign power, whether another nation, an international organization, or an international political grouping of a more informal character.

This desire is a constant throughout our history and it is the basis for the relative unpopularity of the United Nations here. A very important dimension of our national sovereignty is sovereignty in our own currency. The Constitution gives Congress authority: “To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.” That authority, through interpretation by the Supreme Court over the years, has come to mean that it is constitutional for Congress to cause the issuance of fiat money, whose value may be regulated by the government, at will in order to serve the public purpose.

Today the Federal Reserve Bank interprets the power to “print money,” as the power to “mark up” accounts in the banking system by computer, in the process of augmenting the money supply or in implementing spending by the Treasury. There is no limit on the power of the Government to create money this way, provided that Congress doesn't set such limits itself.

In addition, to its unlimited power to create fiat money, the United States also has a constitutional obligation that is worth mentioning when talking about economic sovereignty, since the classical notion of sovereignty is also related to obligation. Section 4 of the 14th Amendment states:

". . . .the validity of the public debt of the United States, authorized by law... shall not be questioned."

Of course, constitutionally, the Government can only spend what Congress has appropriated; but, beyond that, there are other constraints that Congress has set for the Government which are not mandated by the Constitution, and which limit the degree of economic sovereignty of the Government. Here are three:

-- the Treasury is not allowed to run a negative balance at the Federal Reserve,
-- the Treasury must issue debt when it expects to deficit spend, and
-- the Treasury cannot issue debt beyond the statutory debt limit,

The first two constrain the Government by forcing it to remove money from the non-Government sector before it can deficit spend; even when Congress has already appropriated the deficit spending. The last constraint is intended to impose an arbitrary limit on deficit spending by bringing it to a halt, even after it has been appropriated. Its purpose right now seems to be to provide periodic and very public opportunities for political kabuki theater during which the two parties can express their core political values as they apply to fiscal policy, while they dismantle the heritage of the New Deal.

The kabuki opportunities carry a very high cost, however, since the constraints making them possible:

-- cause Government shutdown crises,

-- sometimes create doubt that the Government will voluntarily become insolvent and fail to meet its obligations, and most important of all,

-- are responsible for the existence of the National Debt of $14 Trillion, and for the “welfare” for the rich and foreign nations paid to them every year in the form of interest on Treasury securities, which, except for the Congressional requirement to issue debt, the Government would never have to pay.

Why does the Congress limit the fiscal flexibility of the Government, including its own flexibility, with constraints like the three above?

Why are some in Congress trying to get a balanced budget amendment passed to further limit flexibility in Government spending and fiscal policy?

Why do many in all three branches want to limit the monetary power of the Federal Government and its potential for helping America achieve in public purposes?

Why, in short, are so many politicians so much in favor of limiting the currency and fiscal sovereignty of the United States?

Why are we letting them do it?

Why aren't we as protective about our currency/fiscal sovereignty, as we are about other aspects of sovereignty, such as our territorial integrity, and our political independence?

Before I try to answer these questions, I'll review what fiscal/monetary sovereignty is.

What It means To be Sovereign In Your Own Currency

Deficit hawks in the United States envision a day when the United States Government will go broke, unless we curb government spending on entitlements. Well, governments can go broke in the sense that they can run out of money they need to pay their debts. But not all governments. Only Governments:

-- whose monetary systems are commodity-based, such as those on the gold standard; or

-- those using fiat money,

whose official fiat currency is issued by supra-ordinate authorities, or

-- those who owe debts in a fiat currency issued by another governmental authority,

can all “go broke,” involuntarily.

Governments issuing their own fiat currency, subordinate to no higher authority, and owing no debt to anyone else in a currency other than their own, can never “go broke,” or put another way, become insolvent, due to events in financial markets, or decisions made by other nations. This is true, because all they need to do to spend money is to issue credits to non-government sector accounts in banks, and all they need to do to pay back other Governments who have lent them their own currency, is to credit the accounts of the lender Governments in that currency, an action which they have full authority to do, absent any political constraint they may have placed on themselves preventing them from exercising their full monetary sovereignty.

We call such Governments “sovereign” in their own currency. And because they have this kind of sovereignty, they also have flexibility to facilitate economic activity to accomplish public purposes that Governments without that kind of sovereignty don't have. But with that fiscal flexibility also comes fiscal responsibility – the responsibility to use the operationally unlimited spending power of an economically sovereign government to use that spending power for public purpose and not for private gain.

One of the Governments that fit these criteria and so can never go broke is the US Federal Government. Other common examples are Japan, Australia, New Zealand, and Canada, and the UK. Governments that don't fit these criteria and that can go broke include the nations of the EU, such as Greece, Portugal, Spain, and Italy. Even France and Germany can go broke, since they no longer issue their own currency. Other examples include all those developing nations with loans from the IMF, the World Bank, and other international authorities that must be paid back in US Dollars, or any other currencies they cannot issue; as well as state, local, provincial, and other governments subordinate to a super-ordinate currency-issuing authority such as California.

Most governments that are sovereign in their own currency haven't been fiscally responsible in a very long time.

While some have performed better than others in seeking and achieving public purposes, most have continued to act as if they are constrained by the gold standard, and have attempted to either reduce spending at the expense of the less well off, or to fail to pursue programs for full employment, or to fail to make enough investments that will fulfill other pubic purposes. In most of these cases, deficit hawkism and specifically the desire to either reduce deficits, or to balance budgets, has trumped the desire to fulfill public purposes.

In short, governments sovereign in their own currencies have been acting like governments on the gold standard, or those who owe debts in currencies they don't issue. They have been acting in a fiscally irresponsible way given their fiat monetary systems, while at the same time claiming to be fiscally responsible.

They can get away with this, because very few people make the distinction between governments sovereign in their own currency and governments that are not. And even fewer go on to recognize that what may be fiscally responsible for gold standard governments, or governments that are not economically sovereign, is most certainly fiscally irresponsible for economically sovereign Governments.

In systems where governments are economically sovereign like the United States, it is a big mistake to measure how well the nation is doing fiscally by using deficit, the national debt, or debt-to-GDP ratios. That mistake is one the United States and most other nations with monetary sovereignty are making right now.

Those measures, in fact, are the wrong things to measure. The government is a scorekeeper that can always credit accounts when it needs to spend or pay what it owes, or even set interest rates by flooding the market with reserves and driving short-term interest rates down to near zero. In such systems, the money is always there for the non-governmental sector, not in the sense that the government has accumulated some physical stock of it, but in the sense that the Government can always spend or pay back by crediting accounts, regardless of any physical stock it may have.

In such systems, fiscal responsibility is not about what the Government has accumulated either in debt or in surpluses, since given its unlimited ability to create new currency, these neither constrain nor support its further ability to spend What it is about, however, is the Government's success in spending on worthwhile things that produce actual value, rather than spending on worthless outcomes.

Why Are We Self-limiting Our Currency Sovereignty?

There are a few contributing reasons. First, most Americans don't understand that the power of Government to help the economy to recover from recessions and to achieve full employment, is dependent on the ability of the Government to deficit spend and to add net financial resources to the private sector. To the extent that the ability to deficit spend is limited by fiscal rules, the fiscal sovereignty of Government is impaired, diluted, or, in the case of balanced budget amendments like the one gathering steam in Congress, largely destroyed.

Second, most Americans don't understand that deficit spending and the resulting deficits and debts, carry no solvency risk. They view the US Government as an analogue to a household, and they think that, like a household, the Government cannot spend more than the revenue it raises through taxing or borrowing without risking insolvency, and that the more it borrows, the more it will need to borrow and the less its ability to borrow will be. Of course, the Government is different from a household in many ways, but most importantly, in that: all money in the United States ultimately derives from Government-issued money, and the Government, of course, can always add more money to the private sector if it chooses to do so.

Third, most Americans don't understand that every dollar of Federal deficit spending adds a dollar of net financial assets to the non-Government sector of the economy.

The asset can be base money, if the Treasury is allowed to spend without issuing debt, as it sometimes has been, or it can be in Treasury securities if it is required to continue debt issuance. Many think that when Government deficit spends it impoverishes the private sector, because it competes with it for resources. But this is clearly not the case, when there is an output gap and much of our productive capacity is unused.

Fourth, most Americans don't understand that global elites and corporations don't want the United States to retain its currency/fiscal sovereignty, because they make more risk—free money if the Government's currency power is constrained, and if we must buy/”borrow” our previously created USD, rather than make more. So, long as we issue debt instruments rather than just issue currency, they have a risk--free place to put the money they've previously acquired, and get an interest return besides. Over the next 15 years, the interest paid on the debt will be roughly $12 Trillion. If the Government can and does use its full currency sovereignty, and deficit spends, without issuing further debt, then the global elites can say goodbye to that money.

Fifth, global elites recognize that if Governments use their power to create currency to benefit any other groups other than the global elites themselves, then that potentially harms the elites and makes their USD holdings worth less. Perhaps not immediately, because demand is slack and businesses will try to increase production rather than raise prices for their valued goods. But, eventually when full employment is reached, they fully expect that either the need to regulate inflation will subject them to increased taxes, or, alternatively, the occurrence of inflation will cause the de-evaluation of their own money and Treasury Securities.

Conclusion

Issues about governments sovereign in their own currencies, as well as others having to do with fiscal sustainability and fiscal responsibility have been addressed at the Fiscal Sustainability Teach-In Counter-Conference last April 28th. It provides the answers to the continuing attempts of the deficit hawks and austerity mongers to orchestrate and implement a political process that will result in transferring more wealth from the middle class and the poor to the very well-off and the corporations, and that has already resulted in the failure of many nations, including our own, to end the sufferings of the unemployed and others victimized by the wholly avoidable crash of 2008.

The primary anti-deficit hawk message of the Teach-In was this: Since the United States Government is sovereign in its own currency: We. Are. Not. Running. Out. Of. Money. The. Money. Was. There. All. Along. The. Money. Is. There. Now. The. Money. Will. Be. There. Tomorrow. And. It. Will. Be. There. For. Our. Children. And. Our. Grandchildren. Too.

This is a message that needs to be sent to Congress, to the President, and to Republican budget-cutters like Paul Ryan, Jon Kyl, Mike Pence, and all the tea party folk, whose “pay off the national debt by cutting spending and taxing to get a surplus,” austerity nonsense, will ruin the United States, and create the second great depression, if we go along with it. We must not forget that every dollar less of deficit spending translates to at least a dollar subtracted from the dollars available to the non-Government sector, and the amount may well be more than a dollar if the dollar less is in a high fiscal multiplier segment of the economy. The attempts by budget-cutters to cut high-multiplier deficit spending will accelerate the downward spiral of the macro-economy, especially as compared with the impact that increased taxes on the wealthy may have had.

Finally, I have to wonder why the very legislators who are always so quick to wrap themselves in The American Flag, are also the ones who are quickest to put forward and implement fiscal rules that will constrain American currency sovereignty and subject the best interests of the American people and the public purposes of the United States to the interests of globalizing elites, foreign Governments like China, Japan, Middle east oil exporting nations, the Eurozone, Wall Street, the bond markets, and the wealthy like themselves. The fiscal rules Congresspersons have implemented and new ones they are seeking to implement to force the nation to pay off the national debt through economic surpluses, have the effect of subordinating the national interest, which they are elected to uphold, to the interests of multi-national corporations, global elites, and foreign nations.

We must recognize this problem for what it is. It isn't just a technical issue of economics. It's an issue of patriotism. It's an issue of whether our economy will be run for we, the people, or interests both domestic and foreign who place their own needs for more wealth above the interests of most Americans to be able to influence our own economic futures and opportunities.

If you're really worried about your children and your grandchildren, not to mention yourself, then you need to stop the deficit hawks and the deficit doves from destroying the economic sovereignty of the United States with their fiscal rules. You need to insist instead on the freedom and economic independence of the Government from the bond markets and all other elite interests. You need to insist that we act in our own national interest and not in the interest of the global elites. You need to insist that the Government keep its spending/currency creation power intact and use it for the public purpose. You need, in other words, to insist that we remain a Government sovereign in its currency, and to begin to act like one, taking responsibility for the miserable state of the economy within our national borders.

(Cross-posted at All Life Is Problem Solving and Fiscal Sustainability).

Winning The Future, Brought To You By GE

Digby — Wed, 26 Jan 2011 15:24:02 -0500

Here's an interesting interpretation of Winning the Future:

After two years of federal spending to boost the economy, the ground has shifted decisively in Washington: On Tuesday night, the most pressing question was not whether to spend more to create jobs but whether to cut spending, deeply and now.

For the first time in his annual address to the American people, President Obama did not hail a newly passed "recovery act" or call for a "new jobs bill." Instead, he called for a five-year freeze in domestic spending, except for "investments" in education, infrastructure and research.

Republicans went much further, calling for an immediate and unprecedented reduction in non-defense programs that could take more than $100 billion out of the economy over the next few months. Both sides are casting their proposals as the best course for deepening the economic recovery and improving U.S. competitiveness abroad.

But with the unemployment rate still hovering at 9.4 percent, neither the president nor congressional Republicans are offering a clear strategy to create jobs in the short run, economists said, and that is the most critical challenge in the minds of voters heading into the 2012 presidential election. The one initiative likely to have immediate impact is the GOP's plan for sharp spending cuts, and some economists fear that could push the economy in the wrong direction.

Hours before Obama spoke Tuesday, the House approved a resolution calling for domestic spending to be cut to 2008 levels for the rest of the fiscal year, and Republicans are discussing reductions of at least $60 billion. Cuts of that size would trim domestic programs to their lowest level as a share of the economy in more than 30 years, according to an analysis by the liberal Economic Policy Institute, endangering as many as 600,000 jobs.

"Government spending restraint is vital to addressing our long-term fiscal problems. It just shouldn't start in 2011," said Mark Zandi, chief economist at Moody's Analytics, who has advised both Republicans and Democrats on economic issues. Zandi said cuts of the magnitude Republicans are discussing probably would not invite a new recession. But they could push unemployment back into double digits, he said, "taking a very significant risk with this fragile economy."

So? What's wrong with double digit employment? We almost have that now and nobody seems to give a damn. It certainly wasn't a big topic last night from either the president, the Republicans or the Teabaggers. This is the new normal. We only worry about GDP now and Mark Zandi isn't worried about that, thank goodness, so carry on with the freezing and cutting. It's all good.

I'm not sure how high unemployment has to rise before people feel it's a big problem again, but at this point I'd have to guess that it would take another five percent. Which means that we are now a country that thinks it's perfectly fine to have tens of millions of people out of work—while at the same time we are busily slashing spending at the local, state and federal level. Talk about a winning future!

In this instance, the conservatives (and I include the likes of Kent Conrad in that designation) are far more honest than the "centrists" about what this all adds up to. They don't pretend to care about the unemployed or the students or the people who have lost their futures in this downturn. They are right up front about what this is about—☺confidence fairies:

Conservative economists are less inclined to predict that immediate spending cuts would harm the economy. But they don't see them as an effective economic tonic, either. At a time when the national debt has surpassed $14 trillion, business leaders and bond market investors are looking to Obama and other policymakers for certainty about tax policy, entitlement spending and the nation's long-term budget outlook, said Glenn Hubbard, dean of the Columbia Graduate School of Business.

"The right way to do a pro-jobs agenda would be to limit policy uncertainty. We need to put the country on a long-term sustainable path," said Hubbard, who served as chief economist in George W. Bush's White House. "Businesses fear investing if we can't get this stuff right. You don't have to start cutting now. But absent presidential leadership, it's really hard to see how it gets done.&quot

The view that the U.S. economy would benefit from adoption of a comprehensive deficit reduction plan is broadly shared by policymakers and budget analysts.

"Most economists say if you put in place a credible plan that only took effect once the economy had strengthened, just adopting a plan itself would have positive benefits for the economy right now," said Senate Budget Committee chairman Kent Conrad (D-N.D.).

I happen to have the man who can explain why this is total, complete, utter bullshit right here:

That was six and a half months ago, when unemployment was the same as it is now. (Krugman's response to the speech is here.)

From what I can tell this is working for the president. I would guess that the country is sick of bad news and just wants more than anything to believe that the president can end all this and that we can get back to the way things were. But psychologically we are starting to adjust to this new normal and that new normal is not good for the middle and working class of this country. (The poor are so screwed they don't even merit discussion.) In fact, it's devastating and it's all happening to benefit the ever more powerful top two percent.

Of course, it's the top two percent who have the money to fund elections, so there is a logic to all of this. This is Oligarchy and for those who say that it can't work in a democracy, I think we are seeing just how wrong that is.

Update: It occurs to me that deficit reduction has now joined Tax Cuts for the cure-all for what ails the economy. After all, Kent Conrad has been agitated about deficits when they are small, when they are large, when the economy is booming and when it's in recession. No matter what the situation, the proper response is always to cut government spending, preferably "entitlements." (Being a Democrat he'll sometimes give a vague wave toward raising taxes, but it's never a deal breaker.)