Saturday, November 20, 2010

Myths about the Deficit, Part 2

Part 1 can be found here.

Myth #2) Government deficits leave a debt burden to our children, or put in another way, deficits today mean higher taxes tomorrow.

In reality, debt or no debt, our children get to consume whatever they produce.

This is difficult to explain in terms understandable to a non-economist, but I'll try anyway. No matter what our government's debt is, our children get to use what they produce. When the government spends, it just adjusts the numbers in bank (checking) accounts. When it taxes, it does the same. When it sells bonds or Treasury securities it does the same except that bonds or securities earn interest, just like a savings account. When the security comes due, it 'transfers' the funds from the savings account to the checking account.

So our $13 trillion debt is nothing more than our savings account at the Fed, whether its owned by us, or banks, or the Chinese, or whoever. Government spending and taxation does influence distribution, but deficits will not cause us to go bankrupt and will not leave a burden to our children.

If deficits cause inflation and currency depreciation, then our children's dollars will have less purchasing power, but they still get to consume whatever they produce. They won't be any poorer or have to pay $40,000 to pay off their portion of the debt.

On the other hand, unemployment and underused factory equipment are detrimental to our children. We are losing output that could benefit us and future generations because of too little spending.

It is important to remember that all debt is someone's liability and another person's asset. When the government takes on liabilities, then that means someone else has an asset. As individuals or businesses we can't take on liabilities without limit, but the government can because it has power over its own currency. This can lead to inflation, but again, inflation is NOT a concern right now. We just set a record for the lowest core inflation measurement since it began in 1958.

The burden we are putting on our children's generation is not the debt, but the lack of employment, output, and the increasing income inequality gap.


Against Vested Interests

Catholic social teaching should counter powerful vested interests, Pope says

The Pope is calling for us to take action in public life against the prevailing vested interests of big business and corrupt politicians to advance the vision of justice especially in defense of the dignity of the human person. We may soon see more institutions created for research and education of the laity. This would be a great step for the promotion and practice of Catholic Social Teaching!

Thursday, November 18, 2010


The U.S. Bishops on immigration, including illegal immigration, from 10 years ago:

Welcoming the Stranger Among Us

A few highlights I would like to point out:

The ultimate resolution of the problems associated with forced migration and illegal immigration lies in changing the conditions that drive persons from their countries of origin. Accordingly, we urge the governments of the world, particularly our own government, to promote a just peace in those countries that are at war, to protect human rights in those countries that deny them, and to foster the economic development of those countries that are unable to provide for their own peoples. We also urge the governments of the "receiving" countries to welcome these immigrants, to provide for their immediate needs, and to enable them to come to self-sufficiency as quickly as possible.

We must never forget that many immigrants come to this country in desperate circumstances.

As Pope John Paul II has noted, "In many regions of the world today people live in tragic situations of instability and uncertainty. It does not come as a surprise that in such contexts the poor and the destitute make plans to escape, to seek a new land that can offer them bread, dignity and peace. This is the migration of the desperate. . . . Unfortunately, the reality they find in host nations is frequently a source of further disappointment

One reality remains constant in the American experience of immigration: the demand of the U.S. economy for unskilled labor—and the corresponding entrance of immigrants seeking work—in labor-intensive industries such as agriculture, construction, food processing, and services. Undocumented immigrants face special hardships in such areas. The Immigration and Naturalization Service estimates that three to four million undocumented workers hold jobs in this country, many of which are poorly paid, insecure, and dangerous.

They face discrimination in the workplace and on the streets, the constant threat of arrest and deportation, and the fear that they or their children will be denied medical care, education, or job opportunities. Many have lived in the United States for years, establishing roots in their communities, building their families, paying taxes, and contributing to the economy. If arrested and deported, they leave behind children and sometimes spouses who are American citizens.

While the changes in the law over the last several years have enabled many in this situation to adjust their status to that of permanent resident, the 1996 immigration legislation made this option more difficult for the vast majority. Without condoning undocumented migration, the Church supports the human rights of all people and offers them pastoral care, education, and social services, no matter what the circumstances of entry into this country, and it works for the respect of the human dignity of all—especially those who find themselves in desperate circumstances. We recognize that nations have the right to control their borders. We also recognize and strongly assert that all human persons, created as they are in the image of God, possess a fundamental dignity that gives rise to a more compelling claim to the conditions worthy of human life.

Accordingly, the Church also advocates legalization opportunities for the maximum number of undocumented persons, particularly those who have built equities and otherwise contributed to their communities.

My commentary:

It often irks me that so many well meaning conservatives, including good Catholics, are very against illegal immigration, thinking of them as job-stealers and welfare usurpers as well as believing they should be forced to assimilate and "learn our language" if they want to live here. These views often contrast starkly with upholding the dignity of the person, especially when they are referred to as "aliens." It is clear our immigration policy needs to be fixed, and no we can't just open up our borders to all who want to live here. For safety and stability it is necessary to have a well organized and documented process, but to think of our fellow men as "aliens" and treat them as such is not christian. The U.S. Bishops are clear on this in their letter from 10 years ago. Upholding the dignity and welfare of persons should be our aim with any policy, something we have not done so well on with our own citizens, let alone illegal immigrants.

Two posts from Paul Krugman

On why inflation is NOT a problem at the moment and on the core of our economic downturn:


The root of the problem

Wednesday, November 17, 2010

11/17 Excerpt from CST

From Caritas in Veritate:

Today the picture of development has many overlapping layers. The actors and the causes in both underdevelopment and development are manifold, the faults and the merits are differentiated. This fact should prompt us to liberate ourselves from ideologies, which often oversimplify reality in artificial ways, and it should lead us to examine objectively the full human dimension of the problems.

As John Paul II has already observed, the demarcation line between rich and poor countries is no longer as clear as it was at the time of Populorum Progressio. The world's wealth is growing in absolute terms, but inequalities are on the increase. In rich countries, new sectors of society are succumbing to poverty and new forms of poverty are emerging. In poorer areas some groups enjoy a sort of “superdevelopment” of a wasteful and consumerist kind which forms an unacceptable contrast with the ongoing situations of dehumanizing deprivation. “The scandal of glaring inequalities” continues.

Corruption and illegality are unfortunately evident in the conduct of the economic and political class in rich countries, both old and new, as well as in poor ones. Among those who sometimes fail to respect the human rights of workers are large multinational companies as well as local producers.

International aid has often been diverted from its proper ends, through irresponsible actions both within the chain of donors and within that of the beneficiaries. Similarly, in the context of immaterial or cultural causes of development and underdevelopment, we find these same patterns of responsibility reproduced. On the part of rich countries there is excessive zeal for protecting knowledge through an unduly rigid assertion of the right to intellectual property, especially in the field of health care. At the same time, in some poor countries, cultural models and social norms of behaviour persist which hinder the process of development.

Pope Benedict XVI, 2009

Tuesday, November 16, 2010

Myths about the Deficit, Part 1

The hot topic in economics at the moment is certainly the enormous size of the deficit. Unfortunately, many of our politicians and even major economists are mistaken or are intentionally misleading the public about government deficits. This is mostly because of their ideologies or from being stuck in the past when we were on the gold standard. It is important, then, to understand how government spending works so that you can be an informed voter and engage in helpful dialogue with others who are misinformed.

So I will embark on a multi-part series on myths about the deficit (based on Warren Mosler's book the 7 Deadly Innocent Frauds of Economic Policy). Please comment or ask questions if you have them! This has very important implications for our political economy and is something that is vastly misunderstood!

Myth #1) The government must tax or raise funds through borrowing in order to spend.

The government can spend as much as it wants. It can print the money, or more accurately, change the numbers in bank accounts to meet its obligations. If it owes China $50 billion dollars for whatever reason, it can give China $50 billion dollars, without taxing the public or financing it through bonds. All it does is give China $50 billion U.S. dollars worth of credit to either spend in the U.S. or convert it to another currency.

This doesn't mean the government can spend what it wants without consequence. Over-spending can cause inflation or depreciate the currency, but it WILL NOT GO BANKRUPT!

So why tax us if the government doesn’t need it to spend?

Taxes create an on-going need to get dollars in order to pay them. They are what give our currency value. Our currency is no longer backed, partially or fully, with gold. It is a purely fiat money system and the way it maintains value is by the government demanding it to meet tax liabilities. If you don’t pay the government your U.S. dollars, then you will be thrown into jail.

Taxes also reduce our aggregate demand, or reduce our ability to spend. This allows the government to spend without causing inflation. Think of the economy as a big department store full of all the goods and services we produce and offer for sale every year. All together we earn enough wages and income to buy all of what we produce. But the government wants to spend money, too, in order to provide defense, infrastructure, etc. If it does not tax us then there is more money to buy than there are goods to be bought, this excess demand pushes prices up so that spending equals income, a necessary accounting identity.

If the government taxes us and does not spend, the output will not all get sold and prices will drop due to a lack of demand. But along with prices, businesses will cut costs by cutting employment because they didn’t make as much as they expected.

So the government taxes us in order to maintain currency value and allow it to buy the goods and services the people want it to buy.

Put simply, the federal government doesn't ever have or not have any dollars; it just changes the numbers in the bank accounts. It is more of a scorekeeper than a vault of money.

So how does that apply to today? The government wants to cut deficits amidst an underemployed economy on the verge of deflation. In order to boost spending, the government should increase the deficit to make up for our lack of spending.

Now this is where ideology and preferences come in. If you prefer smaller government, then you should demand lower taxes to improve private sector spending. If, however, we save the tax cuts and do not spend them, then they are no good. If you prefer a bigger government, then you should demand more spending.

Again, inflation and currency depreciation are our only concerns with high government deficits! But at the moment inflation is not a threat and unemployment is still terribly high. If the currency depreciates we should see a rise in exports and a fall in imports, another boost to our aggregate demand.

To be sure, this is not my own “opinion” or anyone else's “opinion,” but how it actually works. Opinions and ideologies can get in the way or be used within this framework, but do not change how the system works.

For more on this topic see:

Monday, November 15, 2010

Little Things

A great deal of carrying out Catholic Social Teaching is in the little things. Not many of us are in a position to set wages or prices; we don't have much control over laws and regulations, though thankfully we live in a democratic nation that does give us some say; and a lot of us don't have enough wealth to develop an impoverished neighborhood, or to feed, clothe, and shelter all the hungry, naked, and homeless.

But we do have the power to love. As Mother Teresa, a great example of living out the social teaching of the Church, said, "We cannot all do great things, but we can do small things with great love.” All of our Christian everyday life can be summed up in the 1st and 2nd great commandments: 'Love the Lord your God with all your heart and with all your soul and with all your mind.' This is the first and greatest commandment. And the second is like it: 'Love your neighbor as yourself.' -- Matthew 26:36-37

This can easily be carried out everyday by a simple smile or hell, an extra out-of-your way thank you or compliment, a recognition of someone else's good work or unselfishness. These things spread Christian love much more quickly and effectively than donating a large sum to a good cause.

Indeed, the best way to convert the hearts of others is to love others. Our joy and unselfishness will attract others to live the same way. No one wants to join a group who uses guilt and fear as their motivation.

Yet, these small things can be very difficult, as the desire to serve oneself is great and hard to overcome. Overcoming our tiredness or grumpiness, frustrations with circumstances out of our control, and other selfish desires are very difficult tasks indeed, but as Mother Teresa also said, "Unless a life is lived for others, it is not worthwhile."

Pope Leo XIII wrote: "The happy results we all long for must be chiefly brought about by the plenteous outpuring of charity; of that true Christian charity which is the fulfilling of the whole Gospel law, which is always ready to sacrifice itself for other's sake...which was outlined by St. Paul in these words: 'Love is patient, love is does not seek its own suffers all things...and endures all things'"

Today's Excerpt from CST

From Rerum Novarum on riches and poverty:

"As for riches and the other things which men call good and desirable, whether we have them in abundance, or are lacking in them-so far as eternal happiness is concerned, it makes no difference; the only important thing is to use them aright."

“Therefore, those whom fortune favors are warned that riches do no bring freedom from sorrow and are of no avail for eternal happiness, but rather are obstacles. It is one thing to have a right to the possession of money and another to have a right to use money as one wills. Priavte ownership, as we have seen is the natural right of man, and to exercise that right, especially as members of society, is not only lawful, but absolutely necessary. 'It is lawful,' says St. Thomas Aquinas, 'for a man to hold priavte property; and it is also necessary for the carrying on of human existence, but Man should not consider his material possessions as his own, but as common to all, so as to share them without hesitation when others are in need."

"Whoever has received from the divine bounty a large share of temporal blessings, whether they be external and material, or gifts of the mind, has received them for the purpose of using them for the perfecting of his own nature, and, at the same time, that he may employ them, as the steward of God's providence, for the benefit of others."

“As for those who posses not the gifts of fortune, they are taught by the Church that in God’s sight poverty is no disgrace, and that there is nothing to be ashamed of in earning their bread by labor. It is more easy to understand that the true worth of nobility of man lie in his moral qualities, that is, in virtue; that virtue is, moreover, the common inheritance of men, equally within the reach of high and low, rich and poor; and that virtue, and virtue alone, wherever found will be followed by the rewards of everlasting happiness."

--Pope Leo XII, pp. 21-24

Friday, November 12, 2010

Today's excerpt from CST

From Laborem Exercens:

THROUGH WORK man must earn his daily bread and contribute to the continual advance of science and technology and, above all, to elevating unceasingly the cultural and moral level of the society within which he lives in community with those who belong to the same family. And work means any activity by man, whether manual or intellectual, whatever its nature or circumstances; it means any human activity that can and must be recognized as work, in the midst of all the many activities of which man is capable and to which he is predisposed by his very nature, by virtue of humanity itself. Man is made to be in the visible universe an image and likeness of God himself, and he is placed in it in order to subdue the earth. From the beginning therefore he is called to work. Work is one of the characteristics that distinguish man from the rest of creatures, whose activity for sustaining their lives cannot be called work. Only man is capable of work, and only man works, at the same time by work occupying his existence on earth. Thus work bears a particular mark of man and of humanity, the mark of a person operating within a community of persons. And this mark decides its interior characteristics; in a sense it constitutes its very nature.

--John Paul II, 1981

Thursday, November 11, 2010

Today's Excerpt from CST

In defense of private property from Rerum Novarum:

"The fact that God has given the earth for the use and enjoyment of the whole human race can in no way be a bar to the owning of private property. For God has granted the earth to mankind in general, not in the sense that all without distinction can deal with it as they like, but rather that no part of it was assigned to any one in particular, and that the limits of private possession have been left to be fixed by man's own industry, and by the laws of individual races."

"That right to property, therefore, which has been proved to belong naturally to individual persons, must in like wise belong to a man in his capacity of head of a family; nay, that right is all the stronger in proportion as the human person receives a wider extension in the family group. It is a most sacred law of nature that a father should provide food and all necessaries for those whom he has begotten; and, similarly, it is natural that he should wish that his children, who carry on, so to speak, and continue his personality, should be by him provided with all that is needful to enable them to keep themselves decently from want and misery amid the uncertainties of this mortal life. Now, in no other way can a father effect this except by the ownership of productive property, which he can transmit to his children by inheritance. A family, no less than a State, is, as We have said, a true society, governed by an authority peculiar to itself, that is to say, by the authority of the father. Provided, therefore, the limits which are prescribed by the very purposes for which it exists be not transgressed, the family has at least equal rights with the State in the choice and pursuit of the things needful to its preservation and its just liberty."

--Pope Leo XIII, 1891

Veterans Day

Today is Veterans Day, a day in which we honor and express our sincere gratitude for those who fought and those who continue to fight for our freedom and the freedom of others. We especially remember those who died in the field of battle.

The courage our Veterans displayed in battle serves as a great example for us who do not engage in combat, but who fight for the rights and freedom of those who have none in our own society. The unborn and elderly, the homeless and jobless members of our society who need us to fight for their right to life, liberty, and justice that for some reason or another are not being given to them. We must take the example of our Veterans and have the courage to vote for those who protect these rights, convert those who take them away, and always and everywhere promote their freedom through our example of faith, hope, and love. If we do not take care of the least of our own no one will be influenced to do the same.

Our battle should be one of pleading and defending, loving and serving, not attacking and dividing. Just as the defenseless need our love and protection, so too, do those who attack them need it.

We should do as Jesus taught us in Luke 6:27-36 and Matthew 25:31-46.

It is a great travesty to take away the rights of our own, when so many great men and women of courage fought and continue fighting for that very freedom we take away. Great abundance of material goods and comfort of living should not be our primary goal. Loving and serving each other should alawys come first.

Thank you to all the men and women who fought and fight for us in battle and especially those who died. May God bless you for your sacrifice and service!

Wednesday, November 10, 2010

Balancing the Budget

It looks as though our move toward austerity (balanced federal budget) will be in the form of massive spending cuts and tax cuts. The early proposal from the bipartisan committee comissioned to balance the deficit by 2015 calls for cuts in Social Security, income taxes, and corporate taxes. The tax cuts would also greatly reduce the progression of the tax code (from 8% to 23% down from 10% to 38% on income taxes) furthering our growing income inequality.

The Bowles-Simpson plan

It's not likely this early proposal will pass, but some components of it might. The reduced progression of income taxes is worrysome as income inequality is a growing problem magnified by the current recession.

I don't think balancing the budget should be a priority at the moment. Government spending and taxation don't work like many think they do (see here and here for more), and this misperception could lead to disastrous results. I think our best bet is a payroll-tax holiday. This is the flat 15% (7.5% employee, 7.5% employer obligation) tax on all payrolls that goes toward Social Security and Medicare. Government need not get involved in messy and inefficient spending, tax cuts would boost aggregate demand, and when we start to see the reapplication of our unused capital and labor, then we can worry about balancing the budget and cutting wasteful spending.

UPDATE: Full Proposal can be found here.

Today's Excerpt from CST

From "Caritas in Veritate":

Charity is at the heart of the Church's social doctrine. Every responsibility and every commitment spelt out by that doctrine is derived from charity which, according to the teaching of Jesus, is the synthesis of the entire Law (cf. Mt 22:36- 40). It gives real substance to the personal relationship with God and with neighbour; it is the principle not only of micro-relationships (with friends, with family members or within small groups) but also of macro-relationships (social, economic and political ones). For the Church, instructed by the Gospel, charity is everything because, as Saint John teaches (cf. 1 Jn 4:8, 16) and as I recalled in my first Encyclical Letter, “God is love” (Deus Caritas Est): everything has its origin in God's love, everything is shaped by it, everything is directed towards it. Love is God's greatest gift to humanity, it is his promise and our hope.


Ok, sorry for the long delay between posts. I am working on some things for my classes that I hope to be able to post in snippets in the coming weeks.

It may appear from previous posts that I am not much of a fan of Capitalism, but while I am critical of it, I do believe it to be the most efficient and productive economic system in terms of wealth and standards of living. The evidence is very clearly in favor of this, I would have no way of arguing against it if I tried.

Most of my criticism is directed toward materialism and individualism, the "structures of sin" which are by-products of Capitalism and very prevalent in our society. The problem with Capitalism is that it creates a guise for these structures of sin. It convinces people that if they act in their self-interest, they will bring about the greatest societal good. This theory is only good in practice when there is a great number of competitors to hold each individual in check, keep him on his toes so to speak. Contrary to common belief, competition isn't the norm in our current capitalism. Big business and banks rule the show. They not only control credit, pricing, and output, but they also use their profits to lobby and persuade politicians. This is not a conspiracy theory, but the reality of our situation.

Even the people who run these businesses and banks, who want the good of all, and subscribe to the notion of acting in self-interest for the common good are not getting it because their self-interest directs them to exploit workers, keep costs (their wages) as low as possible, take care of their own, and maximize profits so that they get a nice bonus check for what? a bigger mansion? more cars? They don't do it to hire more people and increase the welfare of their employees.

The greatest evil in our current system of Capitalism, is not the free market or the government, but individuals acting only for themselves out of love for wealth and power. The free market and the government provide the arenas in which they act.

If the "invisible hand" of the market really worked, wouldn't there be less poverty and inequality? Milton Friedman, perhaps the biggest advocate of a free market, thought this would happen. Yet, we are in a very bad recession caused by greed and self-interested individuals who bear none of the punishment. This is passed on to the losers of the market, the lower class.

There is no question that authentic freedom is a good thing, including freedom in economics, but the power to do what one wants whenever he wants it is not authentic freedom. True freedom is the ability to do the right thing for the good of all. Our current notion of freedom limits our true freedom. Individuals who act for themselves only, inhibit the power of others to act for the good of all.

But this begs the questions: What, if not capitalism, is our alternative? Socialism? Something in between?

I believe that a capitalistic system full of virtuous individuals is our best alternative. Socialism takes away our right to private property along with many other freedoms. Extreme liberalism or individualism denies our social nature and dependency on each other. No economic system is good without upholding our natural rights that stem from our dignity as persons created in the image and likeness of God, pervaded by charity and justice, a constant pursuit of the common good, and the solidarity of all nations. This sort of economic system will have the freedoms of capitalism, but will look more like socialism because those who win in the free market will use it for the benefit of all.

Is such a system possible? That's like asking if removing all sin is possible. We are incapable, but God enables us for by Him we can do all things, without Him we are nothing. True reform lies not in creating or repealing public policy, but in the conversion of hearts. We must continue to strive for our own virtue and that of others by turning to God in prayer and leading by example.

Monday, November 1, 2010

Material Mortality

With today being All Saints Day and tomorrow All Souls Day, we remember, honor, and ask for prayers from the many holy men and women who have gone before us as disciples of Christ. We are also reminded of our mortality and the ever-present potentiality of death.

It is also a reminder to not spend our time striving after or worrying about the accumulation of material goods. Our material goods do not pass with us into eternal life when we die, they are but means to help us live a life worthy of Christ on earth. If we do not use our computers, cars, etc. for the good of all, for the building up of charity and all virtue, then they are obstructing us from our true purpose. Attachment to earthly goods is idolatry and a very common one in our society. If we do not exercise our control over them, then they exercise control over us.

It is good to reflect often on how we use our material goods and whether or not we are too attached to them, but especially on this day of remembrance of those who built their store in heavenly goods.

As St. Benedict advises us, keep death before your eyes daily. It is good to be grateful for the many material blessings that God has given us, and recognize that it could be otherwise, but that either way, we are still able to live as Christ taught us, living as though today is our last. For we put our hope in a life full of happiness that no amount of material goods will ever give us. One in which we can share with the holy men and women whom we remember this day.