Friday, July 1, 2011

The truth is, neither side gets it...

The debate surrounding deficits is still very misplaced and our nation's understanding of government finance is so terribly inadequate. Actually, it's not inadequate, it's downright wrong.

Both sides are calling for a reduction is deficits, but in reality, the government does not need to balance its budget and there need not be any harmful effects of not balancing the budget. In fact, there are very harmful effects of attempting to balance the budget or reduce the deficit.

We have massive unemployment and underutilization of resources needlessly RIGHT NOW and are doing the opposite of what can and should be done. This is why it is so important to understand how our monetary system works.


The government can NEVER go bankrupt, to declare it voluntarily is just pure insanity. It's simply saying "I have the money but I ain't gonna pay you."

The government doesn't need our tax dollars or funds raised by bonds to spend! Our tax dollars and their bond sales drain the economy of reserves (money)! Their spending injects our economy with reserves! (If you're worried about inflation, I can explain why that won't be a problem either in another post).

Taxes function to create a demand for our currency and to allocate REAL resources to the government. Bonds simply function as a monetary policy tool, to adjust the federal funds rate to the level the central bank has chosen.

Borrowing and spending now does NOT hurt or put the burden on our children in the form of raised taxes in the future! The government does not need to ever pay off its debt! It doesn't even have to make the interest payments on the bonds (though not doing so would have an effect on interest rates).

Not deficit spending now WILL/DOES have an effect on us now, in the form of unemployment and underutilized resources, and on our children, in the form of lost potential output.

If you want to challenge me on ANY of these I welcome it and strongly encourage you to do so! Knowing all of this is so very important and teaching it to family and friends so that they can pass it on and eventually demand it from our politicians is imperative! WE DO NOT HAVE TO REMAIN UNEMPLOYED AND UNDERUTILIZED!

Here's more from Marshall Auerback:

Deficit control and deficit reduction [is the aim], despite the fact that at present, the US has massive excess capacity including millions of unemployed and underemployed, a negative contribution from net exports, and a stagnant private spending growth horizon. Yet the President marches on, oblivious to the harm his policies would introduce to an already bleeding economy, using the tired analogy between a household and a sovereign government to support his tired arguments.

Discussion of government budget deficits often begins with an analogy to a household’s budget, and the President continues that horrible pattern of misinformation. Obama challenged the view that the government might side-step the debt ceiling constraint by just paying “interest on the debt” and said:

"This is the equivalent of me saying, you know what, I will choose to pay my mortgage, but I’m not going to pay my car note. Or I’m going to pay my car note but I’m not going to pay my student loan. Now, a lot of people in really tough situations are having to make those tough decisions. But for the U.S. government to start picking and choosing like that is not going to inspire a lot of confidence. "

Let’s state it again: households do not have the power to levy taxes, to issue the currency we use, and to demand that those taxes are paid in the currency it issues. Rather, households are users of the currency issued by the sovereign government. Here the same distinction applies to private businesses, which are also users of the currency. There’s a big difference, as all us on this blog have repeatedly stressed: Users of a currency do face an external constraint in a way that a sovereign issuer of its currency does not.

Typical is this statement from the President:

"I do think that the steps that I talked about to deal with job growth and economic growth right now are vitally important to deficit reduction. Just as deficit reduction is important to grow the economy and to create jobs — well, creating jobs and growing the economy also helps reduce the deficit. If we just increased the growth rate by one percentage point, that would drastically bring down the long-term projections of the deficit, because people are paying more into the coffers and fewer people are drawing unemployment insurance. It makes a huge difference."

The President has the causation here totally backward. A growing economy, characterized by rising employment, rising incomes and rising capacity utilization causes the deficit to shrink, not the other way around. Rising prosperity means rising tax revenues and reduced social welfare payments, whereas there is an overwhelming body of evidence to support the opposite – cutting budget deficits when there is slack private spending growth and external deficits will erode growth and destroy net jobs.

Consider the comments of Senate Minority Leader, Mitch McConnell:

"What Republicans want is simple: We want to cut spending now, we want to cap runaway spending in the future and we want to save our entitlements and our country from bankruptcy by requiring the nation to balance its budget. We want to finally get our economy growing again at a pace that will lead to significant job growth."

Like the President, McConnell evidently also feels that the US government can run out of dollars or, at the very least, computer keyboards to mark up or down the numbers in our national accounts. This is the only way one could make sense of his nonsensical bankruptcy comments. This perverse inability to distinguish between issuers and users of currencies is a disease which afflicts members of both parties and largely explains the willingness to hack away at what’s left of the American social welfare net (the President unilaterally disarming his party on Medicare before securing a single concession from the GOP). Change you can believe in! And the President wonders why his base is totally dispirited!

Let’s be clear: the government creates 'money' whenever it spends; it destroys 'money' whenever it taxes. The issue, which the President should be out and front explaining, is whether or not its spending too much or taxing too little. With a rising unemployment rate, and a huge reserve of underemployed and disadvantaged workers, it is the height of insanity to cut spending overall which is what the US President is claiming is an important and urgent policy goal when there is so much idle productive capacity. Yet both the President and his Republican negotiators on the other side of this issue take it as a given that public debt per se is an unalloyed evil that should be eliminated as a long term policy goal. That is only possible if the external surplus is large enough. Otherwise, if you attempt to achieve that stage via fiscal cutbacks the policy strategy will undermine employment and growth. The upshot is that the budget deficit is likely to rise because the slowing economy will undermine tax revenue.

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