deficits

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.

Bernie: YOU Stop Caving to Peterson/Obama/#supercommittee

Joseph M. Firestone — Sun, 20 Nov 2011 13:00:44 -0500

Dear Bernie,

Today, you told the “Democrats stop caving in . . . ” to the interests of corporations, the tea party, wealthy individuals, and the Republicans in Congress. The only problem with your fiery statement is that you began it by “caving in” to them yourself. You did this by immediately legitimizing their frame of reference by saying:

“Here is something we all can agree on: Federal deficits are a serious problem.”

I'm sorry Bernie, we can't all agree on that, because it's just not true, and it's what the Republicans, the Blue Dogs, most Democrats and the Administration are all using to try to bully you and us into agreeing to spending cuts in key discretionary programs and programs like Social Security and Medicare, and also into not moving for more spending on jobs, better entitlement programs, including Medicare for All, and better discretionary programs we need to solve our many national problems.

The idea that Federal deficit spending is a serious problem is the idea, that along with the belief that the Federal debt is getting to be some kind of irresolvable problem, is in back of the whole anti-deficit/debt thrust of the deficit terrorists like Pete Peterson, David Walker, Alice Rivlin, and all the others in Washington including the President. In turn, this thrust has led to the Bowles-Simpson Catfood Commission, and the current so-called supercommittee that you've been fighting so hard 'lo these past months, and the constant drum beat that “There Is No Alternative” (TINA) to deficit cutting.

So, when are you going to learn that the only way for you and us to end this fight and to win it, is to deny their basic premises and particularly their foundational idea that the United States of America, the issuer of its own non-convertible floating fiat currency, with no external debt payable in anyone else's currency, and the ultimate source of all US Dollars existing in the world, can run out of the money needed to continue to deficit spend, and to pay all its bills including the principal and interest on all its debts, as well as all Congressional appropriations you and your colleagues may choose to legislate?

You say that the deficit is a serious problem. But I think it's not a real problem at all for at least three reasons that refute TINA.

-- First, because nothing bad needs to happen if we continue to run deficits, as long as we don't do so after our economy is operating at full capacity. But we are very far from that state right now with between 25 – 30 million people wanting full time employment and not being able to get it. So, we can't have demand-pull inflation now. It's impossible.

-- Second, because it's the Congress that is constraining the Government from generating money for its debt repayment, or appropriated deficit spending using means other than taxing or borrowing, because Congress prohibits the Treasury from freely issuing Treasury Notes and also requires that it issue debt before it deficit spends, while at the same time imposing debt ceilings that interfere with borrowing to spend appropriations Congress has already made. So, there is no real problem because the constraints were made by Congress and can be lifted by it in a single afternoon, if it wants to.

There Is An Alternative (TIAA). And it is for Congress to stop requiring the Treasury to issue debt when it deficit spends, and to allow it instead to "mark up" its own accounts at the Fed when it needs to spend an already legislated Congressional appropriation, or to repay past debt and interest.

You should be making the truth of TIAA clear to the American people, Bernie, so that everyone knows that any shortage of money to spend is Congress's own fault, and that there is no debt/deficit problem in the sense of an inability to pay, or a need for China, Japan, or the bankers to lend the Government back the money the Government created in the first place, or a need to cut spending, or a need to raise taxes on anyone, or both, to avoid impending or future solvency.

But instead you're reinforcing their message that there is a serious deficit problem. Now that's what I call “loser liberalism,” Bernie.

-- And Third, there is no problem because even under current law, with its constraints on the Treasury's ability to spend what's required to repay debt or spend Congressional appropriations, it has been legal since 1996 for the Executive Branch to issue 1 oz. proof platinum coins having arbitrary face value in the amount of many Trillions of Dollars, deposit those coins at the Fed, and force the Fed to use its money-creating authority to credit Mint and Treasury Accounts with electronic credits equal to the value of the coin. The money placed in Treasury's accounts as a result of this action need not be spent. In fact, if the Executive minted a $60 T coin, then it could not all be spent because the authority for spending by the Treasury would not extend further than repayment of debt subject to the ceiling as it falls due, and payment implementing Congressional appropriations approved up to now.

So, even if such a coin were issued, spending by the end of the year would be limited to repayment of all intra-governmental debt, including all debt held by the Fed itself, and the Federal spending appropriated by Congress for the remainder of this calendar year. Most of the $60 Trillion would still remain unspent to be used for future debt repayment as the securities fall due, and payment for future Congressional appropriations that would not be covered by tax revenues.

As long as those appropriations don't outrun tax revenues more than is necessary to enable a full employment, full capacity utilization economy, no one has to worry about demand-pull inflation resulting from excessive Government spending. It won't happen. And if there is any inflation from other causes, which is possible, and even probable, if we don't prevent excessive commodity speculation through appropriate laws and their faithful enforcement, any cost-push inflation, won't have anything to do with Government spending.

You can find a more detailed explanation of this coin seigniorage idea and its implications here, here, here, and here. Without going into detail in this open letter, I'll just say that if the President uses coin seigniorage in the way I've outlined, he can fill the public purse with such a large volume of USD electronic credits that no one will be able to say, ever again, that the US has a deficit/debt problem because it is running out of money. And, additionally, in a very few years, the Treasury's payment of the Government's debts as they fall due, without any further debt issuance, to spend Congressional appropriations not covered by tax revenues or other sales, will result in most of the debt subject to the ceiling, except for long-term debt, being paid. There will be very low levels of debt subject to the ceiling and eventually no debt of this kind at all.

So, to summarize, it is not true that “. . . Federal deficits are a serious problem.” And it is not true that we have to do anything to reduce deficits defined as a gap between Federal spending and Federal tax revenues. The whole exercise in deficit reduction that the president and the other deficit terrorists have put this country through has been an immensely wasteful distraction.

As you say in your HuffPo piece:

“This is a pivotal moment in American history. The rich and large corporations are doing phenomenally well while the middle class is collapsing and poverty is increasing. Now is the time to answer the question that the Woody Guthrie song poignantly asked, "Which side are you on?" The Democrats must answer boldly that they are on the side of working families and the middle class and that they will fight to protect their interests.”

And you, Bernie, must also answer boldly with the truth. People who are on the side of working families and the middle class, like yourself, cannot continue to say that “we can all agree that there is a serious deficit problem”, because that has been the continuing most important element in the case the deficit terrorists are making.

To defend our ground, and the 99%, we need to deny and defeat that false framing. We cannot reinforce it! We need an alternative framing.

And that framing is, the Federal Government needs no money from anyone to pay its debts and to spend what Congress has appropriated. We are a fully sovereign nation, and as long at we retain that full sovereignty, including its fiscal aspects, the Government can spend/create any money it needs in accordance with the authority given to it by the Constitution of the United States. It is up to the Congress and to the Executive to use that authority as necessary to create and maintain full employment AND price stability, as well as all other aspects of the Public Purpose, as that purpose is defined and specified by the people of the United States of America.

Best,

Joseph M. Firestone, Ph.D.

Everything You Need To Know About Fixing Deficits & Jobs

Dave Johnson — Mon, 15 Aug 2011 13:38:24 -0400

Here is everything you need to know about how to fix the deficits and jobs problems. This is a chart of job creation over the last few years:

There is a report in Saturday's New York Times, "White House Debates Fight on Economy," saying the Obama administration is choosing between doing very little about jobs, or doing nothing.

Mr. Obama’s senior adviser, David Plouffe, and his chief of staff, William M. Daley, want him to maintain a pragmatic strategy of appealing to independent voters by advocating ideas that can pass Congress, even if they may not have much economic impact. ... But others, including Gene Sperling, Mr. Obama’s chief economic adviser, say public anger over the debt ceiling debate has weakened Republicans and created an opening for bigger ideas like tax incentives for businesses that hire more workers, according to Congressional Democrats who share that view.

So according to the Times the choices being debated are a) do nothing, because the mean Republicans will block it anyway, or b) offer even more tax cuts for businesses. Yikes!

Meanwhile, out in the Real World...

The ailing economy, barely growing at the same pace as the population, has swept all other political issues to the sidelines. Twenty-five million Americans could not find full-time jobs last month. Millions of families cannot afford to live in their homes. ... [. . .] A wide range of economists say the administration should call for a new round of stimulus spending, as prescribed by mainstream economic theory, to create jobs and promote growth.

But, back in the White House?

Mr. Plouffe and Mr. Daley share the view that a focus on deficit reduction is an economic and political imperative, according to people who have spoken with them. Voters believe that paying down the debt will help the economy, and the White House agrees, although it wants to avoid cutting too much spending while the economy remains weak.

They think that taking money out of the economy will put more money into the economy. Great. As I wrote the other day, this is austeridiocy. As England, France and every other country that ever tried to grow an economy by cutting the economy has learned, taking money out of the economy takes money out of the economy.

What Works In The Real World

Here is everything you need to know about how to fix the deficits and jobs problems:

This is a chart of the monthly job losses that were occurring before and after the "stimulus" package.

Before The Stimulus

In this chart, the RED lines on the left side -- the ones that keep doing DOWN -- show what happened to jobs under the policies of Bush and the Republicans. We were losing lots and lots of jobs every month, and it was getting worse and worse.

During The Stimulus

The BLUE lines -- the ones that just go UP -- show what happened to jobs when the stimulus was in effect. We stopped losing jobs and started gaining jobs, and it was getting better and better.

The Stimulus Winds Down

The TAIL -- the leveling off on the right side of the chart -- show what happened as the stimulus started to wind down. Job creation leveled off.

It looks a lot like the stimulus reversed what was going on before the stimulus.

Conclusion: THE STIMULUS WORKED BUT WAS NOT ENOUGH!

Jobs Fix Deficits

When people are working they are paying taxes and are not collecting unemployment. And they are buying things, which means there is demand in the economy again, so businesses will hire people.

Customers Create Jobs

Actually, the rich don't create jobs, we do. Lots of regular people having money to spend is what creates jobs and businesses. That is the basic idea of demand-side economics and it works. In a consumer-driven economy designed to serve people, regular people with money in their pockets is what keeps everything going. And the equal opportunity of democracy with its reinvestment in infrastructure and education and the other fruits of democracy is fundamental to keeping a demand-side economy functioning.

When all the money goes to a few at the top everything breaks down. Taxing the people at the top and reinvesting the money into the democratic society is fundamental to keeping things going. Cutting taxes at the top steals from democracy's ability to continue this reinvestment.

It doesn't matter how much more money you give to business owners, businesses are not going to hire any more employees until they have a REASON to -- and that reason is customers coming in the door.

Businesses Do Not Create Jobs

Businesses do not create jobs. In fact, the way our economy is structured the incentive is for businesses to get rid of as many jobs as they can. It costs money to pay employees, so businesses want to trim down to the minimum number required to get the needed work done.

Many people wrongly think that businesses create jobs. They see that a job is usually at a business, so they think that therefore the business "created" the job. This thinking leads to wrongheaded ideas like the current one that giving tax cuts to businesses will create jobs, because the businesses will have more money. But an efficiently-run business will already have the right number of employees. When a business sees that more people are coming in the door (demand) than there are employees to serve them, they hire people to serve the customers. When a business sees that not enough people are coming in the door and employees are sitting around reading the newspaper, they lay people off. Businesses want customers, not tax cuts.

A job is created when demand for goods or services is greater than the existing ability to provide them. When there is a demand, people will see the need and fill it. Either someone will start filling the demand alone, or form a new business to fill it or an existing provider of the good or service will add employees as needed.

Once again:

Connecting the Dots – Deficit Reduction Is Not About Insolvency

Joseph M. Firestone — Thu, 11 Aug 2011 20:09:15 -0400

Warren Mosler

(Editor's note: I'm re-posting this here from moslereconomics.com with a follow-on commentary of my own with the permission of Warren Mosler)

From Warren Buffet to Alan Greenspan,

And from all the responses to the S and P downgrade by
economists and financial professionals from the 4 corners of the world,

THE WORD IS OUT!

The US government is the issuer of the US dollar.

So no matter how large the federal deficit might be:

The US government can always make any payments in US dollars that it wants to.
There is no such thing as the US govt. running out of US dollars.
The US government always has the 'ability to pay' any amount of US dollars at any time.

NOW CONNECT THE DOTS TO:

The US is not dependent on tax revenue or foreign borrowing to be able to spend.

And,
whereas Greece is not the issuer of the euro,
much like the US states are not the issuer of the US dollar,

THERE IS NO SUCH THING AS THE US BECOMING THE NEXT GREECE

There is no such thing as the US getting cut off from spending
by the financial markets and forced to go begging to the IMF
to get US dollars to spend.

Nor is the US government subject to market forces driving up interest rates on US Treasury bills.

EVEN AFTER BEING DOWNGRADED US TREASURY BILL RATES REMAIN NEAR 0%

Why, because, any nation that issues its own currency also sets it's own interest rates.
So in the US, the Federal Reserve Bank votes on the interest rate

SO, THEN,

WHAT IS THE POINT OF DEFICIT REDUCTION?

Suddenly, it's NOT solvency.
The US is suddenly NOT going broke.
Social Security is suddenly NOT broken.
There is suddenly NO risk the US will not be able to make all payments as promised.

So now,

the deficit hawks must CHANGE THEIR REASONS FOR DEFICIT REDUCTION
or shut up!

they must FLIP FLOP
or shut up!

Yes, there is a new reason they can flip flop to.

Inflation.

They can start claiming the current path of deficit spending will lead to inflation.

Fine.

Bring it on!

First, they need to do the research,
as they haven't even thought about this yet.

Then they have to convince Congress to cut social security and medicare
Not because we might become the next Greece
Not because the US government checks might bounce someday
Not because the deficit will burden our grand children

But ONLY because some day,
if we don't do something when the time comes
and even though we don't have an inflation problem now,
and haven't had one in a very long time,
SOME DAY far in the future,
inflation might go from x% to y%.

Fine.

Do you think Congress would take draconian steps now,
during this horrendous recession,
to make things worse
by cutting Social Security?
and by cutting funding or public infrastructure?
and by raising taxes?

How about we get the word out and find out, thanks!

Commentary

Joe Firestone

I'll try my best to spread the news that THE WORD IS OUT! And also spread the further news that the Government can't run out of money, no matter how much it owes and that there is no solvency problem.

So there is also no deficit reduction problem, no national debt problem, or any Social Security, Medicare, or Medicaid problems, or grandchildren burden problems based on fears of, or claims about, insolvency unless we pay our debts back!

I have to say however, that even though THE WORD IS OUT that solvency is not a problem, and that the austerity/human sacrifice crowd must now either fall silent or flip flop to inflation as their new rationalization for driving working people into poverty; I don't think for a minute that they will do either one.

Instead, I think they will assume that the news will never get out to most people and that they are free to go on with their same old narrative about possible insolvency making austerity necessary, without people either laughing at them or calling them liars. The MSM is unlikely to notice that the Government can create currency whenever it wants to, and they will just forget about the admissions made this week after the S & P downgrading, and reinforce the old money scarcity story, without missing a step, to please the Peter Petersons, Kent Conrads, Alice Rivlins and David Walkers of this world. The president already did this in a speech he made today.

So, I think that besides doing our best to spread THE WORD, we also need to pressure the President to prove that the United States Government has no solvency problems, and can never run out of money. In other words, we need to call for the President to use very high value Proof Platinum Coin Seigniorage (PPCS) to begin to pay back the national debt and also to create a balance in the Treasury General Account (TGA) that is so large that no insolvency claims are even thinkable.

The basic idea is to mint a $60 Trillion platinum coin, turn it into electronic credits at the Fed, use the money, first to pay down $6.2 Trillion in debt immediately and the rest as it falls due, and confront Congress with a balance of of about $52 Trillion in the Treasury General Account (TGA). Then, facing that $52 Trillion in available financial resources, and with the President using the bully pulpit, let's see the austerity/human sacrifice crowd, even with all the money in the world behind them, try to justify voting for spending cuts in entitlements and other much needed areas of domestic spending.

(Cross-posted from Correntewire.

How do vanden Heuvel and Meyerson Expect Him to Get By the Austerians

Joseph M. Firestone — Thu, 11 Aug 2011 13:05:52 -0400

Yesterday, must have been jobs day at The Washington Post since they ran two columns calling for job creation: one by Katrina vanden Heuvel and the other by Harold Meyerson. The crux of vanden Heuvel's column is:

Consistent, tenacious persuasion is an extraordinarily powerful tool. The Republican Party understands this. Over the past several months, it has relentlessly repeated its false mantra that spending cuts create jobs. And the public, in response, increasingly believes this to be true. What then, is to stop the president, powered by a movement of dedicated and mobilized Americans, from making his own case for the economy? What is to stop him from convincing the American people that the things the economy requires are the things we ought to be fighting for? What is required other than will? Great leaders, when confronted by crisis, act.

The answer to this question is that President Obama's been telling people since 2009 that we are running out of money and can't afford programs that aren't deficit neutral, and recently he's made clear that he's for $4 Trillion in spending cuts/tax increases including cuts to entitlements over the next decade. So how can he now argue that we can afford the many things we need to do to create jobs and improve the economy?

Katrina vanden Heuvel doesn't address this question. She advises him about what he ought do to improve the economy; but not on how he can show Congress, a media steeped in neoliberalism, and the people that not only do we need his job creation measures but also that we can afford them. Without that kind of explanation, what good is the exhortation that he should vigorously advocate for job creation policies? The first pushback he'll get to any proposal is “that's irresponsible; we can't afford it”!

I found Harold Meyerson's column a good bit more interesting than Katrina vanden Heuvel's, but no more enlightening about how to get around the “we can't afford it” objection. He says:

Which leaves us with this stark reality: If the federal government doesn’t intervene massively to help the economy, the economy will oscillate between neutral and reverse for many years.

What should that intervention look like? First, don’t just extend the 2-percentage-point reduction in the employee payroll tax, which is normally set at 6.2 percent. Eliminate the tax altogether, for employers and employees, at least temporarily. It would increase by $2,100 the take-home pay, and buying power, of workers making $50,000 annually. It would make it easier for small businesses to resume hiring. . . .

The payroll tax can’t be suspended indefinitely without compromising Social Security, which it funds. Its suspension should end when unemployment falls to a specified level — say, 7 percent.

Interestingly, this is an important provision in Warren Mosler's multi-part Modern Monetary Theory (MMT) --based proposal for creating full employment. Warren's been advocating it for 3 years now. Glad to see Harold Meyerson take it up. Meyerson goes on:

We’ll need other, less fleeting forms of stimulus, too. You should call for renewing aid to state and local governments. . . .

Warren and other MMT economists also advocate state revenue sharing. In Warren's proposal the states would be given $500 per person which they might use to prevent Government lay-offs. Some propose as much as $1,000 per person in revenue sharing.

Meyerson's next and last proposal is:

Infrastructure bank or no, you need a long-term program to make our nation navigable again. . . .

Those kinds of projects may take years to realize. Your first stimulus failed to establish a fast track for creating less-capital-intensive jobs in maintenance, rehabilitating buildings, and child- and elder care. It deferred job creation to state and local governments, which have taken forever to set up even such relatively low-tech endeavors as home-weatherization projects. This time around, you should acknowledge the bottlenecks in your first stimulus and call for a federal job corps to do this kind of work.

This is also reminiscent of an MMT proposal, specifically the MMT Federal Job Guarantee, which would end unemployment in a few months by providing a job at a living wage with fringe benefits to any American who wanted to work.

In sum, even though he doesn't admit it in his column, Meyerson's program is very similar to the program for recovery proposed by MMT economists such as Warren Mosler, L. Randall Wray, Stephanie Kelton, and others. Is this a case of MMT reaching the mainstream? That may be the case; but if so it's without attribution.

Both vanden Heuvel's and Meyerson's column, while exhorting him to do things that are undeniably needed by Americans, fail to tell him how, given the Republican House, he can politically beat the drive toward austerity to get them done. Without that, it's hard to see how either of these posts can help anyone. Fortunately, I've already done that here and here.

The ONLY practical way to do it given the current political and institutional constraints in Washington is to use very high value Proof Platinum Coin Seigniorage (PPCS) to demonstrate to people that 1) the national debt is being extinguished and will be nearly completely eliminated in 3 years; 2) Congressional Appropriations for deficit spending can be made without issuing debt for the foreseeable future; 3) the Federal Government can never become insolvent (“run out of money”), unless Congress makes that happen; and 4) there's plenty of money available for not only jobs programs like Meyerson's, but also for Medicare for All, rebuilding infrastructure, creating a world class educational system, and all the other critical things the US must do to make things work here again.

The basic idea is to mint a $60 Trillion platinum coin, turn it into electronic credits at the Fed, use the money, first to pay down $6.2 Trillion in debt immediately and the rest as it falls due, and confront Congress with a balance of of about $52 Trillion in the Treasury General Account (TGA). Then, facing that $52 Trillion in available financial resources, and with the President using the bully pulpit, let's see the austerity/human sacrifice crowd, even with all the money in the world behind them, try to justify voting against a job program like Meyerson's or Warren Mosler's. Please see the posts I've linked to above for more details of my proposal.

(Cross-posted from Correntewire.

Still Superman?

Joseph M. Firestone — Sun, 07 Aug 2011 23:31:43 -0400

There have been many reactions to S & Ps action in downgrading the credit rating of the US, Apart from the widespread annoyance and repudiation of S & P and its procedures, there are some who are saying that it won't have much effect on interest rates. Others even saying that it is a “non-event,” and still others saying that S & P should be investigated and prosecuted on a number of grounds. However, I found two views of the “non-event” particularly interesting.

The first was Warren Buffet's quoted by Fox Business news:

Berkshire Hathaway Chairman and CEO Warren Buffett told the FOX Business Network that S&P's downgrade of the United States' triple-A credit rating "doesn't make sense."

"I don't get it," Buffett told FBN late Friday night. In fact, Buffett reaffirmed his belief in the quality of the United States' credit telling FBN, "In Omaha, the U.S. is still triple A. In fact, if there were a quadruple-A rating, I'd give the U.S. that.”

Buffett also said:

"Think about it. The U.S., to my knowledge owes no money in currency other than the U.S. dollar, which it can print at will. Now if you're talking about inflation, that's a different question."

And so, now we know that Warren Buffett gets a fundamental premise of MMT!

He knows that the US cannot become insolvent because it can make USD at will and it owes nothing that is not denominated in USD!

We can only hope that he'll clue in his friend Barack Obama that the US is NOT running out of money. Perhaps Mr. Buffett even knows about Proof Platinum Coin Seigniorage (PPCS) and he can tell his friend Barack that using it would be a good way to give S & P a sharp stick in the eye.

The other reaction was one to my post on S & P tugging Superman's cape. The commenter asserted that, considering the US Government's domination by an increasingly powerful oligarchy, “the US Government is not Superman.” This squares with views being expressed by Yves Smith and others that this downgrade is about a power struggle. People who write about this struggle characterize it differently.

I think it is a power struggle between sovereign nation states and globalizing international elites whose loyalties are to the emerging new international feudalism in which corporations and enormously wealthy individuals wield the only real power. Some write as if they think that nation states are already and irrevocably subordinate to international elites. But I think that is not yet true.

The forces of nationalism are not yet spent, and will still be used against the international elites when the reality of their growing power and its negative impacts on working people are both fully recognized. People still need nation states for physical protection. People without a favored position in the emerging plutocracy still owe their primary loyalties to their nations, and I don't think they will long accept the subordination of their national Governments and institutions to foreign powers, whether those are other nations or international financial interests. At the moment, the influence of globalizing elite institutions is very great and very real; but they still exist and function on the sufferance of nation states and their internal politics, however parasitical they may be.

Even with all its faults and the mess being made by the special interests and the parties, the US is still Superman if we can free ourselves from the constraints imposed by various Congresses in the past, and from the financial lilliputians.

1. As I say in this piece, and Marshall Auerback says in this one, the US (the Fed and the Treasury) can control interest rates contrary to the desires of the bond markets and the vigilantes. There is no realistic prospect that benchmark interest rates will go up unless the Government wants them to.

2. The US can also de-certify the ratings agencies and prosecute rating agency executives for fraud and other violations. I think they'd be well-advised to do so, if only to show S & P who's boss. And

3. The President, finally, can use very high value PPCS and kill the “austerity” trope of the international elites for good.

So, forgive me my optimism, I still think that's Superman!

(Cross-posted from Correntewire.

Standard & Poor's Tugs on Superman's Cape

Joseph M. Firestone — Sat, 06 Aug 2011 02:24:09 -0400

Last December, my friend, beowulf, had this to say at the time Moody's began to make noises about downgrading US debt. He said:

”I don’t think we’ll see Moody’s or any other rating service based in the US ever downgrade US Treasuries. It would cause a tremendous amount of financial loss and would leave Moody’s and its executives exposed to criminal prosecution. If I were Moody’s general counsel, I’d tell the CEO in no uncertain terms, Do Not Tug On Superman’s Cape.

14th Amendment, Sect. 5

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

Criminal Mischief statute

18 US 1361. Government property or contracts

"Whoever willfully injures or commits any depredation against any property of the United States, or of any department or agency thereof, or any property which has been or is being manufactured or constructed for the United States, or any department or agency thereof, or attempts to commit any of the foregoing offenses, shall be punished as follows:

If the damage or attempted damage to such property exceeds the sum of $1,000, by a fine under this title or imprisonment for not more than ten years, or both; if the damage or attempted damage to such property does not exceed the sum of $1,000, by a fine under this title or by imprisonment for not more than one year, or both."

But, Standard & Poor's has decided to tug on Superman's cape by downgrading US debt to Double A status for the first time in history. Don't get me wrong, I'd love to see S & P executives frog-marched out of their offices and imprisoned for a year for violating the criminal mischief this statute. After their role in the Crash of 2008, that's the least they should get from an outraged populace. However, I have to say that their action will be of little or no consequence if the Treasury responds correctly to their foolishness.

Contrary to popular belief, and also the apparent belief of this Administration, ratings agencies and the bond market itself don't actually control the interest rates that Governments like the United States must pay. Sure, they will determine interest rates if the Government sits idly by and lets them drive the market.

However, the Federal Reserve and the Treasury, can target bond interest rates and set these for the bond markets by manipulating bank reserves. Specifically, one way to do this (As Warren Mosler suggests), is that the Treasury can cease issuing long-term bonds, and sell only three-month bonds. Three-month bond interest rates are generally controlled by overnight rates for bank reserves, and overnight rates can be driven down to near zero by flooding the banks with excess reserves. That's basically how the Japanese keep their bond interest rates near zero, and that's how we can do the same.

Alternatively, another move we can make to remove the effects of the bond markets and the ratings agencies upon public finances, is for the Treasury to stop issuing debt in advance of deficit spending. If we did this, the credit rating agencies and the interest rates in the bond market would be irrelevant from that day forward. And we can do it using Proof Platinum Coin Seigniorage (PPCS) to generate revenues to pay back debt, and deficit spend current or future appropriations.

In short, the bond markets and the ratings agencies aren't in control of US public finances. They are not in a position to influence what our taxing or spending policies ought to be, or whether we will default on our obligations. So, their tug on Superman's cape is of no consequence for us, directly.

On the other hand, the ratings agencies are currently hurting US states, and Eurozone nations with their deeply corrupted ratings processes and judgments. We should take very seriously Bill Mitchell's Conclusion in his post on outlawing the credit rating agencies:

"The real question that I always ask is why governments allow these undemocratic criminal organisations to exist. They can just outlaw them. This would force the corporate players to create better ways of informing the markets about their risk characteristics and leave governments alone to do what they are democratically elected to do – advance public purpose.

(Cross-posted from Correntewire.

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).

Jobs Fix Deficits

Dave Johnson — Thu, 02 Jun 2011 00:39:18 -0400

Polls show that the American Majority is much more concerned about jobs than deficits. So why is DC talking only about deficits instead of jobs, when jobs are the medicine for deficits? And why is DC only talking about budget cuts as a path to fixing the deficits, when the deficits were caused by tax cuts and lack of jobs? In fact most of the “deficit cures” being discussed in DC don’t make the deficit better, they make deficits worse because they kill jobs.

Stimulus Ends And Job Growth Ends, Too

Now that the stimulus is running out, so is any sign of a jobs recovery. The stimulus stopped the economic freefall that was occurring under the prior administration, and restored at least some job growth. It worked, but it was not big enough. Much of it was wasted on tax cuts that leave behind only debt, and it is running out. At the same time, state and local government cutbacks are working against any current economic rebound. For the longer term, badly-needed restructuring of trade deals, development of a national industrial policy and removal of the plutocratic tax and regulatory changes that led to intense concentration of wealth have not occurred, keeping the economy from moving forward. See for yourself in the following chart:

Follow the timeline on this chart:

First, the Bush freefall,
then the effect of the stimulus spending,
then the stimulus winds down,
combined with state & local budget cutbacks.

Until needed changes are made the economy remains mired in the failed Reagan/Bush/Bush plutocratic, everything-to-the-top structure and cannot sustain itself without stimulus. The worst thing that could happen now is federal budget cutbacks on top of the state and local government cutbacks. Pulling that much out of the economy, laying off all those government employees, and ceasing to invest in the infrastructure and education that make us competitive in the world would be a tragic mistake.

Jobs In The News

Stimulus winding down, state and local governments cutting back, trade deficit increasing again... Which brings us to to this week's economic news. Reuters: Private sector job growth slumps in May,

The ADP report showed private employers added a scant 38,000 jobs last month, falling from a downwardly revised 177,000 in April and well short of expectations for 175,000. It was the lowest level since September 2010.

... A separate report showed the number of planned layoffs at U.S. firms rose modestly in May with the government and non-profit sectors making up a large portion of the cuts.

... The housing market, meanwhile, continued to struggle as a report from an industry group showed applications for U.S. home mortgages fell last week, pulled lower by a decline in refinancing demand.

And, Manufacturing growth slowest since September 2009: ISM

The pace of growth in the manufacturing sector tumbled in May, slackening more than expected to its slowest since September 2009, according to an industry report released on Wednesday.

... New orders fell to 51.0 from 61.7 in April, the lowest since June 2009. The index for prices paid fell to 76.5 from 85.5, below expectations of 82.0.

Forbes: Double Dip in Housing; Could Double Dip Recession Be Next?

This chart from Business Insider shows what the Standard & Poor’s Case-Shiller Index looks like on a graph chart: bad. National home prices are back to their 2002 levels, according to the index data released May 31.

. . . Moreover, consumer confidence unexpectedly declined in May to its lowest level in six months due to the lackluster job market and declining home values.

Austerity Cuts Jobs

But DC is not only not talking about jobs, they are talking about austerity -- cutting the very things that create jobs. History and the experience of other countries as they struggle to crawl out of the economic collapse has shown again and again that government investment in infrastructure and education and scientific research and manufacturing are the path to recovery. England, Greece and others trying austerity are falling back into recession. Meanwhile China is investing hundreds of billion in high-speed rail and other infrastructure. Germany is investing in manufacturing. Others are investing billions more in infrastructure. All are pursuing green energy sources.

Mired in austerity ideology we are doing none of these. For example, on a PBS NewsHour discussion of the House vote rejecting a "clean" debt-ceiling bill Tuesday, Rep. Peter Roskam said,

...any raising of the debt ceiling has to be preconditioned upon cuts that drive towards a real economic recovery and long-term growth and prosperity and job creation.

Rep. Roskam actually claimed that cutting the things that have proven to drive growth and job creation will drive growth and job creation.

Austerity Can't Cut Deficits

The other day I wrote about calculations that shows that cutting budgets does not cut deficits. From See WHY Austerity Can't Reduce The Deficit, (click through to see the calculations that prove austerity can't reduce deficits),

Austerity -- cutting government benefits and services -- is not the path to fixing deficits. In fact, economists warn that trying to fix a sluggish economy by cutting government spending will just make things worse. Worse yet, this approach can have damaging effects that last into the future. This can be easily shown with simple calculations.

Jobs First In Democracy

In a democracy jobs would be the first topic of discussion and the only toipic until plenty of good-paying jobs are available. But in a plutocracy -- government by the wealthy -- jobs for regular people would be of little concern. Which are we seeing here?

The American Majority clearly, absolutely, firmly and primarily want jobs as government's -- our -- first priority (click through to see the polling), while our leaders are talking about doing things that cut jobs and cut the thing that We, the People do for each other.

The solution to the huge post-collapse jump in deficits is to restore the jobs. Restoring good-paying jobs starts to restore the tax base and stops the emergency spending on the unemployed. The increased demand as people find work and paychecks revives retail and manufacturing. Housing recovery, for example, depends on more jobs. With more jobs and better pay. Unemployment is high and wages are low, so many people just can't afford to buy -- or keep -- a house.

Just cutting people out of the economy doesn't fix the problem, it shifts the problem and eventually will kill the economy.

Jobs First In Election

One thing is for sure: jobs will be the first concern of voters in the coming 2012 elections. And Republicans understand that making things worse now helps Republicans later. The question is why aren't Democrats and the President focusing on making things better now to help themselves and all of us later?