Crunch Time

It's that time of year (or should I say semester?) again. Finals and papers are stacking up and though I have a lot of ideas I want to blog about, I don't have a lot of time.

I hope to be back posting sometime next week or the week after, but then will likely be on a hiatus through the new year.

If there are any topics you would like me to blog about, or if you are interested in writing a guest piece shoot me an email at adbinder24@yahoo.com!

Thank you for reading!

The U.S. is in a debt and deficit crisis

The U.S. is in a debt and deficit crisis, but the crisis is that the deficit is too little and that households (not the government!) hold too much debt.

We must absolutely spend our government money wisely; toward productive things like infrastructure and employing people. There are plenty of things to spend the money on that won't compete with the private sector, will actually help the private sector, and are way more efficient then letting so many resources sit and do nothing. The government is not facing a debt default of any kind and we are no where near inflation let alone hyperinflation. We are trying to stave off deflation of the variety experienced by Japan for over a decade which earned it the title of 'the lost decade'. The government doesn't need to borrow (or tax) to spend, but it can do so if it wants to at historically low rates.

We must have a deficit to stimulate aggregate demand because consumers are under way too much debt to do it themselves. Business can't thrive without spending and consumers can't spend with so much debt to pay off and no jobs to earn an income. A debt write-down is absolutely needed. The banks received a bailout for making bad loans and, even worse, for betting multiple times on those bad loans. Debtors should receive a bailout too in the form of a write-down.

Debt and the deficit do matter.

We must write down debt and reform the financial sector (here are some good ideas). And we must increase the deficit to stimulate aggregate demand (see here).

We won't and can't recover as long as we hold so much debt and as long as the government deficit remains so small.

So, sorry Satyajit Das, you are very wrong when you say the U.S. government is in a financial crisis because it cannot sustain its debts. Note well that total U.S. debt equals total U.S. Dollar savings.

Double-Dip Optimism?

Not sure why.

From Yahoo! News about Wall Street Journal Poll:

Economists are getting increasingly optimistic about our chances of avoiding a double-dip recession.

A Wall Street Journal survey of 52 economists put the chances of falling back into a recession in the next year at one in four. That's down from a one in three chance, when the Journal put the question to the same group in September.

The Great Recession officially ended in June 2009, but since then growth has been frustratingly slow. Over the summer, anemic job growth, Europe's debt crisis and the wrangling in Washington over raising the U.S. debt ceiling sparked new fears that the economy could begin contracting again. But since then, signs have pointed to steady, though still far from strong, growth. On Thursday, the Labor Department said the number of people filing first-time claims for jobless benefits dropped to 390,000--the lowest level in seven months.

Still, economists in the survey said they expected the jobless rate to stay above 7 percent by 2014.

They also said there's a two in three chance that the Eurozone will fall into a recession, dragged down by possible Greek or Italian defaults. If that happens, the U.S. economy would likely also be affected.

I am not so optimistic. An imminent EU collapse would have widespread ramifications for the U.S. and the world as a whole. Deficit cutting will also lower aggregate effective demand and therefore growth. Private spending is unlikely to make up the difference because of the large amounts of debt still on their balance sheets.

This could be avoided if the EU creates a fiscal institution to carry out the spending necessary to prevent a collapse in demand and if the U.S. increases deficit spending and writes down large amounts of private debt, but all of these remedies seem extremely unlikely. Thus, I am rather pessimistic that we will avoid a double-dip recession.

Why is the EU failing?

The simple answer is that it divorced monetary and fiscal powers. This cannot be sustained because fiscal actions have a direct impact on the monetary system and vice versa. The EU stripped themselves of the ability to deal with crises of any kind and those who understand monetary systems predicted this from the very beginning. Among those includes Wynne Godley who wrote this article about the EU in 1992 (via New Economic Perspectives).

I just want to highlight one paragraph, but I highly recommend reading his entire piece.

Let me express a different view. I think that the central government of any sovereign state ought to be striving all the time to determine the optimum overall level of public provision, the correct overall burden of taxation, the correct allocation of total expenditures between competing requirements and the just distribution of the tax burden. It must also determine the extent to which any gap between expenditure and taxation is financed by making a draft on the central bank and how much it is financed by borrowing and on what terms. The way in which governments decide all these (and some other) issues, and the quality of leadership which they can deploy, will, in interaction with the decisions of individuals, corporations and foreigners, determine such things as interest rates, the exchange rate, the inflation rate, the growth rate and the unemployment rate. It will also profoundly influence the distribution of income and wealth not only between individuals but between whole regions, assisting, one hopes, those adversely affected by structural change...Almost nothing simple can be said about the use of these instruments, with all their inter-dependencies, to promote the well-being of a nation and protect it as well as may be from the shocks of various kinds to which it will inevitably be subjected...I recite all this to suggest, not that sovereignty should not be given up in the noble cause of European integration, but that if all these functions are renounced by individual governments they simply have to be taken on by some other authority...The counterpart of giving up sovereignty should be that the component nations are constituted into a federation to whom their sovereignty is entrusted.

Pope Benedict XVI on the Environment

Major issues in our day concern our environment, including global warming, increasing extinction of species, deterioration of natural resources, etc. Reading other Catholic blogs there seems to be a wide variety of opinions on global warming, non-renewable energy sources, and protecting the environment in general, so I thought it expedient to write a post on what Pope Benedict had to say about this topic in Caritas en Veritate.

Highlights are my own:

48. Today the subject of development is also closely related to the duties arising from our relationship to the natural environment. The environment is God's gift to everyone, and in our use of it we have a responsibility towards the poor, towards future generations and towards humanity as a whole. When nature, including the human being, is viewed as the result of mere chance or evolutionary determinism, our sense of responsibility wanes. In nature, the believer recognizes the wonderful result of God's creative activity, which we may use responsibly to satisfy our legitimate needs, material or otherwise, while respecting the intrinsic balance of creation. If this vision is lost, we end up either considering nature an untouchable taboo or, on the contrary, abusing it. Neither attitude is consonant with the Christian vision of nature as the fruit of God's creation.

Nature expresses a design of love and truth. It is prior to us, and it has been given to us by God as the setting for our life. Nature speaks to us of the Creator (cf. Rom 1:20) and his love for humanity. It is destined to be “recapitulated” in Christ at the end of time (cf. Eph 1:9-10; Col 1:19-20). Thus it too is a “vocation”[115]. Nature is at our disposal not as “a heap of scattered refuse”[116], but as a gift of the Creator who has given it an inbuilt order, enabling man to draw from it the principles needed in order “to till it and keep it” (Gen 2:15). But it should also be stressed that it is contrary to authentic development to view nature as something more important than the human person. This position leads to attitudes of neo-paganism or a new pantheism — human salvation cannot come from nature alone, understood in a purely naturalistic sense. This having been said, it is also necessary to reject the opposite position, which aims at total technical dominion over nature, because the natural environment is more than raw material to be manipulated at our pleasure; it is a wondrous work of the Creator containing a “grammar” which sets forth ends and criteria for its wise use, not its reckless exploitation. Today much harm is done to development precisely as a result of these distorted notions. Reducing nature merely to a collection of contingent data ends up doing violence to the environment and even encouraging activity that fails to respect human nature itself. Our nature, constituted not only by matter but also by spirit, and as such, endowed with transcendent meaning and aspirations, is also normative for culture. Human beings interpret and shape the natural environment through culture, which in turn is given direction by the responsible use of freedom, in accordance with the dictates of the moral law. Consequently, projects for integral human development cannot ignore coming generations, but need to be marked by solidarity and inter-generational justice, while taking into account a variety of contexts: ecological, juridical, economic, political and cultural[117].

49. Questions linked to the care and preservation of the environment today need to give due consideration to the energy problem. The fact that some States, power groups and companies hoard non-renewable energy resources represents a grave obstacle to development in poor countries. Those countries lack the economic means either to gain access to existing sources of non-renewable energy or to finance research into new alternatives. The stockpiling of natural resources, which in many cases are found in the poor countries themselves, gives rise to exploitation and frequent conflicts between and within nations. These conflicts are often fought on the soil of those same countries, with a heavy toll of death, destruction and further decay. The international community has an urgent duty to find institutional means of regulating the exploitation of non-renewable resources, involving poor countries in the process, in order to plan together for the future.

On this front too, there is a pressing moral need for renewed solidarity, especially in relationships between developing countries and those that are highly industrialized[118]. The technologically advanced societies can and must lower their domestic energy consumption, either through an evolution in manufacturing methods or through greater ecological sensitivity among their citizens. It should be added that at present it is possible to achieve improved energy efficiency while at the same time encouraging research into alternative forms of energy. What is also needed, though, is a worldwide redistribution of energy resources, so that countries lacking those resources can have access to them. The fate of those countries cannot be left in the hands of whoever is first to claim the spoils, or whoever is able to prevail over the rest. Here we are dealing with major issues; if they are to be faced adequately, then everyone must responsibly recognize the impact they will have on future generations, particularly on the many young people in the poorer nations, who “ask to assume their active part in the construction of a better world”[119].

50. This responsibility is a global one, for it is concerned not just with energy but with the whole of creation, which must not be bequeathed to future generations depleted of its resources. Human beings legitimately exercise a responsible stewardship over nature, in order to protect it, to enjoy its fruits and to cultivate it in new ways, with the assistance of advanced technologies, so that it can worthily accommodate and feed the world's population. On this earth there is room for everyone: here the entire human family must find the resources to live with dignity, through the help of nature itself — God's gift to his children — and through hard work and creativity. At the same time we must recognize our grave duty to hand the earth on to future generations in such a condition that they too can worthily inhabit it and continue to cultivate it. This means being committed to making joint decisions “after pondering responsibly the road to be taken, decisions aimed at strengthening that covenant between human beings and the environment, which should mirror the creative love of God, from whom we come and towards whom we are journeying”[120]. Let us hope that the international community and individual governments will succeed in countering harmful ways of treating the environment. It is likewise incumbent upon the competent authorities to make every effort to ensure that the economic and social costs of using up shared environmental resources are recognized with transparency and fully borne by those who incur them, not by other peoples or future generations: the protection of the environment, of resources and of the climate obliges all international leaders to act jointly and to show a readiness to work in good faith, respecting the law and promoting solidarity with the weakest regions of the planet[121]. One of the greatest challenges facing the economy is to achieve the most efficient use — not abuse — of natural resources, based on a realization that the notion of “efficiency” is not value-free.

51. The way humanity treats the environment influences the way it treats itself, and vice versa. This invites contemporary society to a serious review of its life-style, which, in many parts of the world, is prone to hedonism and consumerism, regardless of their harmful consequences[122]. What is needed is an effective shift in mentality which can lead to the adoption of new life-styles “in which the quest for truth, beauty, goodness and communion with others for the sake of common growth are the factors which determine consumer choices, savings and investments”[123]. Every violation of solidarity and civic friendship harms the environment, just as environmental deterioration in turn upsets relations in society. Nature, especially in our time, is so integrated into the dynamics of society and culture that by now it hardly constitutes an independent variable. Desertification and the decline in productivity in some agricultural areas are also the result of impoverishment and underdevelopment among their inhabitants. When incentives are offered for their economic and cultural development, nature itself is protected. Moreover, how many natural resources are squandered by wars! Peace in and among peoples would also provide greater protection for nature. The hoarding of resources, especially water, can generate serious conflicts among the peoples involved. Peaceful agreement about the use of resources can protect nature and, at the same time, the well-being of the societies concerned.

The Church has a responsibility towards creation and she must assert this responsibility in the public sphere. In so doing, she must defend not only earth, water and air as gifts of creation that belong to everyone. She must above all protect mankind from self-destruction. There is need for what might be called a human ecology, correctly understood. The deterioration of nature is in fact closely connected to the culture that shapes human coexistence: when “human ecology”[124] is respected within society, environmental ecology also benefits. Just as human virtues are interrelated, such that the weakening of one places others at risk, so the ecological system is based on respect for a plan that affects both the health of society and its good relationship with nature.

In order to protect nature, it is not enough to intervene with economic incentives or deterrents; not even an apposite education is sufficient. These are important steps, but the decisive issue is the overall moral tenor of society. If there is a lack of respect for the right to life and to a natural death, if human conception, gestation and birth are made artificial, if human embryos are sacrificed to research, the conscience of society ends up losing the concept of human ecology and, along with it, that of environmental ecology. It is contradictory to insist that future generations respect the natural environment when our educational systems and laws do not help them to respect themselves. The book of nature is one and indivisible: it takes in not only the environment but also life, sexuality, marriage, the family, social relations: in a word, integral human development. Our duties towards the environment are linked to our duties towards the human person, considered in himself and in relation to others. It would be wrong to uphold one set of duties while trampling on the other. Herein lies a grave contradiction in our mentality and practice today: one which demeans the person, disrupts the environment and damages society.

52. Truth, and the love which it reveals, cannot be produced: they can only be received as a gift. Their ultimate source is not, and cannot be, mankind, but only God, who is himself Truth and Love. This principle is extremely important for society and for development, since neither can be a purely human product; the vocation to development on the part of individuals and peoples is not based simply on human choice, but is an intrinsic part of a plan that is prior to us and constitutes for all of us a duty to be freely accepted. That which is prior to us and constitutes us — subsistent Love and Truth — shows us what goodness is, and in what our true happiness consists. It shows us the road to true development.

Understanding Fiat Money

There seems to be a lot of confusion concerning just what gives money its value or even what money really is. I think that evidence has shown that this is a somewhat elusive issue, because the nature and role of money has varied throughout history (See David Graeber's book "Debt: The first 5000 years").

But almost invariably, money has represented a credit-debt relation. Money is one person's asset and another's liability. It has taken many forms throughout history: gold, tokens, coins, tallies, people, cigarettes, and even numbers in bank accounts. There really are too many to name in a reasonable amount of time. But the important point is that the object represented a relation or social obligation. The gold or whatever was the asset of one individual but the liability of another.

Money in recent history has evolved from precious metals and the gold standard to paper money and eventually to pure credit represented by numbers in bank accounts or so the tale goes. But if gold was what gave money its value (supposedly) and our paper currency or even our pure credit currency isn't backed by gold then what gives it its value?

That is, if money is a credit-debt relation and not merely an object, then what gives it value? Some contend that the goods it can buy is what gives it value, i.e. that it is backed by real goods. This seems to make sense, because after all, paper money is pretty worthless in and of itself. It doesn't do anything but get you other things that do have some use-value. I suppose you could use it as kleenex (as in one of my favorite movies), but clearly its physical properties are not what give it value. Pure credit money would have no value at all then.

Instead, we give it value by accepting it. Just like the key to obtaining a loan (a debt) is getting it accepted by a creditor, the key to any money is getting it accepted. I can create my own money, essentially IOUs, but the only way that it would have value is if someone was willing to accept it usually in exchange for something. They might do this if they trust me to make good on my promise to pay them back whatever it is that I said I'd pay them back.

Acceptance, then, is the key to any money having value. All monies fall into a sort of hierarchy of acceptance. Not many people would be willing to accept my IOUs, but perhaps they would accept them from a higher more powerful institution, say a bank. In fact, that's what bank loans are, bank money. They aren't US Dollars. They are convertible into US Dollars, but they aren't initially US dollars.

So why do we use US dollars as currency? Because our government requires us to pay our taxes and fines to them in US dollars. To pay taxes we need to obtain US dollars. We do this by working for the state, offering goods and services to the state in exchange for US dollars. We then use those dollars to pay our taxes. Logically, the gov’t must pay out at least as many dollars as it requires in taxes, otherwise some of us wouldn’t be able to pay our taxes and would face the punishment of not paying our taxes. But even more likely, it will have to pay out more dollars than it requires us to pay in because we will want to save and prepare for future tax liabilities. This means that the govt MUST spend at a deficit (gov’t spending>taxes).

Because we need US dollars to pay taxes, we will also use them to exchange for other goods and services outside of the government sector because others will also need US dollars to pay their taxes. So long as the tax liability is sufficiently high and on a sufficient amount of the people in the nation, US dollars will be the most accepted form of money. If taxes aren’t high enough, then inflation can become an issue. Spending should be high enough to provide the public with enough dollars to pay back in taxes and to satisfy their desire for net financial saving. With this understanding, you can see that a balanced budget would be disastrous! Deficits do matter; the right sized deficit is what we need, not a balanced budget.

To sum up, acceptance is what gives money its value, not real goods and services (note however that real goods and services are what matter in an economy because we create money in order to obtain or lay claim to those goods and services, but that the value of money still depends on acceptance). Taxes are what make state money the most accepted form of money in a nation, and it is therefore the state’s ability to issue a tax on its people that gives it its power over the monetary system.

Moving to a gold standard would not remove this power from the state. It would only restrict their ability to respond to economic or financial crises much like in the early 20th century.

For more on this topic I recommend this post from L. Randall Wray.

Global Public Authority and Central World Bank

An economist for the Vatican calls for a Global Authority and a Central World Bank.

The Vatican called on Monday for the establishment of a "global public authority" and a "central world bank" to rule over financial institutions that have become outdated and often ineffective in dealing fairly with crises.

The 18-page document, "Towards Reforming the International Financial and Monetary Systems in the Context of a Global Public Authority," was at times very specific, calling, for example, for taxation measures on financial transactions.

In a section explaining why the Vatican felt the reform of the global economy was necessary, the document said:

"In economic and financial matters, the most significant difficulties come from the lack of an effective set of structures that can guarantee, in addition to a system of governance, a system of government for the economy and international finance."

You can read the full article here and the full document here.

This isn't the first time the Church has called for a central global public authority, here is what the Popes have said:

From Pacem in Terris:

136. Now, if one considers carefully the inner significance of the common good on the one hand, and the nature and function of public authority on the other, one cannot fail to see that there is an intrinsic connection between them. Public authority, as the means of promoting the common good in civil society, is a postulate of the moral order. But the moral order likewise requires that this authority be effective in attaining its end. Hence the civil institutions in which such authority resides, becomes operative and promotes its ends, are endowed with a certain kind of structure and efficacy: a structure and efficacy which make such institutions capable of realizing the common good by ways and means adequate to the changing historical conditions.

137. Today the universal common good presents us with problems which are world-wide in their dimensions; problems, therefore, which cannot be solved except by a public authority with power, organization and means co-extensive with these problems, and with a world-wide sphere of activity. Consequently the moral order itself demands the establishment of some such general form of public authority.

138. But this general authority equipped with world-wide power and adequate means for achieving the universal common good cannot be imposed by force. It must be set up with the consent of all nations. If its work is to be effective, it must operate with fairness, absolute impartiality, and with dedication to the common good of all peoples. The forcible imposition by the more powerful nations of a universal authority of this kind would inevitably arouse fears of its being used as an instrument to serve the interests of the few or to take the side of a single nation, and thus the influence and effectiveness of its activity would be undermined. For even though nations may differ widely in material progress and military strength, they are very sensitive as regards their juridical equality and the excellence of their own way of life. They are right, therefore, in their reluctance to submit to an authority imposed by force, established without their co-operation, or not accepted of their own accord.

139. The common good of individual States is something that cannot be determined without reference to the human person, and the same is true of the common good of all States taken together. Hence the public authority of the world community must likewise have as its special aim the recognition, respect, safeguarding and promotion of the rights of the human person. This can be done by direct action, if need be, or by the creation throughout the world of the sort of conditions in which rulers of individual States can more easily carry out their specific functions.

140. The same principle of subsidiarity which governs the relations between public authorities and individuals, families and intermediate societies in a single State, must also apply to the relations between the public authority of the world community and the public authorities of each political community. The special function of this universal authority must be to evaluate and find a solution to economic, social, political and cultural problems which affect the universal common good. These are problems which, because of their extreme gravity, vastness and urgency, must be considered too difficult for the rulers of individual States to solve with any degree of success.

141. But it is no part of the duty of universal authority to limit the sphere of action of the public authority of individual States, or to arrogate any of their functions to itself. On the contrary, its essential purpose is to create world conditions in which the public authorities of each nation, its citizens and intermediate groups, can carry out their tasks, fullfill their duties and claim their rights with greater security.

142. The United Nations Organization (U.N.) was established, as is well known, on June 26, 1945. To it were subsequently added lesser organizations consisting of members nominated by the public authority of the various nations and entrusted with highly important international functions in the economics, social, cultural, educational and health fields. The United Nations Organization has the special aim of maintaining and strengthening peace between nations, and of encouraging and assisting friendly relations between them, based on the principles of equality, mutual respect, and extensive cooperation in every field of human endeavor.

143. A clear proof of the farsightedness of this organization is provided by the Universal Declaration of Human Rights passed by the United Nations General Assembly on December 10, 1948. The preamble of this declaration affirms that the genuine recognition and complete observance of all the rights and freedoms outlined in the declaration is a goal to be sought by all peoples and all nations.

144. We are, of course, aware that some of the points in the declaration did not meet with unqualified approval in some quarters; and there was justification for this. Nevertheless, We think the document should be considered a step in the right direction, an approach toward the establishment of a juridical and political ordering of the world community. It is a solemn recognition of the personal dignity of every human being; an assertion of everyone's right to be free to seek out the truth, to follow moral principles, discharge the duties imposed by justice, and lead a fully human life. It also recognized other rights connected with these.

Creation of a world fund from Populorum Progressio:

51. A further step must be taken. When We were at Bombay for the Eucharistic Congress, We asked world leaders to set aside part of their military expenditures for a world fund to relieve the needs of impoverished peoples. (55) What is true for the immediate war against poverty is also true for the work of national development. Only a concerted effort on the part of all nations, embodied in and carried out by this world fund, will stop these senseless rivalries and promote fruitful, friendly dialogue between nations.

52. It is certainly all right to maintain bilateral and multilateral agreements. Through such agreements, ties of dependence and feelings of jealousy—holdovers from the era of colonialism —give way to friendly relationships of true solidarity that are based on juridical and political equality. But such agreements would be free of all suspicion if they were integrated into an overall policy of worldwide collaboration. The member nations, who benefit from these agreements, would have less reason for fear or mistrust. They would not have to worry that financial or technical assistance was being used as a cover for some new form of colonialism that would threaten their civil liberty, exert economic pressure on them, or create a new power group with controlling influence.

53. Is it not plain to everyone that such a fund would reduce the need for those other expenditures that are motivated by fear and stubborn pride? Countless millions are starving, countless families are destitute, countless men are steeped in ignorance; countless people need schools, hospitals, and homes worthy of the name. In such circumstances, we cannot tolerate public and private expenditures of a wasteful nature; we cannot but condemn lavish displays of wealth by nations or individuals; we cannot approve a debilitating arms race. It is Our solemn duty to speak out against them. If only world leaders would listen to Us, before it is too late!

A little more indirectly from Caritas in Veritate:

41.Political authority also involves a wide range of values, which must not be overlooked in the process of constructing a new order of economic productivity, socially responsible and human in scale. As well as cultivating differentiated forms of business activity on the global plane, we must also promote a dispersed political authority, effective on different levels. The integrated economy of the present day does not make the role of States redundant, but rather it commits governments to greater collaboration with one another. Both wisdom and prudence suggest not being too precipitous in declaring the demise of the State. In terms of the resolution of the current crisis, the State's role seems destined to grow, as it regains many of its competences. In some nations, moreover, the construction or reconstruction of the State remains a key factor in their development. The focus of international aid, within a solidarity-based plan to resolve today's economic problems, should rather be on consolidating constitutional, juridical and administrative systems in countries that do not yet fully enjoy these goods. Alongside economic aid, there needs to be aid directed towards reinforcing the guarantees proper to the State of law: a system of public order and effective imprisonment that respects human rights, truly democratic institutions. The State does not need to have identical characteristics everywhere: the support aimed at strengthening weak constitutional systems can easily be accompanied by the development of other political players, of a cultural, social, territorial or religious nature, alongside the State. The articulation of political authority at the local, national and international levels is one of the best ways of giving direction to the process of economic globalization. It is also the way to ensure that it does not actually undermine the foundations of democracy.

Chris Hedges on Occupy Wall Street

Below is an excellent video from CBC via Youtube. I think Mr. Hedges understands the situation very well in terms of what the Occupy movement wants and in terms of the workings of our current politico-economic system. I agree with Mr. Hedges and the Occupy movement that our current government is being run largely by corporate america, particularly the financial sector, and that those responsible for our financial crisis and the fraudulent loans that helped cause it should be prosecuted.

I also think that he is right that true conservatives want the restoration of law and the end of corrupt government.

Debt Forgiveness

The reason debt forgiveness or write-downs is a big deal right now is because consumers can't pick up spending if they are buried under a mountain of debt.

The Occupy movement has not called, to my knowledge, specifically for debt forgiveness, but has loosely referred to it in their declaration and elsewhere.

I am in favor of debt forgiveness because of the fraudulent way in which the loans were originally made. Much of the debt for housing taken on by home-buyers and offered by banks was simply fraudulent. The loans were predicated on house prices that were way above trend because of the speculative housing bubble and banks made them despite being well aware they likely wouldn't be paid back. To be fair, it takes two to make a loan, and consumers probably shouldn't have taken on the enormous amount of debt that they did, but when it comes to culpability, I put more of the blame on the bankers because they knew the risks and told people they could make it work anyway.

They told people that they could afford the loans they were handing out and then repackaging and selling to other banks all to make a buck. The bubble finally burst, banks were bailed out, debtors were not. The ones committing fraud were bailed out and not tried for their criminal actions and the ones who fell subject to that fraud are still being held subject to that fraud. They are still required to pay back that debt.

Bankruptcy is an option, and I don't understand bankruptcy laws all that well, but I do know that if you declare bankruptcy your credit score tanks and you've likely sealed your financial fate. Why should people who took on debt because banks gave it to them fraudulently be forced to declare bankruptcy when the banks would have gone bankrupt if not for a federal bailout?

When the government bailed out the banks, they should have also bailed out the debtors by writing down their debt or forgiving it all together. This whole fiasco is a major Moral Hazard problem on both sides and is inherent in unstable Capitalist economies.

The major point is that that debt need not exist. It was created fraudulently and should just go away. Banks will be fine without it and people will be much better off without it. It really might be the only way forward. Debt really is our problem in the U.S., but it's not the government's debt, it's private households' debt.

Consumers can then start spending again, which will increase sales, and increase employment, which will start the cycle back upward. Banks will then be willing to lend to businesses and households again.

It appears conservatives are also considering this option.


In my opinion this shouldn't be a cyclical thing (that would only increase the moral hazard). It should be a one-time write down on housing debt. The bankers responsible should be tried criminally for fraud. No one should be evicted if the bank doesn't have the mortgage and no one should be evicted if the loan was made fraudulently.

From a CST perspective, I think a write-down is necessary out of justice and for the common good. Going forward, banks and households in general need more temperance and a feeling of responsibility both toward debt. That is, a debtor should take on debt responsibly and creditors should only give to debtors responsibly. In our Capitalist economy, that is far from the case. Households often want more than they can afford and banks aren't shy giving it to them if they know they can make a buck and get bailed out if they fail. There is little to no view toward the common good in all of this and is, I think, the major underlying cause of the financial crisis.

UPDATE: I should have said that CST doesn't say anything specific about debt forgiveness. What I'm saying is 'I believe that, given the fraudulent nature of the loans, justice demands some forgiveness and that CST would agree', but it is up to you to apply CST to this situation, or to the Church to teach us how to apply her teaching to this situation. I haven't seen anything from the Church on this particular topic; if you do, please send it to me!


UPDATE UPDATE: This is my reponse to comments because the computer that I am on won't let me comment.

Darwin--I am no expert on these matters, I take my info from my professors. One is a former regulator and expert in financial law and another is a monetary system expert who has studied the workings of the Fed and the Treasury extensively. You can consult the video here and the blog posts of Bill Black at neweconomicperspectives.blogspot.com.

Fr. Damien--I agree with you. I don't know that many student loans are/were fraudulent, but I do think a write down on student loans would be beneficial to the economy. The government is already actively involved in education 'investment' and investing in education is one of the best things you can do for the long run health of the economy. A big write down could be seen as an investment in our future, while at the same time improving things now by clearing consumer debt. I don't know what to do about students earning 'useless' (in terms of finding a job) degrees. That, to me, is unrelated to the fraud I am talking about.

The Family

A common unit of analysis in economics is the household. The household is a buyer of goods and services from firms and a supplier of labor to firms. Yet analysis of the household often doesn't take into consideration the composition or relationships of the household.

In Catholic Social Teaching, the family is the most fundamental institution in society where man first realizes and fulfills his social nature. In this way, the family is more than a unit that provides and buys goods and services, it is the sanctuary of life, the reflection of our Trinitarian God, and very important for our development as persons.

It is no wonder that those who are without a loving family often deal with immense struggles in life. That is not to say that those with a loving family don't have struggles or that those without it can't live life well, but the love and support of a family can go a long way toward helping us live well, whether they be our natural family or our human family.

The Pope recently addressed the “Centesimus Annus Pro Pontifice” foundation about Catholic Social Teaching and the importance of the family.

Pope John Paul II also took up this issue in his encyclical Centesimus Annus:

The first and fundamental structure for "human ecology" is the family, in which man receives his first formative ideas about truth and goodness, and learns what it means to love and to be loved, and thus what it actually means to be a person. Here we mean the family founded on marriage, in which the mutual gift of self by husband and wife creates an environment in which children can be born and develop their potentialities, become aware of their dignity and prepare to face their unique and individual destiny. But it often happens that people are discouraged from creating the proper conditions for human reproduction and are led to consider themselves and their lives as a series of sensations to be experienced rather than as a work to be accomplished. The result is a lack of freedom, which causes a person to reject a commitment to enter into a stable relationship with another person and to bring children into the world, or which leads people to consider children as one of the many "things" which an individual can have or not have, according to taste, and which compete with other possibilities.

It is necessary to go back to seeing the family as the sanctuary of life. The family is indeed sacred: it is the place in which life — the gift of God — can be properly welcomed and protected against the many attacks to which it is exposed, and can develop in accordance with what constitutes authentic human growth. In the face of the so-called culture of death, the family is the heart of the culture of life.

Human ingenuity seems to be directed more towards limiting, suppressing or destroying the sources of life — including recourse to abortion, which unfortunately is so widespread in the world — than towards defending and opening up the possibilities of life. The Encyclical Sollicitudo rei socialis denounced systematic anti-childbearing campaigns which, on the basis of a distorted view of the demographic problem and in a climate of "absolute lack of respect for the freedom of choice of the parties involved", often subject them "to intolerable pressures ... in order to force them to submit to this new form of oppression".78 These policies are extending their field of action by the use of new techniques, to the point of poisoning the lives of millions of defenceless human beings, as if in a form of "chemical warfare".

These criticisms are directed not so much against an economic system as against an ethical and cultural system. The economy in fact is only one aspect and one dimension of the whole of human activity. If economic life is absolutized, if the production and consumption of goods become the centre of social life and society's only value, not subject to any other value, the reason is to be found not so much in the economic system itself as in the fact that the entire socio-cultural system, by ignoring the ethical and religious dimension, has been weakened, and ends by limiting itself to the production of goods and services alone.79

All of this can be summed up by repeating once more that economic freedom is only one element of human freedom. When it becomes autonomous, when man is seen more as a producer or consumer of goods than as a subject who produces and consumes in order to live, then economic freedom loses its necessary relationship to the human person and ends up by alienating and oppressing him.

Recovery largely rests on Debt Relief

No, not government debt, but private household debt. The enormous run-up in private debt that both contributed to the housing bubble and was an effect of the housing bubble is now holding us back from recovery. Households are trying to pay down debt through 'saving' more of their income, but in the aggregate are unable to because of unemployment and the 'paradox of thrift'.

In order for consumers to pick up spending again, they first need an income, and they second need reduced debts. Since the debt run-up was largely fraudulent (on both sides but I hold the creditors more culpable because of their understanding that the loans wouldn't be paid back and that the gov't would subsequently bail them out) I am in favor of some form of debt-forgiveness.

If we do not forgive large amounts of household debt, our recovery may never come. Job creation relies on sales which rely on consumer spending which relies on lower household debt which relies on income which relies on jobs. How can you enter the circle? The gov't can write down large amounts of debt and guarantee a job to all willing and able to work. These policies would, I think, ensure a swift recovery.

Read here for more on debt forgiveness.

The problem with 'economics'

Okay, so I can't claim it is the only problem, but this article written by John Kay of the Financial Times sums up nicely why my discipline has failed to describe the real world and to provide adequate prescriptions for fixing the economy.

You can read the article here.

Wall Street: Investor or Game-player?

Below is a small excerpt from "What is Wall Street?", an article sent to me by one of my professors. It is a year old but still relevant and speaks on one of the major problems that helped contribute to our financial ruin in the United States, including the major losses in pensions of many Americans near retirement.

You can read the full article by clicking on the link above.

Here is the part I wanted to highlight:

Yet Wall Street’s role in financing new businesses is a small portion of what it does. The market for initial public offerings (I.P.O.s) of stock by U.S. companies never fully recovered from the tech bust. During the third quarter of 2010, just thirty-three U.S. companies went public, and they raised a paltry five billion dollars. Most people on Wall Street aren’t finding the next Apple or promoting a green rival to Exxon. They are buying and selling securities that are tied to existing firms and capital projects, or to something less concrete, such as the price of a stock or the level of an exchange rate. During the past two decades, trading volumes have risen exponentially across many markets: stocks, bonds, currencies, commodities, and all manner of derivative securities. In the first nine months of this year, sales and trading accounted for thirty-six per cent of Morgan Stanley’s revenues and a much higher proportion of profits. Traditional investment banking—the business of raising money for companies and advising them on deals—contributed less than fifteen per cent of the firm’s revenue. Goldman Sachs is even more reliant on trading. Between July and September of this year, trading accounted for sixty-three per cent of its revenue, and corporate finance just thirteen per cent.

In effect, many of the big banks have turned themselves from businesses whose profits rose and fell with the capital-raising needs of their clients into immense trading houses whose fortunes depend on their ability to exploit day-to-day movements in the markets. Because trading has become so central to their business, the big banks are forever trying to invent new financial products that they can sell but that their competitors, at least for the moment, cannot. Some recent innovations, such as tradable pollution rights and catastrophe bonds, have provided a public benefit. But it’s easy to point to other innovations that serve little purpose or that blew up and caused a lot of collateral damage, such as auction-rate securities and collateralized debt obligations. Testifying earlier this year before the Financial Crisis Inquiry Commission, Ben Bernanke, the chairman of the Federal Reserve, said that financial innovation “isn’t always a good thing,” adding that some innovations amplify risk and others are used primarily “to take unfair advantage rather than create a more efficient market.”

Pope John Paul II on Socialism

The role of the State is always a hot topic and often comes up in discussions I have with others or in the articles, blogs, etc. that I read.

Many or most people seem to know/believe that socialism is bad. Yet the reason they give is almost invariably that the Soviet experience went very very poorly and that the U.S. experience was clearly much better.

This seems to be de facto evidence of socialism's inability to be a system of organization and of capitalism/libearlism's triumph.

In my studies of both economics and Catholic Social Teaching, however, I have found that many people don't really know why the Church rejects socialism and they also seem to think that welfare or gov't intervention in the economy of any kind is 'socialist'. I also think that Karl Marx gets a bad name for the 'experiment' played out in Russia. That 'Marxism' wasn't what Marx had in mind and that doesn't mean Marx's version was good, but he certainly didn't advocate the authoritarian, police state that was the USSR.

In fact, he really just wanted freedom for the workers from their employers. He wanted better working conditions, choices, and wages for the workers--he wanted them to stop being exploited. He believed that Capitalism would eventually end in Socialism because of its own contradictory nature--accumulation leading to the immiseration of the working class. That said, he was, I believe, misguided in a few ways.


So why, exactly, is Socialism bad?

From Centesimus Annus 12-15 by Pope John Paul II on Rerum Novarum, socialism, and the state:

The commemoration of Rerum novarum would be incomplete unless reference were also made to the situation of the world today.

This is especially confirmed by the events which took place near the end of 1989 and at the beginning of 1990.

Absentee Blogger

I'm really sorry I haven't been able to post in a while. Last week was crazier than crazy and I don't see things letting up for a while, but I'm hoping to pop my head in here and there with a blog post.

But if you're just craving to know more about economics or Catholic Social Teaching there are a myriad of blogs and sources for you to go to! Check out the links on the right, my old blog posts, or the other blogs I follow.

Thanks again for reading!

Indifference to the Poor

Father Raniero Cantalamessa, preacher of the Pontifical Household, gave an address to the Caritas general assembly in May on the Gospel's Social Relevance. You can read the full text here, but I wanted to highlight one part of his address:

Perhaps the greatest sin committed against the poor is indifference, pretending not to see, “passing by on the other side”. (cf. Lk 10, 31). What Jesus objected to in the rich man who feasted sumptuously, was not so much the unbridled luxury of his lifestyle, as his indifference to the poor man lying at his gate.

We tend to set up a kind of double glazing between ourselves and the poor. The effect of double glazing, so much in use today, is to keep out cold and noise. It dilutes everything, deadens and muffles every sound. So it is with the poor: we see them on our TV screens or in the pages of newspapers or missionary magazines, but their cries are a distant echo that never reaches our hearts. We protect ourselves from them. In rich countries, the very words “the poor” provoke the same agitation and panic as the cry “Barbarians!” aroused in the inhabitants of ancient Rome. They built walls and sent armies to watch their borders. We do the same thing, in different ways, but history tells us it is all to no avail.

So the first thing to do in relation to the poor is to break through the double glazing, to overcome our indifference and insensitivity. We need to let our defences down and be overwhelmed by a healthy anxiety in face of the fearful misery there is in the world. As Pope Paul VI wrote in Evangelica testificatio, ”The persistence of poverty-stricken masses and individuals is a pressing call for conversion of minds and attitudes”. The cry of the poor obliges us “to awaken consciences to the drama of misery and to the demands of social justice made by the Gospel and the Church”[5].

In the incarnation of the Word, the “problem of the poor” has taken on a new dimension in history; it has become a Christological question too. Jesus of Nazareth identified himself with them. He who pronounced the words: “This is my body” over the bread, has spoken the same words with reference to the poor. He spoke them when, talking about what people had done or failed to do for the hungry, the thirsty, prisoners, the naked or the stranger, he solemnly declared “You did it to me” and “you failed to do it to me” (cf Mt 25, 31 ff). This is the same as saying: “You remember that ragged person who needed a piece of bread, that poor person holding out his hand – it was me, it was me!”

I remember the first time the full force of this truth “exploded” within me. I was preaching in a third-world country, and with each new scene of misery I saw - a child in a tattered dress, her face covered in flies; groups of people running after a refuse cart, hoping to pick up something dumped on the garbage heap; a body covered in sores – I heard a voice booming inside me: “This is my body. This is my body”. It took my breath away.

The poor person is Jesus, still wandering the world unrecognised. It’s a little like when, after the resurrection, He appeared in other guises – to Mary as a gardener, as a pilgrim to the disciples on the way to Emmaus, to the apostles on the lake as someone walking on the shore –, waiting for “their eyes to be opened”. On one occasion, the first person to recognise Him called out to the others: “It is the Lord!” (Jn 21, 7). Oh, if only we too, on seeing a poor person, would exclaim even once, with the same cry of recognition: “It is the Lord”, it is Jesus!

It is so important to not only see Jesus in the poor, but to see the poor as Jesus. We need to break down our double glazing, share the pain and burden of the poor, and ease that burden through acts of charity that go beyond simply giving them money or things. This is at the heart of living the Gospel, has been a constant message of Catholic Social Teaching, and is what we are all called to do as persons created in the image and likeness of God.

More on the History of Money

I don't know if these are boring you, but I am deeply fascinated by this topic, because it seems as if my profession has gotten it wrong for the past 100 years or longer. Most economics textbooks will tell you money sprang forth naturally from barter to solve the 'double coincidence of wants' problem made evident in Adam Smith's Wealth of Nations. Austrian economists and 'goldbugs' really seem to like this interpretation of the history of money, but the evidence seems to be against this view.

David Graeber, an anthropologist (not an economist), recently authored a book called ‘Debt: The First 5,000 Years’ and has made some waves in the media. I posted an interview on PBS a couple weeks ago.

Note that this history of debt/money is already very much a part of MMT and in line with the findings of A. Mitchell Innes almost a century ago. I can't wait to read his book, but until then, I recommend his post at Naked Capitalism in which he responds to a pro-Austrian economist who argued against his findings.

Full post here: David Graeber on the Invention of Money

Highlights:

First, the history:

1) Adam Smith first proposed in ‘The Wealth of Nations’ that as soon as a division of labor appeared in human society, some specializing in hunting, for instance, others making arrowheads, people would begin swapping goods with one another (6 arrowheads for a beaver pelt, for instance.) This habit, though, would logically lead to a problem economists have since dubbed the ‘double coincidence of wants’ problem—for exchange to be possible, both sides have to have something the other is willing to accept in trade. This was assumed to eventually lead to the people stockpiling items deemed likely to be generally desirable, which would thus become ever more desirable for that reason, and eventually, become money. Barter thus gave birth to money, and money, eventually, to credit.

Employment for All Debate: My Response to Darwin

Great response from DarwinCatholic. I’ll outline my response similar to his. [You can find my proposal and the first of this series here.]

Unemployment/Job searching

I agree that job searching is a good thing in the short term. My proposal is not meant to replace unemployment insurance or job searching. I think unemployment insurance should be made available to those who choose to remain unemployed and search for a job vs. being hired into the job guarantee program so that the worker can search for a higher paying job or one that more closely suits their interests or skill set.

So you could offer unemployment insurance for a few months or even up to year at which point the gov’t could remove the insurance in order to create incentive to join the program over free-riding unemployed. The guaranteed job at a low living wage would always be there for them, some could choose to remain unemployed, but it is their choice, thus eliminating all involuntary unemployment.

Make work/sticky jobs

The program is designed to pay workers a minimum living wage, to provide goods and services that would otherwise be unprovided, and to increase the skills and hire-ability of the workers in the program. That is, a major part of the program is getting them back into the private sector by providing them with the skills necessary to do so. So, no, there isn’t a future in the program, the future is out of the program; we really don’t want them in the program and should do what it takes to get them out.

I do think that there may be “lifers”, that is, those who like the job and the pay would never want to leave, but I wouldn't say it is a free-riding issue as might be the case of other welfare programs. It is a guaranteed opportunity to provide for oneself and one's family by working, not a case of getting something for nothing. Other welfare programs should fill any inadequacy of the job guarantee program in providing the minimum level of goods and services necessary to maintain the person's dignity that is his by virtue of him being a person created in the image and likeness of God. So I don't think free-riding will be an issue, and I don't think that "lifers" are a problem, either.

The program should increase their future earnings by preventing the deterioration of skills caused by unemployment and by providing them with new skills in sectors that are hiring.

Inflation

This is a much trickier area of argument and again it gets a little ‘wonkish’ so please stick with me. MMT is very correct in my view on how finances work and what money is, etc., but when it comes to inflation there is much less certainty. Though I do believe MMTers still have a better idea of how inflation works than most mainstream economists.

Darwin provides a neat example of how injecting reserves into an economy via government spending is inflationary. I have no bone to pick there, government spending of its very nature is inflationary. But I think he is ignoring or overlooking the deflationary tendencies/factors. Taxes are deflationary for example. They drain the economy of reserves (money). Net desired aggregate saving is also deflationary. Investment equals saving in the private sector (necessarily), but if the private sector wants to net save financial assets, which is expected to be the normal case, then this is also deflationary (the savings must either come from the public sector through federal government deficits or a trade surplus).

Drops in consumer spending are also deflationary. So when consumers are paying down debts and increasing saving in the wake of a crisis they bring about a deflationary tendency by lowering aggregate demand (note this is no different than saying they desire higher net saving). Also note that this deflationary factor shows up more often as slack in the economy rather than price decreases, that is, firms decrease output more so than they decrease prices.

Increasing aggregate supply also is deflationary as would be the case if unemployed workers are put to work in a job guarantee program.

Inflation is more complicated than ‘too much money chasing too few goods’. There are many tendencies at work. A simple closed economy example cannot nail down all the tendencies and cannot say which will outweigh the others.

Darwin also brings up ‘value’ which is much trickier than inflation to pinpoint. Is it subjective? Objective? Both? Neither? Material? Supernatural? Both? Neither? Valuable in that it serves needs? Wants? Both? Neither?...etc. Value is the question that has flummoxed economists since before Adam Smith. I would argue that the ‘value’ that Darwin introduces here is subjective (as opposed to objective), which is in line with mainstream economics but has some problems, not the least of which is that it is based purely in the mind on the imaginary, incalculable concept of ‘utility’ (hence its subjectivity).

So, I don’t reject Darwin’s argument that net gov’t deficits are inflationary, but I do disagree that the program I propose would bring about inflation let alone hyper-inflation. It is not simply more money chasing a less ‘valuable’ amount of goods. There are other forces at work. The program is designed to work as a buffer stock by fixing the price of low skilled labor and letting quantity float much like the gold standard did except that low skilled labor is a much more pervasive ‘commodity’ in American production and is the ‘commodity’ hit hardest by crises. The fixed wage would temper aggregate demand during booms by anchoring wages and the prices of goods whose production involve low skilled labor and would prevent large drops in aggregate demand during crises by guaranteeing a wage to anyone willing and able to work for that wage.

The nature of a buffer stock would help anchor prices just like the gold standard. The difference between a labor buffer stock and a gold buffer stock is that labor is more pervasive and important and also that it necessarily guarantees full employment just as a gold standard ‘employed’ all gold. So full employment and greater price stability is achieved.

This to me is a great ‘side-product’ of the program, whose main attraction to me is providing an opportunity for men and women to provide for themselves and their families in times when the private sector is unwilling to do so.

Socialist caluculation problem/Administration difficulties

Here I suggest that the jobs that the workers will do be based on their skills and the needs of the community. I recommend a county level administrator who can assess the skills of the workers and the needs of the community and even ask for applications from the community who know their needs better than an administrator would. To me, the biggest problem the job guarantee program faces is administration, much like all gov’t programs. There will no doubt be some politics involved and some skewed motives/incentives on the part of workers and administrators. My opinion, however, is that the administration difficulties are outweighed by the benefits of the program—full employment and price stability.

Discipline of workers is absolutely necessary to prevent shirking as in all private sector jobs. There must be ability to fire workers with conditions placed on re-hiring.

Convicted criminals could also be an issue in the form of limiting what they can do (they couldn’t work in a classroom as an assistant, e.g.), but ex-criminals can provide for society and indeed this program may help rehabilitate criminals who would otherwise not find work in society once outside of prison.

Dignity of the job guarantee program

I disagree with Darwin here that dignity of work is solely tied to a sense of providing value to society. I believe that the dignity of work involves providing value for society, but also in providing for oneself and one’s family and in the spiritual, moral development of the worker. I also believe this is what CST says as well.

I think that there are many, many “make-work” jobs that would provide substantial amounts of ‘value’ to society and provide the worker with dignity. I do think that there might be some that feel they are getting a check to do nothing valuable for society, but I believe that to be the case with some jobs in the private sector as well. I hope that through time and our example they will realize that there is dignity in all kinds of work, even picking up trash.

Structural Adjustment?

I don’t think that the long term unemployment we are experiencing is a structural adjustment; rather, I am strongly convinced that the drop in employment caused by the financial crisis is cyclical and NOT structural. In other words, the roughly 5% unemployed before the crisis are maybe structurally unemployed (mismatch of skills and jobs), but the increases in unemployment caused by the crisis are because of the drop in overall demand, not an Austrian sectoral re-balancing.


I really appreciate Darwin taking on the task of engaging in a debate over a topic I have studied more intensely than he has. He brought up excellent points and I’m glad to debate with someone willing to understand a new/alternative perspective. I, too, have benefited greatly from this conversation.

But now I want to know, what do you think?

A Colossal Hoax

U.S. bankruptcy that is...I've been saying this for a while now, but Susan Feiner from the University of Southern Maine wrote a nice article on modern money about a month ago that is probably a better explanation than what I offer.

From EconIntersect

Readers put on your thinking caps and learn something new about money.

Modern money—not the old fashioned, greasy kid’s stuff—follows uber modern rules, rules which have been misrepresented/misunderstood in the coverage of Washington’s debt-ceiling hysteria.

First things first: no matter how much money we’re talking about, there’s nothing there—not gold not silver. At best, a few reams of green paper.

Follow up:
For some folks the fact that there’s nothing there is intolerable. “How,” they wonder, “can money be so important, and so insubstantial?”

That’s modern money. When was the last time your pay (if you still have a job, there are 29.2 million unemployed or underemployed in the US today) was cash in an envelope? Like 99.9% of Americans you get paid by check or a direct deposit.

Someone working for your boss tapped on a keyboard (just like the keyboard I’m typing on now), to initiate a transaction that put ‘money’ in your checking account by taking ‘money’ out of your boss’s checking account.

That money is just a click, an electronic blip, your ability to keep bread on the table and a roof over your head, an ineffable nothing, and the root of all evil.

“Get out! No way! Susan, you’ve gone loony tunes.”

The United States is sovereign in its own currency. (Note to readers: this is just a fancy way of saying that the US is the only entity in the world that can create dollar denominated money. Japan and Mexican have similar monopolies on yen and pesos.) Our government creates, spends, borrows, and pays interest in dollars.

Clerks at the US Treasury enter numbers into computers that record plusses in federal agency accounts. When agencies spend—more keyboard clicks—other bank accounts are credited, then those account owners spend their money.

Next, people like you and me drive on roads, attend public school, drink clean water, fly on safe planes, and eat food checked for deadly bacteria. Myriad other necessities flow from Congressionally authorized Treasury clicks: fire and safety officers ready at a moment’s notice to come to our rescue, energy delivered via the nation’s grid powers our appliances, Social Security checks feed our seniors, and infectious diseases are checked when kids are vaccinated.

Of course people work (caveat: those 29.2 million people are still unemployed), businesses earn profits (well yeah, it’s a lot harder to do this when there are 29.2 million unemployed), consumers spend and banks’ lend.

But, as frustratingly insubstantial as it may seem, the wheels of commerce are greased by nothing more than these accounting clicks.

“You’ve got to be kidding me. My business has cash reserves of six months.”

“Sure you do. Is that reserve—coin plus currency—buried in the backyard? Or is it on deposit at a bank? If the former, send me your address! If the latter, baby you’ve got blips. You run your business by telling the bank what to do with your blips.”

As I said, money is nothing. Money is everything. And that’s true in spades for the federal government.

We are in a different place than is the government, because you and I will die. At that point, our estates will be settled: if our assets (positive blips) are greater than our liabilities (negative blips), then our heirs inherit. If the reverse occurs, then nobody gets anything. Ditto for business bankruptcies—paying off creditors requires asset liquidation.

There’s nothing comparable to death for the US. The national analogy—revolution or an invasion/occupation—would render dollars useless, no longer accepted for purchases or paying debts.

Bankruptcy is simply not possible. As long as the debts owed by the US government are dollar denominated debts, we can always create all the dollars we need.

Yep, you’re right. Creating dollars ad infinitum could cause repercussions. But that’s not what we’re talking about. The topic is bankruptcy … running out of the money needed to pay our dollar denominated debts. That is impossible, short of a self-destructive decision not to pay the debt.

The inflation boogie man can be put to bed, as well. If we create money to retire debt, we are “printing money” that has already been spent. (That’s what debt is: money - oops, blips - that has been spent.) It has already supplied whatever inflation it could. Offsetting those blips that have already been spent cannot produce any inflation. This is what the “mobs” are missing.

If you’re just about to pull out your hair because you are thinking …. “this woman, what a dimwit, if we created all this ‘money’ no one in the world would lend us a dime” .…, relax.

The interest rate the US is paying on its debt is at a historic lows. Globally, cash rich (oops, make that blip rich) investors are queuing up to lend to us. In fact, on August 1 (the day before we hit the debt ceiling) the world’s investors were paying America for the privilege of lending us money. Negative interest! I am not making this up. Markets ain’t worrying ‘bout federal borrowing or money creation.

And you shouldn’t be either. Le deficit es mort. Viva le deficit.

Discretionary Problem

A major problem with fiscal stimulus (government spending increases or tax decreases) is their discretionary nature. "Well, duh" you might say, but it does seem overlooked at times so I thought I'd write a post about it.

First, for those who might need a primer here, 'fiscal stimulus' refers to the federal government's ability to stimulate overall demand in the economy by increasing its spending or decreasing its taxes. Note the opposite is also true--gov'ts can 'destimulate' by decreasing spending or increasing taxes. There are two levers: taxes and spending. They can be used to increase demand or decrease it (there is debate over how effective each are, but that debate is outside the scope of this post and in fact part of the discretionary problem).

Our congressmen and president often disagree on composition of spending and levels of spending as well as on types of taxes and levels of taxes in general, but that problem comes to the fore when there is need for fiscal stimulus in times of low overall demand (the signs of which are unemployment, underutilized capital,...you know, just a bad looking economy...like the one we have now).

The time it takes for Congress to agree on stimulus measures and then the time it takes to implement those measures are major obstacles to the timeliness and benefits of the stimulus. The stimulus measures passed by Bush and Obama were largely ineffective because of their size, composition, and speed of implementation. All things that discretion create or worsen.

Spending and tax levers can be effective business cycle stabilizers, but the discretion government holds over them largely eradicates this potential and this is one of if not THE major argument of those who would rather government stay out of trying to 'fix' the economy. [This discretionary problem is also found in setting monetary policy and is why there is a debate among economists over whether the Central Bank should follow rules or use their own discretion to set interest rates].

Part of the attraction of my job guarantee proposal is that it eliminates a large part of the need for this discretion, first of all, by guaranteeing full employment and secondly, by tempering aggregate demand. Deficits (through both levers) would adjust to hold down aggregate demand in booms and prop it up during busts...automatically, without discretion.

Discretion would still hold sway over tax levels and types and over the composition and levels of government spending (and indeed over the program itself), but the need for discretionary fiscal stimulus would largely be eradicated. Politicians would be relieved of the burden of curing the economy and could focus on more important things such as deciding appropriate tax levels for different income groups or what government should even spend their money on to begin with, as well as social policies, international relations, etc.

I think that sounds pretty nice, what do you think?

Employment For All Debate: Darwin's Response

Darwin has posted his response to my proposal for a job guarantee program where the Federal gov't acts as an Employer of Last Resort to ensure full employment and impart greater price stability on our economy than the current system.

I will hopefully respond to his response shortly. In the meantime, I recommend the previous post on an alternative to Obama's inadequate job proposal.

Obama's Jobs Proposal Inadequate

Highlights from L. Randall Wray and Stephanie Kelton's critique of and alternative to Obama's jobs proposal via truthdig.com:

On Thursday night Barack Obama will deliver his highly anticipated jobs speech. At this point, only those closest to the president know exactly how he intends to help spur the economy and create jobs, but reports suggest that he is mulling a $300 billion jobs package that includes more of the same—a one-year extension of the payroll tax cut, a continuation of unemployment benefits, some additional spending on infrastructure and tax incentives to encourage businesses to hire and invest in new capital. Too little of what will work and too much of what won’t for an economy that’s teetering on the brink of a double-dip recession and a president who is running out of time to deliver jobs.

There’s little doubt that extending unemployment benefits will help those who are struggling to find work. But continuing the payments we’re already making doesn’t add a single dollar of new demand to the economy. Nor does extending the payroll tax cut, which simply allows workers to keep the extra 2 percent they’ve already been getting. There will be no boost in consumer spending from these measures, although they account for more than half of the $300 billion plan the president is said to be considering. For the same price tag, the president could do something truly different—he could eliminate unemployment altogether.

The job market is much worse than the official numbers suggest. Officially, we’ve got 14 million unemployed Americans looking for jobs—about four job seekers for every job vacancy. But those 14 million Americans are also competing with 8.8 million part-time workers who are hoping to land a full-time job. Since the recession began, employers have cut so many hours from the workweek that it is equivalent to the loss of a million more jobs. Add to that the roughly 2.6 million people who gave up looking for a job, and you’ve got about 25 million people needing more work and an economy that is creating no new jobs.

Whatever the president promises, it is certain to be too little, too late. Indeed, as Eric Tymoigne has shown, by some measures job performance since the start of the “recovery” has been even worse than during the Great Depression. At the rate we’re going, it will take nine years to return to the pre-recession employment level; by contrast, in the 1930s the jobs lost in the aftermath of the Great Crash had been fully restored within seven years. The difference was the New Deal, which created jobs for 13 million Americans. President Obama has never displayed any Rooseveltian sense of purpose and he will not propose any comprehensive job creation programs like the New Deal’s WPA and the CCC.

The problem is that the president believes we can cure our jobless problem by providing the proper incentives to the business community. And here he is committing one of the few big policy blunders from Lyndon Johnson’s War on Poverty. Like Johnson, who focused on retraining the unemployed for jobs that did not exist, Obama has focused on incentivizing the businesses community to hire workers to produce for customers that do not exist. Time and again, Obama has shown that he will only tinker around the edges, relying on the same tired supply-side initiatives that will not work: more incentives to build business confidence, subsidies to reduce labor costs and to promote exports, and maybe even tax cuts to please Republicans.

Economists and policymakers alike appear to believe that if we can only improve the outlook of our entrepreneurs, they will suddenly begin hiring. And the Republicans warn of the depressing effects of Obamacare, Dodd-Frank regulations and EPA restrictions that damage the sentiments on Wall Street.

The truth is simple and contrary to these views. Business will not hire more workers until it has more sales. Consumers will not spend more until they’ve got more jobs. A private-sector recovery requires 300,000 new jobs every month. But the private sector doesn’t need 300,000 new workers per month to meet prospective sales.

The new jobs can only come from the federal government—the only economic entity that can afford to hire. Obama’s 1 million infrastructure jobs is a nice down payment, but it is only three month’s worth. New workers will create the sales that firms need to justify new hiring. Still, we must think bigger if we are to create 20 million jobs.

When it comes to the health and welfare of a nation, there is no economic policy that is more important than job creation. And yet decades of experience, in nations across the globe, provide ample evidence that while the private sector plays an important role, it cannot by itself provide employment for all who want to work.

There is a way to do that: The government could serve as the “employer of last resort” under a job guarantee program modeled on the WPA (the Works Progress Administration, in existence from 1935 to 1943 after being renamed the Work Projects Administration in 1939) and the CCC (Civilian Conservation Corps, 1933-1942). The program would offer a job to any American who was ready and willing to work at the federal minimum wage, plus legislated benefits. No time limits. No means testing. No minimum education or skill requirements.

The program would operate like a buffer stock, absorbing and releasing workers during the economy’s natural boom-and-bust cycles. In a boom, employers would recruit workers out of the program; in a slump the safety net would allow those who had lost their jobs to continue to work to preserve good habits, making them easier to re-employ when activity picked up. The program would also take those whose education, training or job experience was initially inadequate to obtain work outside the program, enhancing their employability through on-the-job training. Work records would be maintained for all program participants and would be available for potential employers. Unemployment offices could be converted to employment offices, to match workers with jobs in the program, and to help private and public employers recruit workers.

Funding for the job guarantee program must come from the federal government—and the wage should be periodically adjusted to reflect changes in the cost of living and to allow workers to share in rising national productivity so that real living standards would rise—but the administration and operation of the program should be decentralized to the state and local level. Registered not-for-profit organizations could propose projects for approval by responsible offices designated within each of the states and U.S. territories as well as the District of Columbia. Then the proposals should be submitted to the federal office for final approval and funding. To ensure transparency and accountability, the Labor Department should maintain a website providing details on all projects submitted, all projects approved and all projects started.

To avoid simple “make-work” employment, project proposals could be evaluated on the following criteria: (a) value to the community; (b) value to the participants; (c) likelihood of successful implementation of project; (d) contribution to preparing workers for employment outside the program.

The program would take workers as they were and where they were, with jobs designed so that they could be performed by workers with the education and training they already had, but it would strive to improve the education and skills of all workers as they participated in the program. Proposals would come from every community in America, to employ workers in every community. Project proposals should include provisions for part-time work and other flexible arrangements for workers who need them, including but not restricted to flexible arrangements for parents of young children.

In truth, the $300 billion the president might propose Thursday is more than enough to jump-start our economy if it is really targeted to job creation. We can estimate the total program cost at $20,000 per worker, times 15 million workers. That adds up to a $300 billion gross cost, less savings on unemployment compensation (roughly $150 billion), welfare and food stamps, as well as the social cost of depression, divorce, abuse and crime. A direct job creation program modeled on the New Deal’s WPA could create 15 million jobs for less than $300 billion net spending, while also providing the infrastructure and public services required to bring our nation into the 21st century.

And because the job guarantee is designed not to compete with other employment options, the program would not result in the bidding up of wages (and prices) as workers were absorbed into the buffer stock. This is because the job guarantee program would hire only those that the market was not yet ready to employ. Because the program would not intensify competition for workers, it would not lead to wage-push inflation. It would, however, help to stabilize output and employment by establishing a floor on wages.

The program should be permanent, offering a good job at a basic wage to anyone who wants to work. With recovery, the number of jobs required in the program would quickly shrink, as the private sector would ramp up hiring as sales to consumers rise.

By keeping the program in place even once the economy recovered, we’d ensure continuous full employment, with the job program acting as a “buffer stock” that absorbed workers laid off when the private sector contracted and as an employment recruitment pool when private sector hiring resumed. In this way, full employment is maintained through the thick and thin of the business cycle.

Only jobs will create the infrastructure we need to compete in the 21st century. And we cannot restore the security needed to turn around expectations, to get the sales the private sector needs, with anything less than a nationwide universal jobs program.

The $300 billion “investment” in a direct jobs program would be the best way to prove that President Obama is committed to resolving the jobs crisis.

Employment for All

A friend I have met in the blogosphere, known as DarwinCatholic (or sometimes just Darwin) has agreed to engage in a debate with me over a federal job guarantee program.

It's a policy I feel very strongly about, because I feel that not only is it possible to achieve both full employment and price stability (low inflation) in the U.S. but also that an ‘employer of last resort’ (ELR) or ‘job-guarantee program’ is the key to obtaining those goals.

Here is my very truncated argument (it is very difficult to make this argument in a short blog post, but I'm gonna give it a shot):


1) Full employment is desirable.

Okay, obvious I know, but this goal isn't just desirable for the obvious reasons (greater economic prosperity and efficiency, lower crime, higher education, less poverty, etc.) it's also desirable because man develops as a person through his work. As Pope John Paul II said, work enables a man to become “more a human being” for “virtue is something whereby man becomes good as man” – Centesimus Annus pp.9. Denying someone an opportunity to work, to feed his family and develop as a person is a grave evil that should be avoided if doing so doesn't bring about other greater evils.


2) Price stability is desirable.

Okay, this one may not be quite as obvious, but is still pretty obvious. We want price stability because it brings about greater overall stability to the society. Not knowing how much your dollar is going to be worth tomorrow adds to the already uncertain conditions we live in and would make the economy much more volatile. High inflation also erodes the value of savings, thus punishing savers. Price instability is not near as grave an evil as unemployment, but the results of price instability can be, so it too should be avoided if it all possible.


3) The Catholic Church has in several instances mandated societies to provide for decent work for all willing and able to work.

In Rerum Novarum, Pope Leo XIII wrote, “Among the several purposes of a society, one should be to try to arrange for a continuous supply of work at all times and seasons.”

In Quadragesimo Anno Pope Pius XI wrote, “But another point, scarcely less important, and especially vital in our times, must not be overlooked: namely, that the opportunity to work be provided to those who are able and willing to work.”

In Caritas in Veritate, Pope Benedict XVI wrote, “The dignity of the individual and the demands of justice require, particularly today, that economic choices do not cause disparities in wealth to increase in an excessive and morally unacceptable manner, and that we continue to prioritize the goal of access to steady employment for everyone.”

4) Economists have long thought that achieving both is very difficult if not impossible.

They call this the Phillips Curve. As unemployment goes lower and lower, inflation gets higher and higher. The opposite is also true. This relationship has held pretty well, with shifts in the curve occurring frequently, often times upon the onset of a recession. So full employment, that is everyone willing and able to work having a job, is NOT possible without accelerating inflation. Instead economists have shot for a low level of unemployment they called the NAIRU (non-accelerating inflation rate of unemployment) that would bring about the lowest unemployment possible without stimulating increasing inflation. This NAIRU has also shifted over the years, although economists don't really know what the number really is. They can only guess based upon the evidence they receive, which is why the number is constantly being revised.

Somewhat ironically, despite this perceived impossibility, the Humphrey-Hawkins Act of 1978 gave the Federal Reserve Bank the dual mandate of full employment and price stability.


5) So despite the desirability of full employment and price stability and the mandates given by the US gov't and the Catholic Church (which granted doesn't really carry much sway in the US), economists believe the goals to be incompatible. The best they think we can accomplish is some low rate of unemployment with some low rate of inflation.

I say, however, that it IS possible to achieve both and that to do so, the government would have to play an active role as an employer of last resort providing a job to anyone willing and able to work at a living wage.


6) To understand how this is possible, one first has to understand money. I argue that money is not a commodity like gold, but a token or debt/credit relation, a promise to pay, and has been for the past 4000 years at least. There have been periods in history where gov'ts fixed the currency to a commodity, but what made it the acceptable form of money used in that nation was the government's demand for it in payment of taxes, not the weight of metal in the coin. (Read here and herefor more on the history of money).

In nations where the gov't doesn't fix their currency to a commodity or another currency, that is, in nations with a sovereign fiat currency, there is no constraint to government spending. The issuer of the currency defines the currency and cannot go bankrupt or default on its obligations.

So going bankrupt or spending more than it "brings in" is not a reason we can't have full employment. I also argue that there is nothing inherently wrong with deficits. I argue that they don't crowd out private spending by raising interest rates (the central bank controls interest rates), they do not burden future generations, and they do not lead to financial ruin or a weak currency.

Deficits are expected to be the norm due to the private sector's desire to net save financial assets. To do so, the private sector must run a trade surplus (exports>imports) or the government must run a deficit.

Deficits can be too high, however. When they are too high they can be inflationary, so it is still necessary to show how inflation wouldn't ensue with such a program.


[This part gets kinda wonkish, so stick with me!]
7) The job guarantee program would act as a 'buffer stock'. That is, it would anchor prices by fixing the price for low-skilled labor and let the quantity of said labor in the program float.

I argue that the gov’t doesn’t have to pay the market price when it buys goods and services. If it offers a lower price suppliers may refuse to sell to the gov’t inciting a deflationary cycle, if the gov’t offers a higher price an inflationary cycle may set in.

It would not be wise to try and fix the price for everything it buys (the effects of which would be quite destabilizing and have major distributional changes). Instead it could fix the price of an important commodity letting the quantity float which would also mean the gov’t deficit would float with it. By fixing an important price, one that enters as a major cost in the private sector, the gov’t would impart some price stability to the economy and by letting the deficit float counter-cyclically the gov’t would fill any demand gap created when private sector spending is too low.

The best commodity to fix the price of, I argue, is low-skilled or unskilled labor. This will stabilize private sector wages and thus costs and prices. Employment in the program will increase when private sector employment decreases. When private sector spending picks back up, employees will be hired out of the job guarantee program back into the private sector.

The recommended wage for the program would start with the minimum wage and be ratcheted up until what is deemed a living wage is reached. Starting at a minimum wage and ratcheting it up to a living wage minimizes the one-time adjustment and subsequent adjustments in all other relative prices.

Such a policy guarantees full employment, a counter-cyclical deficit to fill any demand gap left by the private sector, and impart greater price stability than the current system.


8) Like any gov’t program, such a program is not without challenges. It is unwise to assume that gov’t would ever be perfect, we humans are not, so why would an institution created by us be perfect?

The ELR is not slavery, only those willing and able to work will be hired. It is not meant to replace welfare, but will likely replace a large amount of unemployment insurance and some other welfare spending as people earn their way out of need. ELR workers can be fired with restrictions placed on re-hiring; there will need to be discipline. This program will not resolve all economic problems, but will likely improve a great deal of them.

There are plenty of different jobs ELR workers can perform: companions to the elderly, classroom assistants, safety monitors, neighborhood cleaners, low-income housing restorers, day care assistants, library assistants, environmental safety monitors, artists or musicians, and many, many more. These jobs may not all ‘produce’ as much as they are paid and I have many arguments to address this, but is it not better to offer someone a job at a living wage who will produce something rather than give someone unemployment insurance for nothing?

I argue that it would be best to run the program at the county level with the Federal gov’t simply writing the check. I believe this is in line with the CST’s principle of subsidiarity.

Admittedly this a very non-orthodox approach to economics, but is one which I believe to be far more accurate than the mainstream’s belief that reaching the two goals of full employment and price stability is impossible. The key I believe is in the understanding of money and gov’t finance. This program does not favor ‘bigger government’ but rather a government that proactively works for the common good according to the principle of subsidiarity. Understanding how modern money works is neither republican nor democrat. Once it is understood how modern money works it seems natural to come to the conclusion that the gov’t should have a job guarantee program. Whether gov’t should be active in other areas is a matter left to further debate and is outside the scope of this argument.

It is impossible to address all the objections to the program in such a short post, so I’ll turn it over to my fellow debater to object and point out weaknesses and then respond to them.

You can read his response here. [Link will be posted shortly].