Christian Economics

Pope Quotes 3-1-12

2012-03-01T14:34:00.003-06:00

I have been as busy as ever, so I apologize for little posting lately. I also feel I have tended to emphasize economics more than Catholic Social Teaching lately, so strapped for time and desiring to spread the Church's teaching on economics and other social issues I decided to start a new series called "Pope Quotes". I hope you find the series informative and helpful!

On food shortages or famine, as has been occurring in East Africa and happens elsewhere around the world even outside of weather/climate-induced famines:

"Life in many poor countries is still extremely insecure as a consequence of food shortages, and the situation could become worse: hunger still reaps enormous numbers of victims among those who, like Lazarus, are not permitted to take their place at the rich man's table, contrary to the hopes expressed by Paul VI. Feed the hungry (cf. Mt 25: 35, 37, 42) is an ethical imperative for the universal Church, as she responds to the teachings of her Founder, the Lord Jesus, concerning solidarity and the sharing of goods. Moreover, the elimination of world hunger has also, in the global era, become a requirement for safeguarding the peace and stability of the planet.

Hunger is not so much dependent on lack of material things as on shortage of social resources, the most important of which are institutional. What is missing, in other words, is a network of economic institutions capable of guaranteeing regular access to sufficient food and water for nutritional needs, and also capable of addressing the primary needs and necessities ensuing from genuine food crises, whether due to natural causes or political irresponsibility, nationally and internationally." -- Pope Benedict XVI, Caritas in Veritate, pp. 27 (emphasis added)

On inequality and protection of the working class for the good of society:

"But although all citizens, without exception, can and ought to contribute to that common good in which individuals share so advantageously to themselves, yet it should not be supposed that all can contribute in the like way and to the same extent. No matter what changes may occur in forms of government, there will ever be differences and inequalities of condition in the State. Society cannot exist or be conceived of without them... We have insisted, it is true, that, since the end of society is to make men better, the chief good that society can possess is virtue. Nevertheless, it is the business of a well-constituted body politic to see to the provision of those material and external helps 'the use of which is necessary to virtuous action.'"

"Now, for the provision of such commodities, the labor of the working class - the exercise of their skill, and the employment of their strength, in the cultivation of the land, and in the workshops of trade - is especially responsible and quite indispensable. Indeed, their co-operation is in this respect so important that it may be truly said that it is only by the labor of working men that States grow rich.

Justice, therefore, demands that the interests of the working classes should be carefully watched over by the administration, so that they who contribute so largely to the advantage of the community may themselves share in the benefits which they create-that being housed, clothed, and bodily fit, they may find their life less hard and more endurable. It follows that whatever shall appear to prove conducive to the well-being of those who work should obtain favorable consideration. There is no fear that solicitude of this kind will be harmful to any interest; on the contrary, it will be to the advantage of all, for it cannot but be good for the commonwealth to shield from misery those on whom it so largely depends for the things that it needs." -- Pope Leo XIII, Rerum Novarum, pp. 34 (emphasis added)

On the true value of work (and the reason why I feel full employment is of greater importance than material well-being):

"It only means that the primary basis of the value of work is man himself, who is its subject. This leads immediately to a very important conclusion of an ethical nature: however true it may be that man is destined for work and called to it, in the first place work is "for man" and not man "for work". Through this conclusion one rightly comes to recognize the pre-eminence of the subjective meaning of work over the objective one. Given this way of understanding things, and presupposing that different sorts of work that people do can have greater or lesser objective value, let us try nevertheless to show that each sort is judged above all by the measure of the dignity of the subject of work, that is to say the person, the individual who carries it out.

On the other hand: independently of the work that every man does, and presupposing that this work constitutes a purpose-at times a very demanding one-of his activity, this purpose does not possess a definitive meaning in itself. In fact, in the final analysis it is always man who is the purpose of the work, whatever work it is that is done by man-even if the common scale of values rates it as the merest "service", as the most monotonous even the most alienating work." -- Pope John Paul II, Laborem Exercens, pp. 6.6 (emphasis added)

Scary? Facts about the Debt

2012-02-17T10:51:00.000-06:00

Saying these are facts about the debt is one thing, but to call them 'scary' is to put needless fear into Americans. My comments are in red.

As President Obama unveiled the 2013 fiscal year budget, the nation's financial situation came back into sharp focus. Experts say partisan gridlock in Washington means the budget will probably go nowhere.

Considering this is an election year, however, expect politicians to harp on facts, figures and terms that most Americans weren't taught in high school. To help out, it's time to dredge up lots of scary facts to make you pay attention.

Before we get going, a quick primer on the number TRILLION:

$1 trillion = $1,000 billion or $1,000,000,000,000 (that's 12 zeros) very true

How hard is it to spend a trillion dollars? If you spent one dollar every second, you would have spent a million dollars in 12 days. At that same rate, it would take you 32 years to spend a billion dollars. But it would take you more than 31,000 years to spend a trillion dollars.

And now, some scary (She still hasn't said why it is scary) facts about the debt and the deficit -- some basics:

Deficit = money government takes in -- money government spends very true

2012 US deficit = $1.33 trillion still see no problem here, it is not causing inflation and our economy is still not doing that well

2013 Proposed budget deficit = $901 billion this may actually not be enough to grow our economy, still too far away to tell for sure

National debt = Total amount borrowed over time to fund the annual deficit sort of true, the debt is meant to 'fund' the deficit, but isn't necessary to do so. Issuing debt is a way for the Fed to maintain interest rate targets, not a necessary means for raising funds. The government can spend without taxes or issuing debt.

Current national debt = $15.3 trillion (or $49,030 per every man, woman and child in the US or $135,773 per taxpayer) True, but thinking of it this way is misleading. We will never have to fork over $49,000 to pay it off. Most of it isn't due for years to come and doesn't ever have to paid off at anyone one moment. Plus, the national debt=national savings. That means there is $15.3 trillion dollars of US bonds in the hands of the private sector, of which they are earning interest on.

OK, let's get started! Here is her official list of "scary" facts

1. The U.S. national debt on Jan. 1, 1791, was just $75 million dollars. Today, the U.S. national debt rises by that amount about once an hour. Which increases total savings and boosts the economy

2. Our nation began its existence in debt after borrowing money to finance the Revolutionary War. President Andrew Jackson nearly eliminated the debt, calling it a "national curse." Jackson railed against borrowing, spending and even banks, for that matter, and he tried to eliminate all federal debt. By Jan. 1, 1835, under Jackson, the debt was just $33,733.

3. When World War II ended, the debt equaled 122 percent of GDP (GDP is a measure of the entire economy). In the 1950s and 1960s, the economy grew at an average rate of 4.3 percent a year and the debt gradually declined to 38 percent of GDP in 1970. This year, the Office of Budget and Management expects that the debt will equal nearly 100 percent of GDP. These numbers are meaningless. It doesn't really matter how much of GDP our debt is, what matters is the health of our economy. Increasing our national debt to improve our economy is a good thing, not a bad thing. It only becomes a bad thing when it causes inflation, but that will happen only when the economy is over-heating from doing too well. At that point we must stop increasing the debt, but the debt-to-GDP ratio is meaningless for a country sovereign in its own currency.

4. Since 1938, the national debt has increased at an average annual rate of 8.5 percent. The only exceptions to the constant annual increase over the last 62 years were during the administrations of Clinton and Johnson. (Note that this is the rate of growth; the national debt still existed under both presidents.) During the Clinton presidency, debt growth was almost zero. Johnson averaged 3 percent growth of debt for the six years he served (1963-69). These administrations were followed by bad recessions in the early 70s and early 2000s. Decreasing the debt by going into surplus budgets or even just diminishing deficits takes away income from the economy which is likely to cause recession.

5. When Ronald Reagan took office, the U.S. national debt was just under $1 trillion. When he left office, it was $2.6 trillion. During the eight Regan years, the US moved from being the world's largest international creditor to the largest debtor nation. Growth was pretty solid in the 80s too, but much (almost all) of that growth went to the top through tax cuts and defense spending.

6. The U.S. national debt has more than doubled since the year 2000.

Under President Bush: At the end of calendar year 2000, the debt stood at $5.629 trillion. Eight years later, the federal debt stood at $9.986 trillion.

Under President Obama: The debt started at $9.986 trillion and escalated to $15.3 trillion, a 53 percent increase over three years.

A lot of that went toward bailing out big banks and businesses and this still hasn't been enough to grow the economy.

7. FY 2013 budget projects a deficit of $901 billion in 2013, representing 5.5 percent of GDP, down from a deficit of $1.33 trillion in FY 2012, which was the fourth consecutive year of more than $1 trillion dollar deficits.

8. The U.S. national debt rises at an average of approximately $3.8 billion per day.

9. The US government now borrows approximately $5 billion every business day.

10. A trillion $10 bills, if they were taped end to end, would wrap around the globe more than 380 times. That amount of money would still not be enough to pay off the U.S. national debt.

The only things scary about these numbers is that their enormous size still isn't big enough to grow the economy.

11. The debt ceiling is the maximum amount of debt that Congress allows for the government. The current debt ceiling is $16.394 trillion effective Jan. 30, 2012. A useless ceiling. Our national government cannot go bankrupt. It faces no insolvency issues because it is the issuer of the money it needs to pay its bills. So when that debt comes due, it has no problem paying it off. Capping it arbitrarily serves no useful purpose and often causes fear or even panic if it is taken seriously.

12. The U.S. government has to borrow 43 cents of every dollar that it currently spends, four times the rate in 1980. I'm assuming she means that the other 57 cents is paid for by taxes, but in reality taxes aren't collected by the government. Paying in taxes destroys money from balance sheets. Spending by government creates it.

Don't be scared by the national debt. Remember that it equals savings for anyone who holds that debt, that the government cannot go bankrupt, and that we never at any one moment have to fork over the money to pay it off. We should be worried about full employment and income distribution, not the debt. Don't be fooled by these scare tactics and this fear mongering.

And again, this doesn't mean I support 'big government'. The issue is the growth of the economy which relies on spending which in part relies on the deficit to plug any holes in aggregate demand caused by saving and other leakages. If the deficit isn't large enough to fill the gap caused by these leakages then we can expect a recession (or a debt driven bubble followed by a financial crisis and then recession). If you want smaller government, then you shouldn't support a balanced budget amendment, but rather a decrease in total spending and taxes.

Full article by Jill Schlesinger here.

Are we leaving our debt to our children?

2012-02-16T14:55:00.000-06:00

I think this article by Dean Baker at Truthout explains fairly well how our national debt isn't a transfer of stuff now for debt later. Our lack of using all our productive capability is a real cost to our future generations. The (federal) debt only becomes a burden to future generations if paying the interest on that debt leads to inflation, where too much money is flooding the markets to compete for real goods and resources. The US debt clock is, to the penny, the amount of savings in bonds that the private sector holds and is not something we have to pay off out of our own pockets or that has to be taxed from us to pay off because the government doesn't need tax dollars to spend. The threat is inflation, not insolvency. We should focus on full employment growth and stable prices, not the mythical 'burden' of our debt.

Here are some highlights:

It's budget time, again. This means that the deficit hawks will be out in force warning us about the devastating debt burden that we are passing on to our children. So that this Halloween fright gang doesn't needlessly cause any kids to lose sleep, here's what parents can tell their children.

First, it is important to tell your kids that the national debt is not in any way a measure of intergenerational transfers from the young to the old. Debt is also an asset to the people who own the bonds. At some point, everyone who is alive today will be dead, which means that the bonds they own will be passed on to their or someone else's children and grandchildren.

Our children and grandchildren might owe the debt, but they will also be receiving the interest paid on the debt. There can be an issue of distribution within future generations (e.g. Bill Gates' descendants own all the debt), but that is a question of inequality within generations, not between generations. So, when you hear the deficit hawks ranting about the $15 trillion debt that we are passing on to our kids, you can tell your children that we are passing on $15 trillion in government bonds to our children.

Of course, some of the debt is held by foreigners. Many of the deficit hawks have been harping on the China menace, running scary ads about how the Chinese are going to own the United States in 20 or 30 years.

While the debt service paid on the bonds held by foreigners will be a drain in future years, there are two important points to keep in mind. First, the outflow on interest payments on bonds held by foreigners is still quite small by any measure.

The second and more important point is that foreign ownership of government bonds and US assets more generally is determined by the trade deficit, not the budget deficit. It is our $600 billion annual trade deficit that gives China and other countries the means to buy up government bonds and other US assets.

The trade deficit is in turn primarily the result of an overvalued dollar. This means that if the deficit hawks were really worried about foreigners owning too much of the US economy then they should be railing about the overvalued dollar, not the budget deficit. When the deficit hawks rant about China owning the US, they are either confused or being dishonest.

There are certainly times when deficits can make our children poorer than they otherwise would be. If the economy were operating near its potential, and the deficits had the effect of raising interest rates and pulling money away from private investment, then the economy would be less productive in the future as a result of the deficit.

However, the relevant measure here is not the deficit or debt, but productivity growth: the rate at which the economy is getting more efficient. Productivity has continued to grow at close to a 2.5 percent annual rate, meaning that the economy is getting more efficient at a relatively rapid pace.

This is not surprising, since it is absurd to imagine that current deficits are pulling money away from private investment. Interest rates are at near rock-bottom levels. Given the huge amounts of excess capacity in most sectors, it is likely that the deficits are actually increasing investment by increasing demand. In this sense, deficits are making our children richer. This would be even more true insofar as the deficits are being run to build infrastructure or to finance education and training; all of which will make the economy more productive in the future.

Suppose that we eliminated $1 trillion of our debt burden by selling off public roads and allowing private companies to charge tolls. Are future generations better off by this huge reduction in the debt burden?

They aren't in any obvious way. In fact, depending on the terms of the deal, selling off public assets to reduce the debt could in fact lead to much higher economic costs for future generations. These costs just would not show up as public debt.

This point should sound familiar to people. There have been several prominent cases of asset sales of exactly this sort. For example, Indiana's Gov. Mitch Daniels sold off the Indiana toll road to reduce that state's debt. In my hometown, former Mayor Richard Daley sold off a 75-year lease of Chicago's parking meters to a consortium led by Morgan Stanley. This reduced the city's debt, but did not necessarily benefit either current or future generations of Chicagoans.

There are other ways in which the government imposes future burdens that are not at all captured in budget numbers. Patent and copyright monopolies are, in effect, a way that the government allows individuals and corporations to get a claim to future income flows to promote innovation and creative work.

The more items that are subject to such protection, the greater the burden will be on future generations. We pay roughly $300 billion a year for prescription drugs that would sell for $30 billion a year in a free market without patent protection. This is equivalent to a tax of $270 billion on prescription drugs (at 1.8 percent of gross domestic product) that is paid to the drug companies because of a government-imposed patent monopoly.

Safety Net full of Holes

2012-02-15T16:34:00.002-06:00

Looks like our safety net has some holes in it and could use some repair:

From this article at the NY Times:

"...across the nation, the government now provides almost $1 in benefits for every $4 in other income. Older people get most of the benefits, primarily through Social Security and Medicare, but aid for the rest of the population has increased about as quickly through programs for the disabled, the unemployed, veterans and children.

The government safety net was created to keep Americans from abject poverty, but the poorest households no longer receive a majority of government benefits. A secondary mission has gradually become primary: maintaining the middle class from childhood through retirement. The share of benefits flowing to the least affluent households, the bottom fifth, has declined from 54 percent in 1979 to 36 percent in 2007, according to a Congressional Budget Office analysis published last year.

And from this article also in the NY Times via Yahoo:

"...the new study suggests that the recent recession did not cause any significant increase in the share of benefits flowing to the poor, as might once have been expected.

The study found that older people received slightly more than half of government benefits, while the nonelderly with disabilities received an additional 20 percent. These benefits are not means-tested - indeed, better-paid workers get more in Social Security.

Furthermore, the study notes that politicians have shifted benefits away from the "jobless poor," through reductions in traditional welfare, and increased benefits for working families, for example through tax credits. The government also has steadily expanded eligibility for benefit programs.

"The safety net became much more work-based," wrote Arloc Sherman and his collaborators at the center, a left-leaning research group. "In addition, the U.S. population is aging, which raises the share of benefits going to seniors and people with disabilities."

Our safety net could use some reform and I'm still in favor of a job for everyone who wants one. It would do a lot more for the people its meant to help and for the country as a whole. I think it's a matter of justice and charity that we help the poor, but first of all justice, because we cannot give to the poor what rightfully belongs to them:

Charity goes beyond justice, because to love is to give, to offer what is “mine” to the other; but it never lacks justice, which prompts us to give the other what is “his”, what is due to him by reason of his being or his acting. I cannot “give” what is mine to the other, without first giving him what pertains to him in justice. If we love others with charity, then first of all we are just towards them.--Caritas In Veritate, pp. 6

What is just is a matter of debate, but I think it would be good to start here.

Functional Finance: Govt ≠ Household

2012-02-14T11:44:00.001-06:00

This post probably explains better than I can why the government is not like a household and what good finance really means for the government. Full post here.

Highlights:

FUNCTIONAL FINANCE: Monetary and Fiscal Policy for Sovereign Currencies
By L. Randall Wray

This week we begin a new topic: functional finance. This will occupy us for the next several blogs. Today we will lay out Abba Lerner’s approach to policy. In the 1940s he came up with what he called the functional finance approach to policy. In one of those amazing historical coincidences, Lerner happened to teach at UMKC when he published one of his most famous papers, laying out the approach. Maybe there is something special in the air in Kansas City?

Lerner posed two principles:

First Principle: if domestic income is too low, government needs to spend more. Unemployment is sufficient evidence of this condition, so if there is unemployment it means government spending is too low.

Second Principle: if the domestic interest rate is too high, it means government needs to provide more “money”, mostly in the form of bank reserves.

The idea is pretty simple. A government that issues its own currency has the fiscal and monetary policy space to spend enough to get the economy to full employment and to set its interest rate target where it wants. (We will address exchange rate regimes later; a fixed exchange rate system requires a modification to this claim.) For a sovereign nation, “affordability” is not an issue—it spends by crediting bank accounts with its own IOUs, something it can never run out of. If there is unemployed labor, government can always afford to hire it—and by definition, unemployed labor is willing to work for money.

Lerner realized that this does not mean government should spend as if the “sky is the limit”—runaway spending would be inflationary (and, as discussed many times in the MMP, it does not presume that government spending won’t affect the exchange rate). When Lerner first formulated the functional finance approach (in the early 1940s), inflation was not a major concern—the US had recently lived through deflation in the Great Depression. However, over time, inflation became a serious concern, and Lerner proposed a form of wage and price controls to constrain inflation that he believed would result as the economy nears full employment. Whether or not that would be an effective and desired way of attenuating inflation pressures is not our concern here. The point is that Lerner was only arguing that government should use its spending power with a view to moving the economy toward full employment—while recognizing that it might have to adopt measures to fight inflation.

Lerner rejected the notion of “sound finance”—that is the belief that government ought to run its finances as if it were like a household or a firm. He could see no reason for the government to try to balance its budget annually, over the course of a business cycle, or ever. For Lerner, “sound” finance (budget balancing) was not “functional”—it did not help to achieve the public purpose (including, for example, full employment). If the budget were occasionally balanced, so be it; but if it never balanced, that would be fine too. He also rejected any attempt to keep a budget deficit below any specific ratio to GDP, as well as any arbitrary debt to GDP ratio. The “correct” deficit would be the one that achieves full employment.

Similarly the “correct” debt ratio would be the one consistent with achieving the desired interest rate target. This follows from his second principle: if government issues too much debt, it has by the same token issued too few bank reserves and cash. The solution is for the treasury and central bank to stop selling bonds, and, indeed, for the central bank to engage in open market purchases (buying treasuries by crediting the selling banks with reserves). That will allow the overnight rate to fall as banks obtain more reserves and the public gets more cash.

The functional finance approach of Lerner was mostly forgotten by the 1970s. Indeed, it was replaced in academia with something known as the “government budget constraint”. The idea is also simple: a government’s spending is constrained by its tax revenue, its ability to borrow (sell bonds) and “printing money”. In this view, government really spends its tax revenue and borrows money from markets in order to finance a shortfall of tax revenue. If all else fails, it can run the printing presses, but most economists abhor this activity because it is believed to be highly inflationary. Indeed, economists continually refer to hyperinflationary episodes—such as Germany’s Weimar republic, Hungary’s experience, or in modern times, Zimbabwe—as a cautionary tale against “financing” spending through printing money.

Note that there are two related points that are being made. First, government is “constrained” much like a household. A household has income (wages, interest, profits) and when that is insufficient it can run a deficit through borrowing from a bank or other financial institution. While it is recognized that government can also print money, which is something households cannot do, these is seen as extraordinary behaviour—sort of a last resort. There is no recognition that all spending by government is actually done by crediting bank accounts—keystrokes that are more akin to “printing money” than to “spending out of income”. That is to say, the second point is that the conventional view does not recognize that as the issuer of the sovereign currency, government cannot really rely on taxpayers or financial markets to supply it with the “money” it needs. From inception, taxpayers and financial markets can only supply to the government the “money” they received from government. That is to say, taxpayers pay taxes using government’s own IOUs; banks use government’s own IOUs to buy bonds from government.

This confusion by economists then leads to the views propagated by the media and by policy-makers: a government that continually spends more than its tax revenue is “living beyond its means”, flirting with “insolvency” because eventually markets will “shut off credit”. To be sure, most macroeconomists do not make these mistakes—they recognize that a sovereign government cannot really become insolvent in its own currency. They do recognize that government can make all promises as they come due, because it can “run the printing presses”. Yet, they shudder at the thought—since that would expose the nation to the dangers of inflation or hyperinflation. The discussion by policy-makers—at least in the US—is far more confused. For example, President Obama frequently asserted throughout 2010 that the US government was “running out of money”—like a household that had spent all the money it had saved in a cookie jar.

The belief that the government must balance its budget over some timeframe is likened to a “superstition” that is necessary to scare the population into behaving in a desired manner. Otherwise, voters might demand that their elected officials spend too much, causing inflation. Thus, the view that balanced budgets are desirable has nothing to do with “affordability” and the analogies between a household budget and a government budget are not correct. Rather, it is necessary to constrain government spending with the “myth” precisely because it does not really face a budget constraint.

The US (and many other nations) really did face inflationary pressures from the late 1960s until the 1990s (at least periodically). Those who believed the inflation resulted from too much government spending helped to fuel the creation of the balanced budget “religion” to fight the inflation. The problem is that what started as something recognized by economists and policymakers to be a “myth” came to be believed as the truth. An incorrect understanding was developed.

Originally the myth was “functional” in the sense that it constrained a government that otherwise would spend too much, creating inflation and endangering the dollar peg to gold. But like many useful myths, this one eventually became a harmful myth—an example of what John Kenneth Galbraith called an “innocent fraud”, an unwarranted belief that prevents proper behaviour. Sovereign governments began to believe that the really could not “afford” to undertake desired policy, on the belief they might become insolvent. Ironically, in the midst of the worst economic crisis since the Great Depression of the 1930s, President Obama repeatedly claimed that the US government had “run out of money”—that it could not afford to undertake policy that most believed to be desired. As unemployment rose to nearly 10%, the government was paralysed—it could not adopt the policy that Lerner advocated: spend enough to return the economy toward full employment.

Ironically, throughout the crisis, the Fed (as well as some other central banks, including the Bank of England and the Bank of Japan) essentially followed Lerner’s second principle: it provided more than enough bank reserves to keep the overnight interest rate on a target that was nearly zero. It did this by purchasing financial assets from banks (a policy known as “quantitative easing”), in record volumes ($1.75 trillion in the first phase, with a planned additional $600 billion in the second phase). Chairman Bernanke was actually grilled in Congress about where he obtained all the “money” to buy those bonds. He (correctly) stated that the Fed simply created it by crediting bank reserves—through keystrokes. The Fed can never run out “money”; it can afford to buy any financial assets banks are willing to sell. And yet we have the President (as well as many members of the economics profession as well as most politicians in Congress) believing government is “running out of money”! There are plenty of “keystrokes” to buy financial assets, but no “keystrokes” to pay wages.

That indicates just how dysfunctional the myth has become.

Interesting Video

2012-02-10T18:07:00.000-06:00

I think this is an interesting video and is a pretty good understanding of our current situation, both in Europe and in the U.S.:

Hijacking Christianity

2012-02-01T22:13:00.000-06:00

This article was written by Aryeh Spero a few days ago in the Wall Street Journal. These types of articles really bother me, particularly because I feel that he is hijacking Christianity to justify a position he feels strongly about rather than critically analyzing society in light of the teaching of the Bible in order to make it better. Capitalism has its strengths, but it isn't without weaknesses, and to say that Christianity or the Bible endorses it, I think, is very wrong-headed if not out-right ridiculous. This doesn't mean that I think Christianity endorses socialism, but I certainly don't think our brand of capitalism is the best we can come up with to follow the teachings of Bible. To say that Christianity specifically endorses capitalism, is, I think, to be like one of the Pharisees and is extremely dangerous because people can come away from reading this thinking that this is indeed what Christ told us.

Spero's article can be read here (and below): What the Bible Teaches About Capitalism. My comments are in red.

Who would have expected that in a Republican primary campaign the single biggest complaint among candidates would be that the front-runner has taken capitalism too far? As if his success and achievement were evidence of something unethical and immoral? President Obama and other redistributionists must be rejoicing that their assumptions about rugged capitalism and the 1% have been given such legitimacy.

More than any other nation, the United States was founded on broad themes of morality rooted in a specific religious perspective. We call this the Judeo-Christian ethos, and within it resides a ringing endorsement of capitalism as a moral endeavor.

I disagree that within Christianity resides a "ringing endorsement of capitalism as a moral endeavor". The Bible does not endorse 'self-interested' individuals, nor does it endorse the accumulation of riches, and both are hallmarks of capitalism.

Regarding mankind, no theme is more salient in the Bible than the morality of personal responsibility, for it is through this that man cultivates the inner development leading to his own growth, good citizenship and happiness. The entitlement/welfare state is a paradigm that undermines that noble goal.

This is a bold statement. I could propose other themes that might be more salient, e.g. love--the true gift of self to God and to others. I also don't equate entitlement with welfare as he does. A sense of entitlement does undermine the morality of personal responsibility and public welfare programs can certainly cause that, but they can also enable people to be personally responsible who would otherwise be unable to because they aren't afforded much of an opportunity in our capitalist society.

The Bible's proclamation that "Six days shall ye work" is its recognition that on a day-to-day basis work is the engine that brings about man's inner state of personal responsibility. Work develops the qualities of accountability and urgency, including the need for comity with others as a means for the accomplishment of tasks. With work, he becomes imbued with the knowledge that he is to be productive and that his well-being is not an entitlement. And work keeps him away from the idleness that Proverbs warns leads inevitably to actions and attitudes injurious to himself and those around him.

No major qualms here, though I prefer the language of Pope John Paul II in Laborem Exercens. Here is one snippet:

And yet, in spite of all this toil-perhaps, in a sense, because of it-work is a good thing for man. Even though it bears the mark of a bonum arduum, in the terminology of Saint Thomas, this does not take away the fact that, as such, it is a good thing for man. It is not only good in the sense that it is useful or something to enjoy; it is also good as being something worthy, that is to say, something that corresponds to man's dignity, that expresses this dignity and increases it. If one wishes to define more clearly the ethical meaning of work, it is this truth that one must particularly keep in mind. Work is a good thing for man-a good thing for his humanity-because through work man not only transforms nature, adapting it to his own needs, but he also achieves fulfilment as a human being and indeed, in a sense, becomes "more a human being".

And in regard to capitalism and work:

But in the light of the analysis of the fundamental reality of the whole economic process-first and foremost of the production structure that work is-it should be recognized that the error of early capitalism can be repeated wherever man is in a way treated on the same level as the whole complex of the material means of production, as an instrument and not in accordance with the true dignity of his work-that is to say, where he is not treated as subject and maker, and for this very reason as the true purpose of the whole process of production.

Yet capitalism is not content with people only being laborers and holders of jobs, indistinguishable members of the masses punching in and out of mammoth factories or functioning as service employees in government agencies. Nor is the Bible. Unlike socialism, mired as it is in the static reproduction of things already invented, capitalism is dynamic and energetic. It cheerfully fosters and encourages creativity, unspoken possibilities, and dreams of the individual. Because the Hebrew Bible sees us not simply as "workers" and members of the masses but, rather, as individuals, it heralds that characteristic which endows us with individuality: our creativity.

I don't disagree here with the creativity part. Capitalism certainly affords us freedoms that an authoritarian communism proved unable to, but it can also take away freedoms from the working (or non-working) poor if they are not given a just opportunity to succeed. I would argue that there are many poor people who have less freedoms and opportunities than their wealthier counterparts within the United States.

Also, the Bible does not see us simply as individuals. We are certainly autonomous and responsible for our own morality, but we are also social and responsible for the morality of others. Individualism is one of what Pope Pius XI called the 'twin rocks of shipwreck' (collectivism the other).

At the opening bell, Genesis announces: "Man is created in the image of God"—in other words, like Him, with individuality and creative intelligence. Unlike animals, the human being is not only a hunter and gatherer but a creative dreamer with the potential of unlocking all the hidden treasures implanted by God in our universe. The mechanism of capitalism, as manifest through investment and reasoned speculation, helps facilitate our partnership with God by bringing to the surface that which the Almighty embedded in nature for our eventual extraction and activation.

Again, the individuality. I believe all (or most?) Christians believe in the Trinitarian God where God is not an individual, but three persons in one God. If, as we believe, we are made in His image, then we are also autonomous, yet social beings. I think using our creativity for good can be seen as facilitating our relationship with God, but using our creativity to make ourselves rich is hardly what God has asked us to do.

Capitalism makes possible entrepreneurship, which is the realization of an idea birthed in human creativity. Whereas statism demands that citizens think small and bow to a top-down conformity, capitalism, as has been practiced in the U.S., maximizes human potential. It provides a home for aspiration, referred to in the Bible as "the spirit of life."

I think he makes a big jump here from our current government, or even to what liberal-minded people want out of government, to statism. Asking for help from our government (which is or is supposed to be of, for, and by the people in the United States) is not the same thing as the government controlling our every move. Welfare programs aren't statism. That doesn't mean they are perfect, but it also doesn't mean that welfare state=soviet union. I agree that freedoms are good, but I think we have to ask if capitalism is actually providing those freedoms or if our government is safeguarding those freedoms.

The Bible speaks positively of payment and profit: "For why else should a man so labor but to receive reward?" Thus do laborers get paid wages for their hours of work and investors receive profit for their investment and risk.

The Bible, the Word of God, and most directly the Gospel, also warns the rich man that it will be very difficult for him to enter the Kingdom of God (Matthew 19:24) and also that we should not accumulate treasures for ourselves here on earth (Matthew 6:19).

The Bible is not a business-school manual. While it is comfortable with wealth creation and the need for speculation in economic markets, it has nothing to say about financial instruments and models such as private equity, hedge funds or other forms of monetary capitalization. What it does demand is honesty, fair weights and measures, respect for a borrower's collateral, timely payments of wages, resisting usury, and empathy for those injured by life's misfortunes and charity.

I am not sure where it is comfortable with wealth creation or the need for speculation in economic markets, that one really baffles me.

It also demands transparency and honesty regarding one's intentions. The command, "Thou shalt not place a stumbling block in front of the blind man" also means that you should not act deceitfully or obscure the truth from those whose choice depends upon the information you give them. There's nothing to indicate that Mitt Romney breached this biblical code of ethics, and his wealth and success should not be seen as automatic causes for suspicion.

I really don't know if Romney came by his wealth "honestly" or not, but his attitude toward his riches is concerning.

No country has achieved such broad-based prosperity as has America, or invented as many useful things, or seen as many people achieve personal promise. This is not an accident. It is the direct result of centuries lived by the free-market ethos embodied in the Judeo-Christian outlook.

I am not saying the free market wasn't apart of this, but the U.S. has also had many other advantages in achieving its prosperity including the slavery of thousands and thousands of natives and Africans for over 100 years (going back to before the revolution).

Furthermore, only a prosperous nation can protect itself from outside threats, for without prosperity the funds to support a robust military are unavailable. Having radically enlarged the welfare state and hoping to further expand it, President Obama is attempting to justify his cuts to our military by asserting that defense needs must give way to domestic programs.

I don't think Obama has to cut funding to either, as you can see in my posts about the deficit and the job guarantee program.

Both history and the Bible show the way that leads. Countries that were once economic powerhouses atrophied and declined, like England after World War II, once they began adopting socialism. Even King Solomon's thriving kingdom crashed once his son decided to impose onerous taxes.

I would hardly say England has atrophied and declined. It may no longer be the Empire of the world, but is that a bad thing? They are also much smaller and populated than the U.S., how have they 'declined'? And many socialists would be quite angry that you call their government 'socialism'. Again, I think there is an enormous leap here from Bible to big government=collapse that isn't really backed up by evidence.

At the end of Genesis, we hear how after years of famine the people in Egypt gave all their property to the government in return for the promise of food. The architect of this plan was Joseph, son of Jacob, who had risen to become the pharaoh's top official, thus: "Joseph exchanged all the land of Egypt for pharaoh and the land became pharaoh's." The result was that Egyptians became indentured to the ruler and state, and Joseph's descendants ended up enslaved to the state.

Many on the religious left criticize capitalism because all do not end up monetarily equal—or, as Churchill quipped, "all equally miserable." But the Bible's prescription of equality means equality under the law, as in Deuteronomy's saying that "Judges and officers . . . shall judge the people with a just judgment: Do not . . . favor one over the other." Nowhere does the Bible refer to a utopian equality that is contrary to human nature and has never been achieved.

I agree that the Bible doesn't call for everyone to be monetarily equal. Rather, it calls for people to share from their abundance to take care of all humanity, because we are all in this together. So, if there is enormous inequality in capitalism and there are people dying of starvation, could we say that the rich are sharing as the Bible tells them to? The Bible says it's okay to own multiple homes while others are suffering because they can't find a job because capitalism doesn't offer everyone a job who wants to work?

The motive of capitalism's detractors is a quest for their own power and an envy of those who have more money. But envy is a cardinal sin and something that ought not to be.

Envy is a cardinal sin. But how is it envious to desire that the poor be given their dignity? I don't want socialism, but I'm not okay with justifying a system that consistently and atrociously denies a living to a great proportion of its people.

God begins the Ten Commandments with "I am the Lord your God" and concludes with "Thou shalt not envy your neighbor, not for his wife, nor his house, nor for any of his holdings." Envy is corrosive to the individual and to those societies that embrace it. Nations that throw over capitalism for socialism have made an immoral choice.

Envy is corrosive, but why is it capitalism or socialism? There aren't varying degrees of government involvement in between complete laissez-faire and complete authoritarianism? Nations that worship 'mammon' over God have made an immoral choice.

UPDATE: I failed to notice that the author of this article is a Jewish Rabbi. Much of what I said above may not apply to Judaism, I'm not really sure what they accept, if any, of Christ's teachings, or the New Testament. Still, he mentions Christianity, and I don't think the Old Testament is a big supporter of selfishness or accumulation of riches at the expense of others either.

Preferential Option for the Poor(est)

2012-01-23T18:30:00.002-06:00

A few weeks ago I went to a presentation at a group called the "Community of Reason" held on Sunday afternoons at UMKC. The main presenter was a 'pastor' (not sure of her credentials, i.e., which denomination) from St. Louis who ran a pro-abortion, or from their point of view a pro-women's rights, clinic that offered support to pregnant women considering abortion but concerned about their faith. I went to get an idea of what 'the other side' thought about abortion. In particular, I wanted to see what they thought about human rights and just when they thought human life began. I don't feel I got a clear answer from the group, but they felt attacked when I brought it up peacefully and told me that we pro-lifers frame the issue as a human rights/human nature issue and that they don't see it that way. I believe their main concern was for women's reproductive 'rights' and the abuse of women by men who take away her 'right to choose'. They also were concerned about legal rights and legal issues from a practicality standpoint (e.g. if a fetus has rights then can we prosecute women who drink alcohol or even accidentally 'mistreat' the womb somehow).

I think the biggest thing I took away from the presentation was how attacked she (the pastor) felt she and other women were by pro-lifers. She felt the pro-life community were verbally attacking women considering abortion through staged protests of Planned Parenthood. That the pro-life community was engaged in terrorism or warfare.

I don't believe these sort of actions are true of all pro-lifers, but it is something we should be conscious of. Conversions of heart or mind will not happen if we make those we wish to convert an enemy and treat them as such. Abortion is a very emotionally-charged subject, but we need to remember that charity will prevail. Ostracizing or alienating the other side in whatever the debate may be over is never an effective means of conversion.

The preferential option for the poor is a main principle of Catholic Social teaching which is based on Jesus's teaching in the Gospel of Matthew 25:31-46: '...whatever you did for one of these least brothers of mine, you did for me.’

The poorest in our society are those without the basic necessities of a good life, material and immaterial, and though we usually think of the homeless and hungry in Africa, we must not forget the unloved more locally, including the unborn.

I wrote this piece last year after the March for Life:

A major theme in Catholic Social Teaching is the preferential option the poor. In its simplest this means giving of one's time, talent, and treasure to those with the greatest and most basic human needs. Usually this means the hungry, homeless, and ill members of our society. Most often people picture the citizens of Africa, Central America, or Southeast Asia. One can certainly find the hungry, homeless, and ill prevalent in these places, but our Bishops remind us constantly that the poorest, most defenseless members of our society are also in our own society. They are the unborn:

Abortion and euthanasia have become preeminent threats to human dignity because they directly attack life itself, the most fundamental human good and the condition for all others. They are committed against those who are weakest and most defenseless, those who are genuinely "the poorest of the poor." -- U.S. Bishops, Living the Gospel of Life

Our desire to help the poor should culminate in the eradication of abortion and euthanasia from our society. None of the poor should be neglected, but the poorest must come first. Any violation against the most primary right to life must command our attention before all other violations.

This means more than policy changes. We must reach out to our neighbors and establish relationships with each other. The poor must be given proper care and just means of subsistence to not feel as though abortion is the only option. The greatest contributor to abortion, sexual immorality, must be fought with charity, education, and justice.

Laws which authorize and promote abortion and euthanasia are therefore radically opposed not only to the good of the individual but also to the common good; as such they are completely lacking in authentic juridical validity. Disregard for the right to life, precisely because it leads to the killing of the person whom society exists to serve, is what most directly conflicts with the possibility of achieving the common good. Consequently, a civil law authorizing abortion or euthanasia ceases by that very fact to be a true, morally binding civil law." -- John Paul II, The Gospel of Life, emphasis added

Blood in the Streets

2012-01-20T16:54:00.002-06:00

What Europe is doing to its own people is insane and senseless and its all completely unnecessary.

When the EU nations formed a currency union they gave up the right to be the issuer of their own currency. They thought it would unify Europe (not a bad motive) and provide for a strong currency and robust economy. What they did was send themselves back to the gold standard days leading up to the Great Depression, by greatly restricting their fiscal and monetary policy options by foregoing their right to issue their own currency.

They made themselves like Kansas or Missouri. They couldn't issue 'Marks' (Germany) or 'Drachmas' (Greece) anymore, they had to collect Euros, either by taxing their people or borrowing them from banks.

When the crisis hit, overall spending dropped which then reduced tax revenues. Greece could no longer meets its obligations, it had to borrow. Interest rates on bonds went up making borrowing more costly. With very high interest rates Greece couldn't raise the funds through borrowing to meet its obligations and if it tries to raise more tax revenue it will only further the downward spiral by reducing spending even more. The only option left is to abandon the Euro.

However, the European Central Bank (controlled largely by Germany and France) has been stepping in to 'write the check', that is, lend funds at really low interest rates to Greece so it can meet its obligations, but with the stipulation that Greece 'balance its budget' or move to austerity. For some reason, they don't realize that doing so only contracts the economy further. This cycle has been going on for some time now and its leaving a most horrifying scenario for Greece and other nations on the Euro such as Italy, Portugal, Ireland, and Spain: "Children abandoned by Greek parents as cuts also sees country running out of medicine".

I did not coin this phrase, and can't remember where I heard it, but Greece and these other nations are heading for a 'Blood in the Streets' scenario so long as the ECB keeps writing the check but insisting on austerity. Things will get worse until the people revolt violently.

The U.S. will end up like Greece if we try to balance the budget. We will not end up like Greece if we spend more than we take it, because our government is the issuer of the currency. It is not a household or a state or member of the EU or nation on a gold standard which are users of currency. The message should be clear, but many are confounding it because they misunderstand the nature of 'modern money' (money without fixed exchange rates or gold standards).

If you hear that the U.S. must not spend beyond its means just like a household can't spend beyond its means, ask yourself, "just how exactly is the government like a household?".

The WPA

2012-01-16T15:22:00.001-06:00

I have argued for a Job Guarantee (or Employer of Last Resort) program here on this blog in the past and one of the arguments against such a program is finding useful jobs that aren't just "make-work" jobs (digging ditches is generally the example used). One of my professors who specializes in Economic History and the History of Economic Thought (yes they are different) recently wrote a post on the Works Progress Administration (WPA), a government funded program to employ the unemployed during the Great Depression. You can read the full post here.

Here are some highlights:

In the current debates surrounding various job guarantee programs (in association with the Chartalist or Modern Money perspectives), it might prove helpful to review some aspects of the Works Progress Administration (renamed in 1939 as Work Projects Administration). While the WPA was not a “job guarantee” program, it nevertheless points to a number of issues that are under current discussion, including those of the nature of the projects undertaken, impact on the larger economy, concerns surrounding bureaucratic impediments, etc.

Roosevelt was not a progressive. He ran on a balanced budget platform, and initially attempted to fulfill his campaign promise of reducing the federal budget by slashing military spending from $752 million in 1932 to $531 million in 1934, including a 40% reduction in spending for veteran’s benefits which eliminated the pensions of half-a-million veterans and widows and reduced the benefits for those remaining on the rolls. As well, federal spending on research and education was slashed and salaries of federal employees were reduced. Such programs were reversed after 1935. And one might recall that Roosevelt attempted to return to a balanced budget program in 1937, just as the economy appeared to be slowly recovering. The result was a renewed depression that began in the fall of that year and ran through 1938.

Thus, the Roosevelt Administration was forced into progressive activism because of massive—and organized—popular discontent based mainly in working class and small farmer organizations.

The WPA was one of several programs developed to respond to this supposed threat. Initially, the Roosevelt Administration authorized the Federal Emergency Administration of Public Works in 1933 (renamed in 1939 as the Public Works Administration). The PWA allocated over $6 billion to private firms that actually undertook the large scale projects ordered by government. Dams, including Grand Coulee, hospitals, bridges (the Triborough Bridge and Lincoln Tunnel in New York City), etc.

The WPA was not intended as a “full employment” program. Only one household member could be employed under the program (it was usually males), though one does find female heads of households so employed. It should also be noted that state and local governments were required to contribute 10-30% of the costs of the various projects undertaken. Over its life, total spending on WPA projects amounted to about $13.4 billion, roughly 2% of GDP over those years.

And what were those projects? Was this simply a “make work” program that made little difference in the long run? Or, was the WPA integral to the larger economy and its contributions socially useful? A truncated tally follows:

560,000 miles of roads built or improved
20,000 miles of water mains, sewers constructed
417 dams built
325 firehouses built; 2384 renovated
5,000 schools constructed or renovated
143 new hospitals, 1,700 improved
2,000 stadiums, grandstands built
500 landing fields; 1,800 runways (including participation in the construction of LaGuardia Airport, NYC)
State and municipal parks, including the foundation of the extensive California state park system.
100 million trees planted
6,000 miles of fire and forest trails created
Libraries were built. These were especially directed toward poor and rural communities.
Zoo buildings constructed

In addition to the above, one should note the WPA’s contribution to the cultural life of the country. Under the direction of Hallie Flanagan, the Federal Theatre Project mounted 1,200 productions including 300 new plays. Audiences were estimated at 25 million in forty states, many of whom had never before seen a play. As well, WPA programs included Federal Music, Federal Arts, and Federal Writers’ Projects. This latter program produced the most notable “Slave Narrative Collection,” consisting of 10,000 pages of interviews with former slaves, a continuing treasure-trove for researchers. Last, let us not forget the famous murals that were produced by artists hired by the WPA. These dot the country from post offices (though these were mainly funded by the Treasury Department through a grant from the government) to college buildings, to government buildings. Included in this array were those painted by Diego Rivera for the City College of San Francisco, Anton Refregier in the Rincon Annex Post Office, San Francisco, and Thomas Hart Benton in the Missouri State Capitol rotunda.

I think that we could accomplish many useful projects just like the WPA was able to do with a similar program today and I most certainly think it would be better than the waste of resources that comes from unemployment and un-utilized capital goods.

We aren't subject to the economy, it is subject to us

2012-01-16T15:04:00.001-06:00

I wrote this piece recently for a radio program on the public radio station in Kansas City. My main point is that the economy is something we can make into what we want it to be, but that requires us to think about what we want our economy to look like and then to do something about it. For example, if you want a more just income distribution, then what exactly do you think our income distribution should look like? who should redistribute it? and how should they do it? We aren't stuck with what we got; we don't have to live with falling wages, increasing income inequality, or 9% unemployment; we can do something about it.

Here's what I wrote:

Nearly all of the economists you see on TV and who hold all the advisory positions in government come from the Neoclassical tradition, a tradition that thinks economics is a science like physics or chemistry. These economists construct models and test them using data to determine ahistorical laws or tendencies in the economy. They often test numerous models going through each one of them until they finally find one that best fits the data and will make as many assumptions as needed for their mathematical models to work nicely even if that model doesn’t make any sense.

Many of you have probably heard of the law of supply and the law of demand which supposedly work together to set an equilibrium price at which point the market is efficient (the point at which there is no surplus or shortage). These laws of supply and demand are regarded much the same as the law of gravity, something that is always working, has more or less always existed, and that we cannot do anything about.

Because these economists treat economics like physics, they believe that the laws of supply and demand acting in this way will bring about the socially optimal outcome. Workers will be paid according to how hard they work or how much value they create, there won’t be any unemployment unless it is because those workers simply won’t work for a lower wage, and consumers and businesses will bring about the good for everyone with self-serving actions because the market coordinates economic activity in such a way to produce the best outcome. To make these bold statements, they require that markets are perfectly competitive and that human persons are perfectly rational, and by rational they mean self-serving maximizers of utility. They insist that this is free of values, that it is simply how persons behave and how the economy works and that if we tried to do anything about it, we would just make it worse.

Yet, these economists ignore or simply disregard the fact that economics is not a science like physics or chemistry, but is a social science concerned with what ought to be or with what is best for society. Economics is a social science studying the choices of persons and institutions regarding economic phenomena (such as the production, consumption, and distribution of goods and services). Because the subjects of the science of economics are human persons who are social and whose decisions are moral, the content of economics is inherently social and inherently moral. No explanation of economic phenomena can be totally free of value statements. For example, to say that the economy will work best if we just leave it alone is a moral statement often supporting those who have power in the market, like corporations and banks.

Furthermore, economics cannot be completely separated from other social sciences, such as psychology, sociology, politics, history, anthropology, and philosophy. Yet, economists from the neoclassical tradition largely ignore the findings from these sciences. For example, they largely disregard the findings in psychology and sociology about human behavior, particularly group behavior, and instead insist that we act rationally and selfishly so as to maximize utility. Greg Mankiw, a well-known professor of economics at Harvard and an economic advisor under the Bush administration, once said that it would be irrational for bank managers or owners not to commit fraud or loot their own banks to make more money. This sort of sociopathic person who acts in total disregard for others is taken as the model for how all people act and is often used as a justification for behavior that serves the pockets of the wealthy.

The point is that we are not subject to the so called laws of the economy nor are we stuck with the economic outcomes we are experiencing today. The economy is subject to us, we are not subject to it like we are subject to the law of gravity. We can manipulate it and change it to fit our desirable social outcomes. If we are unhappy with 9% unemployment, terrible and growing income inequality, a 15% poverty rate, corporations dominating government, and banks being bailed out while people lose their homes then we can and should do something to change that. That is what is so admirable about the Occupy movement. They have gathered for a cause recognizing that a good society is much better than this and are demanding change from our political leaders, and I urge you to do the same.

Back in Action

2012-01-16T14:57:00.001-06:00

Sorry for the long hiatus. I hope to be back in action with regular posting for a while. I hope you all had a wonderful Christmas and have had a great start to your new year. Thanks for reading!

Crunch Time

2011-12-02T12:06:00.001-06:00

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

2011-11-21T11:52:00.002-06:00

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?

2011-11-11T11:47:00.000-06:00

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?

2011-11-09T13:36:00.000-06:00

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

2011-11-08T20:48:00.002-06:00

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

2011-11-07T22:29:00.000-06:00

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

2011-10-27T09:39:00.004-05:00

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

2011-10-26T18:40:00.001-05:00

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

2011-10-19T10:23:00.002-05:00

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

2011-10-15T17:28:00.000-05:00

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

2011-10-11T21:40:00.000-05:00

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'

2011-10-11T10:51:00.000-05:00

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?

2011-09-27T16:53:00.000-05:00

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

2011-09-26T17:41:00.001-05:00

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.

These events, and the radical transformations which followed, can only be explained by the preceding situations which, to a certain extent, crystallized or institutionalized Leo XIII's predictions and the increasingly disturbing signs noted by his Successors. Pope Leo foresaw the negative consequences — political, social and economic — of the social order proposed by "socialism", which at that time was still only a social philosophy and not yet a fully structured movement. It may seem surprising that "socialism" appeared at the beginning of the Pope's critique of solutions to the "question of the working class" at a time when "socialism" was not yet in the form of a strong and powerful State, with all the resources which that implies, as was later to happen. However, he correctly judged the danger posed to the masses by the attractive presentation of this simple and radical solution to the "question of the working class" of the time — all the more so when one considers the terrible situation of injustice in which the working classes of the recently industrialized nations found themselves.

Two things must be emphasized here: first, the great clarity in perceiving, in all its harshness, the actual condition of the working class — men, women and children; secondly, equal clarity in recognizing the evil of a solution which, by appearing to reverse the positions of the poor and the rich, was in reality detrimental to the very people whom it was meant to help. The remedy would prove worse than the sickness. By defining the nature of the socialism of his day as the suppression of private property, Leo XIII arrived at the crux of the problem.

His words deserve to be re-read attentively: "To remedy these wrongs (the unjust distribution of wealth and the poverty of the workers), the Socialists encourage the poor man's envy of the rich and strive to do away with private property, contending that individual possessions should become the common property of all...; but their contentions are so clearly powerless to end the controversy that, were they carried into effect, the working man himself would be among the first to suffer. They are moreover emphatically unjust, for they would rob the lawful possessor, distort the functions of the State, and create utter confusion in the community". The evils caused by the setting up of this type of socialism as a State system — what would later be called "Real Socialism" — could not be better expressed.

13. Continuing our reflections, and referring also to what has been said in the Encyclicals Laborem exercens and Sollicitudo rei socialis, we have to add that the fundamental error of socialism is anthropological in nature. Socialism considers the individual person simply as an element, a molecule within the social organism, so that the good of the individual is completely subordinated to the functioning of the socio-economic mechanism. Socialism likewise maintains that the good of the individual can be realized without reference to his free choice, to the unique and exclusive responsibility which he exercises in the face of good or evil. Man is thus reduced to a series of social relationships, and the concept of the person as the autonomous subject of moral decision disappears, the very subject whose decisions build the social order. From this mistaken conception of the person there arise both a distortion of law, which defines the sphere of the exercise of freedom, and an opposition to private property. A person who is deprived of something he can call "his own", and of the possibility of earning a living through his own initiative, comes to depend on the social machine and on those who control it. This makes it much more difficult for him to recognize his dignity as a person, and hinders progress towards the building up of an authentic human community.

In contrast, from the Christian vision of the human person there necessarily follows a correct picture of society. According to Rerum novarum and the whole social doctrine of the Church, the social nature of man is not completely fulfilled in the State, but is realized in various intermediary groups, beginning with the family and including economic, social, political and cultural groups which stem from human nature itself and have their own autonomy, always with a view to the common good. This is what I have called the "subjectivity" of society which, together with the subjectivity of the individual, was cancelled out by "Real Socialism".40

If we then inquire as to the source of this mistaken concept of the nature of the person and the "subjectivity" of society, we must reply that its first cause is atheism. It is by responding to the call of God contained in the being of things that man becomes aware of his transcendent dignity. Every individual must give this response, which constitutes the apex of his humanity, and no social mechanism or collective subject can substitute for it. The denial of God deprives the person of his foundation, and consequently leads to a reorganization of the social order without reference to the person's dignity and responsibility.

The atheism of which we are speaking is also closely connected with the rationalism of the Enlightenment, which views human and social reality in a mechanistic way. Thus there is a denial of the supreme insight concerning man's true greatness, his transcendence in respect to earthly realities, the contradiction in his heart between the desire for the fullness of what is good and his own inability to attain it and, above all, the need for salvation which results from this situation.

14. From the same atheistic source, socialism also derives its choice of the means of action condemned in Rerum novarum, namely, class struggle. The Pope does not, of course, intend to condemn every possible form of social conflict. The Church is well aware that in the course of history conflicts of interest between different social groups inevitably arise, and that in the face of such conflicts Christians must often take a position, honestly and decisively. The Encyclical Laborem exercens moreover clearly recognized the positive role of conflict when it takes the form of a "struggle for social justice"; Quadragesimo anno had already stated that "if the class struggle abstains from enmities and mutual hatred, it gradually changes into an honest discussion of differences founded on a desire for justice".

However, what is condemned in class struggle is the idea that conflict is not restrained by ethical or juridical considerations, or by respect for the dignity of others (and consequently of oneself); a reasonable compromise is thus excluded, and what is pursued is not the general good of society, but a partisan interest which replaces the common good and sets out to destroy whatever stands in its way. In a word, it is a question of transferring to the sphere of internal conflict between social groups the doctrine of "total war", which the militarism and imperialism of that time brought to bear on international relations. As a result of this doctrine, the search for a proper balance between the interests of the various nations was replaced by attempts to impose the absolute domination of one's own side through the destruction of the other side's capacity to resist, using every possible means, not excluding the use of lies, terror tactics against citizens, and weapons of utter destruction (which precisely in those years were beginning to be designed). Therefore class struggle in the Marxist sense and militarism have the same root, namely, atheism and contempt for the human person, which place the principle of force above that of reason and law.

15. Rerum novarum is opposed to State control of the means of production, which would reduce every citizen to being a "cog" in the State machine. It is no less forceful in criticizing a concept of the State which completely excludes the economic sector from the State's range of interest and action. There is certainly a legitimate sphere of autonomy in economic life which the State should not enter. The State, however, has the task of determining the juridical framework within which economic affairs are to be conducted, and thus of safeguarding the prerequisites of a free economy, which presumes a certain equality between the parties, such that one party would not be so powerful as practically to reduce the other to subservience.

In this regard, Rerum novarum points the way to just reforms which can restore dignity to work as the free activity of man. These reforms imply that society and the State will both assume responsibility, especially for protecting the worker from the nightmare of unemployment.[EMPLOYER OF LAST RESORT!!!] Historically, this has happened in two converging ways: either through economic policies aimed at ensuring balanced growth and full employment, or through unemployment insurance and retraining programmes capable of ensuring a smooth transfer of workers from crisis sectors to those in expansion.

Furthermore, society and the State must ensure wage levels adequate for the maintenance of the worker and his family, including a certain amount for savings. This requires a continuous effort to improve workers' training and capability so that their work will be more skilled and productive, as well as careful controls and adequate legislative measures to block shameful forms of exploitation, especially to the disadvantage of the most vulnerable workers, of immigrants and of those on the margins of society. The role of trade unions in negotiating minimum salaries and working conditions is decisive in this area.

Finally, "humane" working hours and adequate free-time need to be guaranteed, as well as the right to express one's own personality at the work-place without suffering any affront to one's conscience or personal dignity. This is the place to mention once more the role of trade unions, not only in negotiating contracts, but also as "places" where workers can express themselves. They serve the development of an authentic culture of work and help workers to share in a fully human way in the life of their place of employment.

The State must contribute to the achievement of these goals both directly and indirectly. Indirectly and according to the principle of subsidiarity, by creating favourable conditions for the free exercise of economic activity, which will lead to abundant opportunities for employment and sources of wealth. Directly and according to the principle of solidarity, by defending the weakest, by placing certain limits on the autonomy of the parties who determine working conditions, and by ensuring in every case the necessary minimum support for the unemployed worker.

The Encyclical and the related social teaching of the Church had far-reaching influence in the years bridging the nineteenth and twentieth centuries. This influence is evident in the numerous reforms which were introduced in the areas of social security, pensions, health insurance and compensation in the case of accidents, within the framework of greater respect for the rights of workers.

You can also read my series on Capitalism and Socialism that I wrote several months ago (drawing mostly from Rerum Novarum and Quadragesimo Anno) here:
Socialism vs. Capitalism, Part 1
Socialism vs. Capitalism, Part 2
Socialism vs. Capitalism, Part 3

Absentee Blogger

2011-09-26T17:07:00.000-05:00

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

2011-09-15T17:13:00.000-05:00

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

2011-09-13T20:17:00.001-05:00

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.

2) 19th century economists such as Stanley Jevons and Carl Menger [1] kept the basic framework of Smith’s argument, but developed hypothetical models of just how money might emerge from such a situation. All assumed that in all communities without money, economic life could only have taken the form of barter.

3) Anthropologists gradually fanned out into the world and began directly observing how economies where money was not used (or anyway, not used for everyday transactions) actually worked. What they discovered was an at first bewildering variety of arrangements, ranging from competitive gift-giving to communal stockpiling to places where economic relations centered on neighbors trying to guess each other’s dreams. What they never found was any place, anywhere, where economic relations between members of community took the form economists predicted: “I’ll give you twenty chickens for that cow.”

Hence in the definitive anthropological work on the subject, Cambridge anthropology professor Caroline Humphrey concludes, “No example of a barter economy, pure and simple, has ever been described, let alone the emergence from it of money; all available ethnography suggests that there never has been such a thing” [2]

Just in way of emphasis: economists thus predicted that all (100%) non-monetary economies would be barter economies. Empirical observation has revealed that the actual number of observable cases—out of thousands studied—is 0%.

Similarly, the number of documented marketplaces where people regularly appear to swap goods directly without any reference to a money of account is also zero. If any sociological prediction has ever been empirically refuted, this is it.

4) Economists have for the most part accepted the anthropological findings, if directly confronted with them, but not changed any of the assumptions that generated the false predictions. Meanwhile, all textbooks continue to report the same old sequence: first there was barter, then money, then credit—except instead of actually saying that tribal societies regularly practiced barter, they set it up as an imaginative exercise (“imagine what you would have to do if you didn’t have money!” or vaguely imply that anything actual tribal societies did do must have been barter of some kind.

...

In many times and places, one sees a similar arrangement: two sorts of money, one, a common long-distance trade item, the other, a common subsistence item—cattle, grain—that’s stockpiled, but never traded. Still, Temple bureaucracies and their ilk are something of a rarity. In their absence, how else might a system of pricing, of proportional equivalents between the values of any and all objects, potentially arise? Here again, anthropology and history both provide one compelling answer, one that again, falls off the radar of just about all economists who have ever written on the subject. That is: legal systems.

...

Anthropology is full of examples of societies without markets or money, but with elaborate systems of penalties for various forms of injuries or slights.

Again, unlike the economists’ version, this is not hypothetical. This is a description of what actually happens—and not only in the ethnographic record, but the historical one as well.

For example, Welsh and Irish codes contain extremely detailed price schedules where in the Welsh case, the exact value of every object likely to be found in someone’s house were worked out in painstaking detail, from cooking utensils to floorboards—despite the fact that there appear to have been, at the time, no markets where any such items could be bought and sold. The pricing system existed solely for the payment of damages and compensation—partly material, but particularly for insults to people’s honor, since the precise value of each man’s personal dignity could also be precisely quantified in monetary terms.

The persistence of the barter myth is curious.

It seems to me because it goes back precisely to this notion of rationality that Adam Smith too embraced: that human beings are rational, calculating exchangers seeking material advantage, and that therefore it is possible to construct a scientific field that studies such behavior. The problem is that the real world seems to contradict this assumption at every turn. Thus we find that in actual villages, rather than thinking only about getting the best deal in swapping one material good for another with their neighbors, people are much more interested in who they love, who they hate, who they want to bail out of difficulties, who they want to embarrass and humiliate, etc.—not to mention the need to head off feuds.

...

Economists always ask us to ‘imagine’ how things must have worked before the advent of money. What such examples bring home more than anything else is just how limited their imaginations really are. When one is dealing with a world unfamiliar with money and markets, even on those rare occasions when strangers did meet explicitly in order to exchange goods, they are rarely thinking exclusively about the value of the goods. This not only demonstrates that the Homo Oeconomicus which lies at the basis of all the theorems and equations that purports to render economics a science, is not only an almost impossibly boring person—basically, a monomaniacal sociopath who can wander through an orgy thinking only about marginal rates of return—but that what economists are basically doing in telling the myth of barter, is taking a kind of behavior that is only really possible after the invention of money and markets and then projecting it backwards as the purported reason for the invention of money and markets themselves. Logically, this makes about as much sense as saying that the game of chess was invented to allow people to fulfill a pre-existing desire to checkmate their opponent’s king.

Employment for All Debate: My Response to Darwin

2011-09-11T18:49:00.001-05:00

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

2011-09-11T17:50:00.000-05:00

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

2011-09-09T17:58:00.001-05:00

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

2011-09-08T11:16:00.000-05:00

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

2011-09-08T10:35:00.000-05:00

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

2011-09-01T10:27:00.002-05:00

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].

More on the History of Money

2011-08-31T18:28:00.000-05:00

Wow! What a start to the new semester. At this rate I'll never have time to post anymore, but fortunately I think things will ease up.

If you have been following the History of Money/Debt, part 2 from the Modern Money Primer at New Economic Perspectives has been posted. Check it out:

COMMODITY MONEY COINS? METALISM VS. NOMINALISM, PART TWO

You can find Part 1 here: COMMODITY MONEY COINS? METALISM VS. NOMINALISM, PART ONE

Tomorrow morning I will post my proposal for a job guarantee program that will immediately bring us to full employment and promote greater price stability than our current system. Darwin, a frequent reader and blogger, has agreed to debate with me over the proposal. So come back tomorrow, follow our debate, and pitch in with your own comments!

Bernanke to Congress: Help me out!

2011-08-26T23:45:00.000-05:00

I think Bernanke gets it.

From the Associated Press:

Federal Reserve Chairman Ben Bernanke has a message for Congress: Do more to stimulate hiring and growth -- or risk delaying the economy's return to full health.

Bernanke held out the prospect Friday that the Fed may take further steps later to help the economy. But he offered no new plans for now.

At a time when Congress has focused on shrinking budget deficits, Bernanke agreed that doing so is important for the long term. But he warned lawmakers not to "disregard the fragility of the current economic recovery."

"He appears to be saying that the Fed has largely played its part and that the politicians need to step up their game," said Paul Dales, senior U.S. economist at Capital Economics.

The economy is still hobbled by a depressed housing market, high oil prices and fears that the European debt crisis will deteriorate into a repeat of the 2008 financial crisis. The Dow has lost about 11 percent of its value since late July on fears that the economy might slip back into recession.

On Friday, Bernanke blamed this summer's political squabbling over raising the federal debt limit for undermining consumer and business confidence. And he warned that further gridlock in Washington would "pose ongoing risks to growth."

The Fed chief noted that the depressed housing sector has delayed a full recovery in the broader economy. He said the home market should gradually return to health -- a process he said the government should support.

He said that with oil and other commodity prices easing, he expects long-term inflation to remain low well into 2012.

Others have questioned whether any further lowering of long-term rates is needed. Investors seeking the safety of U.S. debt have forced down the yield on the 10-year Treasury note to 2.19 percent -- a full point lower than it was when the Fed completed its Treasury purchases about two months ago. Yet the economy is still sputtering.

Many economists note, however, that the economy's main problem is not that interest rates are too high. They say the main problem is that consumer spending remains too weak. So businesses feel little incentive to hire, expand and invest.

Until demand for goods and services steps up, the Fed has limited ability to strengthen the economy.

Joshua Shapiro, an economist at MFR Inc., said Bernanke was conceding that the Fed has "basically exhausted its tools."

And, the completely wrong way of thinking about this:

Rep. Jeb Hensarling, R-Texas, co-chair of a committee charged with proposing further deficit cuts, responded to Bernanke's hint that Congress should do more to stimulate growth by saying in a statement:

"The only way to put an end to this spending-driven debt crisis is for Washington to stop spending money we don't have. The committee was created to produce real deficit reduction, and accomplishing that task will help bring confidence back to job creators and grow the economy."

And that argument is coming from both political parties.

All gov't spending (not just spending that is over tax revenue) is 'money it doesn't have'. It's quite literally created out of nowhere. Remember taxes paid in are 'destroyed' not stored until spent by the government.

Reducing deficits won't bring confidence back to job creators, increasing sales will. Reducing deficits will instead decrease sales.

Oh, and don't mistake the title for a quote.

History of Debt

2011-08-25T23:07:00.000-05:00

Another Video! Hopefully this is a little more interesting and understandable than my usual posts.

Watch the full episode. See more Need To Know.

History of Money: Debts, Coins, and Religion

2011-08-23T14:56:00.000-05:00

Over at the Modern Money Primer, Randall Wray briefly walks us through the history (up til Rome) of money, debts, and coins and their significance to religion, including Christianity.

COMMODITY MONEY COINS? METALISM VS. NOMINALISM, PART ONE

A must read if you want to understand the answer to the question 'What is money?'.

Republicans Want Tax Increase

2011-08-23T14:35:00.001-05:00

Really don't understand Republicans on this one...

Why would you fight so virulently against closing tax loopholes for the wealthy to reduce the deficit (which is a dumb idea to begin with...reducing the deficit that is) but be okay with what is essentially a tax hike for very much less wealthy employees by ending the payroll tax break?

Their reasoning?:

Republicans say their stand is consistent with their goal of long-term tax policies that will spur employment and lend greater certainty to the economy.

"It's always a net positive to let taxpayers keep more of what they earn," says Rep. Jeb Hensarling, "but not all tax relief is created equal for the purposes of helping to get the economy moving again." The Texas lawmaker is on the House GOP leadership team.

Many Republicans are adamant about not raising taxes but largely silent on what it would mean to let the payroll tax break expire.

Republicans cite key differences between the two "temporary" taxes, starting with the fact that the Bush measure had a 10-year life from the start. To stimulate job growth, these lawmakers say, it's better to reduce income tax rates for people and for companies than to extend the payroll tax break.

"We don't need short-term gestures. We need long-term fundamental changes in our tax structure and our regulatory structure that people who create jobs can rely on," said Sen. Lamar Alexander, R-Tenn., when asked about the payroll tax matter.

House Majority Leader Eric Cantor, R-Va., "has never believed that this type of temporary tax relief is the best way to grow the economy," said spokesman Brad Dayspring.

Former Massachusetts Gov. Mitt Romney did not flatly rule out an extra year for the payroll tax cut, but he "would prefer to see the payroll tax cut on the employer side" to spur job growth, his campaign said.

Former House speaker Newt Gingrich said Republicans will fall under increasing pressure to extend the payroll tax cut. If they refuse, he said in a recent speech, "we're going to end up in a position where we're going to raise taxes on the lowest-income Americans the day they go to work."

It seems pretty simple to me: businesses won't expand until sales increase. Sales won't increase until people have more money. Why would taking money away from people who buy things help sales? Why would giving more money to businessmen help them expand their business if they won't be able to sell their added production?

They have the line of causation backwards. Money won't 'trickle down' to employees until it 'trickles up' to employers. Even then I'm not sure it will get to the employees...record profits are still being made despite historically low wages and very high unemployment.

I say a complete payroll tax holiday for both employees and employers would be good, but deficit hawks would cry 'foul' (pun intended) because they think deficits are the reason for our bad economy. If you are in this camp I recommend checking out my 'Modern Money Factsheet'.

As for it being too 'temporary', are they worried it won't be spent? If so, say you'll suspend the tax UNTIL we reach full employment. The Central Bank said it would keep rates where they are until the economy is growing again and unemployment goes down. Let's do the same for the payroll tax cut.

But again, this is more about 'people who create jobs'. Those 'people who create jobs' rely on 'people who buy their product'. Just ask small business owners, they'll say that they are in tough positions right now because sales are low not because their taxes are too high or that their regulations are too tough. It doesn't matter how high taxes are or tight regulations are if nobody buys your product. If you want them to increase jobs increase their sales.

This seems to be a major stand in favor of the wealthy. If it isn't can someone please elucidate?

Full story here.

Taxes and Welfare are not Charity

2011-08-23T13:58:00.001-05:00

Taxation and welfare can never be substitutes for charity.

Taxation is a destruction of money (or reserves). Government spending is a creation of money (or reserves). Government welfare programs such as TANF, Social Security, Medicaid, Medicare, etc. reallocate or redistribute resources by destroying financial assets of the taxed and creating financial assets of the receivers of welfare.

This is the nature of government taxation and spending. Your taxes are not someone else's welfare and therefore are not a gift of charity. This 'redistribution' can achieve socially desirable goals, but cannot replace a true act of charity which requires a person or persons giving and a person or persons receiving:

Charity is love received and given. It is “grace” (cháris). Its source is the wellspring of the Father's love for the Son, in the Holy Spirit. Love comes down to us from the Son. -- Caritas in Veritate pp. 5

What persons need above all is love or charity, not material goods. Giving of material goods is an act of charity, but the charity is needed more than the material goods.

The government is not capable of charity because it is not a person capable of love. There is no relationship established, it is not a true gift and it isn't a true sacrifice.

So you can't rely on the government to be charitable for you. This does not mean that welfare programs should not exist, but it does mean that they don't replace man's inherent need for charity. You cannot defer your responsibility to both give and receive charity to the government.

Nor can you give out of charity if justice is not met:

Charity goes beyond justice, because to love is to give, to offer what is “mine” to the other; but it never lacks justice, which prompts us to give the other what is “his”, what is due to him by reason of his being or his acting. I cannot “give” what is mine to the other, without first giving him what pertains to him in justice.

If we love others with charity, then first of all we are just towards them. Not only is justice not extraneous to charity, not only is it not an alternative or parallel path to charity: justice is inseparable from charity, and intrinsic to it. Justice is the primary way of charity or, in Paul VI's words, “the minimum measure” of it, an integral part of the love “in deed and in truth” (1 Jn 3:18), to which Saint John exhorts us.

On the one hand, charity demands justice: recognition and respect for the legitimate rights of individuals and peoples. It strives to build the earthly city according to law and justice. On the other hand, charity transcends justice and completes it in the logic of giving and forgiving. The earthly city is promoted not merely by relationships of rights and duties, but to an even greater and more fundamental extent by relationships of gratuitousness, mercy and communion. Charity always manifests God's love in human relationships as well, it gives theological and salvific value to all commitment for justice in the world. -- Caritas in Veritate pp. 6

In summary, the government cannot replace charity and therefore cannot solve all of society's problems which are rooted in an absence of charity and justice nor can we give out of charity if justice is not first met. To rely on the government to solve all our problems for us or to say that 'government is taxing me and giving it to the poor so I don't need to give' is to misunderstand true charity and a person's need for love.

Krugman on MMT

2011-08-17T15:06:00.000-05:00

Krugman first bashes MMT, then somehow makes an MMT argument presumedly without realizing it...

Franc thoughts on long-run fiscal issues
Anti-'MMT-types' migrate to stage II
MMT, Again
Printing Press Mystery

His acknowledgement:

Countries without a printing press are subject to self-fulfilling crises in a way that nations that still have a currency of their own are not. The point is that fears of default, by driving up interest costs, can themselves trigger default — and that because there’s a crossing-the-Rubicon aspect to default, once a country crosses that line it will probably impose fairly severe losses on creditors. A country with its own currency isn’t in the same position: even if it is pushed into some inflation, there’s no red line that need be crossed.

That’s why America isn’t Greece; and why the UK is being foolish in imposing eurozone-type austerity on itself.

Clarifying Points

2011-08-17T00:19:00.000-05:00

I just wanted to clarify a few things in case there is some confusion or misunderstanding floating out there:

1) I love learning and I love sharing what I learn. The purpose of this blog was to share what I learn and have learned about two of my greatest passions: Catholic Social Teaching and economics. You may have a different understanding of how best to live out the teachings of the Church and that is fine, but all of my posts are underscored by a desire to live and spread the teaching of the Church. If I err in this, please call me out on it because I may not be aware of my misunderstanding.

2) Politically, I am neither conservative nor liberal, Republican nor Democrat. I, personally, do not think that either party fully represents the teachings of the Church. That is my opinion, you're free to have your own. I do not intend to promote either party on this blog, but I often do intend to call out bad policies that are either against the Church's teaching or based on bad economics or both.

3) Modern Money Theory is a description of what money is and how it works in the general economy. It is less theory and more description. It is not politically charged one way or the other. When I say we need more deficits right now to stimulate the economy, that doesn't mean that I want or that it has to be in the form of more spending. It can also come in the form of reduced taxes and less government.

4) This blog is for both your and my benefit. I learn from you as much or more as you learn from me. I can't express to you enough how much I want to know what you think. What your questions are, what comments you have, what you would like to know more about, etc. I think we learn best by engaging in dialogue with each other. I have benefited greatly from this blog and hope you have too, but I would love to get more input from you, the reader!

Thank you again for reading!

Thank You Note

2011-08-12T13:09:00.000-05:00

Thank you all for reading my blog! I hope it has informed you on the trivial world of economics and more importantly inspired you to live out the teachings of the Church.

Blogging may be sparse here the next week or two as I concentrate on other things and prepare for a new semester.

If you want to keep up with the world of economics or know more about CST I recommend the links on the right side of the page. I hope you are all doing well and that God showers many blessings upon you.

I cannot thank you all enough for your support!

Inflation, not Insolvency

2011-08-11T13:28:00.000-05:00

Sorry for the large amount of reposting lately, but it's all I've had time for. This is again via Warren Mosler, but is important to read:

From comments by Warren Buffet to Alan Greenspan,

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

THE WORD IS OUT!

The US government is the issuer of the US dollar.

So no matter how large the federal deficit might be:

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

NOW CONNECT THE DOTS TO:

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

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

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

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

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

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

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

SO, THEN,

WHAT IS THE POINT OF DEFICIT REDUCTION?

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

So now,

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

they must FLIP FLOP
or shut up!

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

Inflation.

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

Fine.

Bring it on!

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

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

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

Fine.

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

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

Paul McCulley on Bloomberg

2011-08-09T16:37:00.001-05:00

Paul McCulley (formerly of PIMCO) is one smart dude:

Understanding Credit Ratings

2011-08-09T16:11:00.000-05:00

Again from Mosler:

“The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics,” S&P said in a statement late yesterday after markets closed.

Credit ratings are based on ability to pay and willingness to pay.

David Beers of S&P knows this and has discussed this in the past.

Including direct discussion with me where he acknowledged a nation like the US always has the ability to make US dollar payments.

Therefore any downgrade would necessarily be based on willingness to pay.

In fact, I downgraded the US on willingness to pay several months ago on this website. And the debt ceiling debate more than demonstrated a willingness to default by far too many members of Congress for even consideration of a AAA rating.

So why then did David T. Beers decide to downgrade the US on ability to pay, and not explicitly on willingness to pay?

Sure looks like a case of intellectual dishonesty.
And I have no idea why.
So much for his legacy.

And, as previously discussed, markets probably won’t care, much like when Japan was even more severely downgraded.

A credit rating simply needn’t be applicable for the issuer of its own currency, as David should well know.

Warren Buffett gets it!

2011-08-09T16:07:00.000-05:00

From FOX Business:

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

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

So let's talk about inflation! NOT about whether we have the ability to pay off our debt!

What was that?!

2011-08-09T15:57:00.001-05:00

I don't understand financial markets that well...I'm an economist, not a banker!

But if you wondered like I did why the markets freaked out, here is an analysis from financial expert Warren Mosler:

From Goldman:
"Following Friday’s downward revisions, we now expect real GDP to increase just 2%-2½% (annualized) through the end of 2012 and the unemployment rate to rise slightly to 9¼% during this period."

This is still higher than the first half, so presumably corporations will have a better second half as well, and they did just fine in the first half.

And with lower gasoline prices, consumers get a nice break there which should firm their spending on other things as well.

The tighter fiscal won’t matter for this year, and markets won’t discount what may happen in November until it’s closer to actually happening.

So still looks to me like the recent sell off in stocks was mainly technical, as the initial knee jerk sell off from the debt ceiling and downgrade uncertainties triggered further selling by those with short options positions, much like the crash of 1987.

And, like then, and unlike early 2008, the current federal deficit seems more than large to me to keep things chugging along at muddle through levels of modest growth, continued too high unemployment, and decent corporate profits and investment.

Yes, risks remain. Europe is a continuous risk, but the ECB, once again, stepped in and wrote the check. China looks to be slipping but the lower commodity prices will help US consumers maybe about as much as they hurt the earnings of some corps.

So for now, with the options related stock selling over, it looks like we’re back to calmer waters for a while.

And Congress goes back to trying to cut the deficit to put people back to work.

Someone needs to tell them they haven’t run out of dollars, they aren’t dependent on China, and they can’t become the next Greece, and so yes, the deficit is too small given the current output gap.

But until then, we keep working to become the next Japan.

Conservative Magic

2011-08-06T10:12:00.000-05:00

Apparently Michele Bachmann thinks that once she becomes president the economy won't take that long to improve:

Earlier in the day in Newton, Bachmann told reporters the economy would start to improve almost immediately after she becomes president because she would implement conservative economic policies to slash the nation's debt, stop tax increases and cut regulations.

"It won't take that long if we send signals to the marketplace," she said, standing by an earlier comment that the improvement would begin within the first quarter

I'm not sure what signals she thinks she will be sending to the marketplace, but there really is only one that the marketplace cares about: sales!

Many large and small businesses are sitting on large piles of cash and reserves and all businesses can borrow more at extremely low rates, yet they don't because sales are low. NOT because of increasing taxes (who has increased taxes?) or because of tighter regulations.

If her plan is to "slash the nation's debt" by reducing deficits then I think she will be sorely disappointed in the results.

Conservative policy CAN help our recovery, however. If we just cut taxes without cutting spending then I think we would see things turn around, but all we hear from both sides is cutting deficits and paying down debt.

Why is it assumed that the government must cut its deficits? The disagreement has been over HOW to reduce the deficits, not WHY we need to reduce them.

They all just assume that if we don't, turmoil will ensue just like it would for you or me if we ran up a bunch of debt. I say: based on what? When I describe how a government's finances work then everyone cries "inflation!" Yet we are having trouble staving off deflation right now.

So if you don't believe me or my reasoning that inflation won't ensue until we get near full employment, then why not at least see if I'm wrong? Why not try some increased deficits? If it leads to high inflation, you can say "I told you so" and then we can reduce our deficits. But why worry about potential high inflation when we are experiencing high unemployment right now?

If you want less government demand a tax cut right now from your congressmen! If you want more government tell them to spend more and what you want them to spend it on!

Me? I'm in favor of a job guarantee program and a complete payroll tax holiday for both employers and employees until the economy gets back to full employment.

Understanding Modern Money

2011-08-05T13:29:00.000-05:00

If you want a quick review of the background and history of Modern Money Theory, as well as a quick synopsis of its key elements there is none better than this post from Johnsville via Mosler:

Modern Money in a Nutshell

Highlights:

A rampaging mutant macroeconomic theory called Modern Monetary Theory, or MMT for short, is kicking keisters and smacking down conventional wisdom in economic circles these days. This is because an energized group of MMT economists, bloggers, and their loyal foot soldiers, lead by economists Warren Mosler, Bill Michell, and L. Randall Wray are swarming on the internet. New MMT disciples are hatching out everywhere. They are like a school of fresh-faced paramedics surrounding a gasping heart attack victim. They seek to present their economic worldview as the definitive first aid for understanding and dealing with the critical issues of growth, unemployment, inflation, budget deficits, and national debt.

MMT is a reformulated blend of some older macroeconomic theories called Chartalism and Functional finance. But, it also adds a fresh dose of monetary accounting for intellectual muscle mass. Chartalism is a school of economic thought that was developed between 1901 and 1905 by German economist Georg F. Knapp with important contributions (1913-1914) from Alfred Mitchell-Innes. Functional finance is an extension of Chartalism, which was developed by economist Abba Lerner in the 1940’s.

MMT is a broad combination of fiscal, monetary and accounting principles that describe an economy with a floating rate fiat currency administered by a sovereign government. The foundation of MMT is its recognition of the importance of the government’s power to tax, thereby creating a demand for its money, and its monopoly power to print money.

There is really not that much “theory” in Modern Monetary Theory. MMT is more concerned with explaining the operational realities of modern fiat money. It is the financial X’s and O’s, the ledger or playbook, of how a sovereign government’s fiscal policies and financial relationships drive an economy. It clarifies the options and outcomes that policy makers face when they are running a tax-driven money monopoly. Proponents of MMT say that its greatest strength is that it is apolitical.

The lifeblood of MMT doctrine is a government’s fiscal policy (taxing and spending). Taxes are only needed to regulate consumer demand and control inflation, not for revenue. A sovereign government that issues its own floating rate fiat currency is not revenue constrained. In other words, taxes are not needed to fund the government.

MMT also asserts that the federal government should net spend, again usually in deficit, to the point where it meets the aggregate savings desire of its population. This is because government budget deficits add to savings.

In the U.S., MMTers see the contentious issue of a mounting national debt and continuing budget deficits as a pseudo-problem, or an “accounting mirage.” The quaint notion of the need for a balanced budget is another ancient relic from the old gold standard days, when the supply of money was actually limited. In fact, under MMT, running a federal budget surplus is usually a bad thing and will often lead to a recession.

MMT is not easy for many people, including trained economists, to understand. This is probably because of its heavy reliance on accounting principles (debts and credits). Some critics consider MMT nothing more than a twisted Ponzi scheme that is simply “printing prosperity.” Calling MMT a “printing prosperity” scheme, by the way, is the quickest way to send MMTers into spasms of outrage. MMT does not “print prosperty” according to its proponents. The MMT counter argument is: it [is] a perverse injustice that, in online discussions, MMT sympathizers are frequently reproached for imagining that “we can print prosperity” when in fact it is us who constantly stress as a fundamental point that the only true constraints are resource based, not financial or monetary in nature. We are the ones insisting that if we have the resources, we can put them to use. It is the neoclassical orthodoxy and others who try to make out that we can’t use resources, even if they are available, because of some magical, mysterious monetary or financial constraint. Just who is it that believes in magic here?

A heavyweight Keynesian economist, like Nobel Prize winner Paul Krugman, has felt the sting of MMT. But the quantity and quality of his criticism of MMT, so far, has been featherweight. He could not land a solid glove on the contender, Kid MMT. Krugman only proved that he does not understand MMT, so his criticism was weak (see MMT comments) and his follow-up even weaker. MMT economist James Galbraith did a succinct breakdown of Krugman’s major errors.

Keeping Faith & Hope

2011-08-04T14:38:00.000-05:00

Despite a deal being reached to raise the debt ceiling, market reaction was less than positive. (At least gas prices are falling!). However, in times like these it's important to remember to keep faith and hope for better times.

It's true that I think we are suffering needlessly because of a grave misunderstanding of our financial system (of what money is, of how government finances work, of what causes inflation, etc.). But it's also true that suffering is not necessarily a bad thing.

We can always unite our suffering to Christ's and "offer it up" as they say in some schools and monasteries.

We must also remember that we are not made to live in this world forever. The things and experiences we enjoy here are not lasting and may even distract us from our true destination. In this way, suffering can be a good thing, it can help us turn away from material detachment to things that really matter: serving others, maintaining and creating loving relationships, striving to be the best we can be.

I think Pope Leo XIII said it best:

From contemplation of this divine Model, it is more easy to understand that the true worth and nobility of man lie in his moral qualities, that is, in virtue; that virtue is, moreover, the common inheritance of men, equally within the reach of high and low, rich and poor; and that virtue, and virtue alone, wherever found, will be followed by the rewards of everlasting happiness. Nay, God Himself seems to incline rather to those who suffer misfortune; for Jesus Christ calls the poor "blessed"; He lovingly invites those in labor and grief to come to Him for solace; and He displays the tenderest charity toward the lowly and the oppressed. These reflections cannot fail to keep down the pride of the well-to-do, and to give heart to the unfortunate; to move the former to be generous and the latter to be moderate in their desires. Thus, the separation which pride would set up tends to disappear, nor will it be difficult to make rich and poor join hands in friendly concord.

But, if Christian precepts prevail, the respective classes will not only be united in the bonds of friendship, but also in those of brotherly love. For they will understand and feel that all men are children of the same common Father, who is God; that all have alike the same last end, which is God Himself, who alone can make either men or angels absolutely and perfectly happy; that each and all are redeemed and made sons of God, by Jesus Christ, "the first-born among many brethren"; that the blessings of nature and the gifts of grace belong to the whole human race in common, and that from none except the unworthy is withheld the inheritance of the kingdom of Heaven.

I do think that our government could make things better for not only our nation, but for other nations if they properly understood how their finances worked. We could have a more equitable distribution of wealth by making sure the poor obtained that which is necessary for maintaining their dignity. But I also think that even if the government (that is, their policies) were able to provide us with the material goods necessary to maintain our dignity, it would not be enough to make us happy or to earn the rewards of everlasting life. For that, we need virtue, brotherly love, faith in God and in each other, and hope for better times.

Would it not seem that, were society penetrated with ideas like these, strife must quickly cease?

Neglecting the Common Good

2011-07-27T14:30:00.000-05:00

I agree with Thomas Bushlack from Catholic Moral Theology that our debate on the debt ceiling is neglecting a key element:

Drawing upon modern Catholic social thought and the work of Thomas Aquinas’ political thinking, the goal of law and political authority is to serve, enhance, and protect the common good of society (see, for example, Summa Theologiae I-II Q. 90). It is perhaps ironic – or tragic – that the common good is the one element that seems to be missing from the current national debate. This seems to be due to the fact that the ideology that holds the most momentum right now in our political system – and hence that controls the terms of our debate – is the far-right ideology represented most vocally by the tea-party movement (but engaged by others as well). This ideology, rather than upholding the common good as the end and goal of government and law, sees government as the very source of the problem. Therefore, those who propound this ideology are seizing upon this moment of debate over government spending, taxation and revenue creation, and the debt ceiling as an opportunity to starve government at its source by cutting off its supply of money. Some of the more extreme elements seem entirely willing to let the whole system come to a crashing halt rather than think about long-term solutions that seek to protect the common good of all involved.

What would bringing the language of the common good back into the discussion accomplish? For one thing, it would re-establish the principle that government has a necessary role to play in seeking the common good (not the only role, but still a necessary one). It would also allow us to recognize that in times of economic hardship sometimes government spending is the last resort to help spur the economy. This principle, established by John Maynard Keynes and until very recently accepted by those on the right and the left, would remind us that the time to cut programs and spending is not during an economic downturn, but rather once the economy has rebounded enough to pick up the slack currently left by the high unemployment rate.

The best of American democracy has always fostered political experimentation and pragmatic results over ideology, but in our current situation the experiment being run by the far right is playing Russian roulette with our common good, and will have disastrous consequences for our economy.

Ultimately, those hit the hardest by this experiment will be those who are already most vulnerable .

In a climate such as this, Christians – and all people of good will – have a responsibility to continue to uphold the principle of the common good as the foundation of our political life together in society, even if it appears that very few are capable of hearing the message right now.

Please pray that our politicians will reach a compromise borne out of humility, prudence, and wisdom; and one that does not neglect the common good, especially those most vulnerable in our society.

The Lesser Depression

2011-07-26T13:17:00.000-05:00

Sarcasm and arrogance aside, I think that Paul Krugman is right (though I'm not sure he completely understands why he is right). Even if we do manage to agree to raise the debt ceiling, the deficit reducing measures contingent upon such an agreement won't help our economy and may make things worse. And all of this is simply because we don't understand that a government doesn't need to balance its budget like a household (or state or EU member) does.

From Krugman:

Even if we manage to avoid immediate catastrophe, the deals being struck on both sides of the Atlantic are almost guaranteed to make the broader economic slump worse.

In fact, policy makers seem determined to perpetuate what I’ve taken to calling the Lesser Depression, the prolonged era of high unemployment that began with the Great Recession of 2007-2009 and continues to this day, more than two years after the recession supposedly ended.

The great housing bubble of the last decade, which was both an American and a European phenomenon, was accompanied by a huge rise in household debt. When the bubble burst, home construction plunged, and so did consumer spending as debt-burdened families cut back.

Everything might still have been O.K. if other major economic players had stepped up their spending, filling the gap left by the housing plunge and the consumer pullback. But nobody did. In particular, cash-rich corporations see no reason to invest that cash in the face of weak consumer demand.

Nor did governments do much to help. Some governments — those of weaker nations in Europe, and state and local governments here — were actually forced to slash spending in the face of falling revenues. And the modest efforts of stronger governments — including, yes, the Obama stimulus plan — were, at best, barely enough to offset this forced austerity.

The disappearance of unemployment from elite policy discourse and its replacement by deficit panic has been truly remarkable. It’s not a response to public opinion. In a recent CBS News/New York Times poll, 53 percent of the public named the economy and jobs as the most important problem we face, while only 7 percent named the deficit. Nor is it a response to market pressure. Interest rates on U.S. debt remain near historic lows.

For those who know their 1930s history, this is all too familiar. If either of the current debt negotiations fails, we could be about to replay 1931, the global banking collapse that made the Great Depression great. But, if the negotiations succeed, we will be set to replay the great mistake of 1937: the premature turn to fiscal contraction that derailed economic recovery and ensured that the Depression would last until World War II finally provided the boost the economy needed.

It's fairly simple, really. We need more demand, which means we need more money, which means that the government should stop taking away (taxing/destroying) our dollars without decreasing its own expenditures. In other words, we need a larger deficit. I'm not seeing how this ends well, until we understand this. I really hope it doesn't take another World War for us to ignore our debt and deficits.

Response to comments

2011-07-26T13:02:00.000-05:00

Here is my response to comments made by Darwin, on a previous post.

Darwin,

My replies are in red.

Alex,

Thanks for your irenic reply. I'll shoot to be more verbose and less blunt (as in object) this time around. :-)

I agree that there is a reason why fringe movements remain on the fringe, though I probably disagree with you on what those reasons are.

Well, FWIW, I think there tend to be various reasons, though it seems one commonality is that partisans of fringe movements often argue that they are kept on the fringe because those in the mainstream are afraid of the disruption they could cause and are keeping them out in order to maintain their own positions. (The folks I am most often very frustrated by who think along these lines are the Intelligent Design movement, who insist that evolution is a house of cards if only anyone would notice.) In academic fields, I think this is often one of the least plausible explanations. Often, I think, the true reason is simply that the beliefs of the fringe group do not in fact have huge amounts of explanatory power, if they are not outright wrong.

Well said, I guess I am so strongly convinced by the evidence, that I do not think we (MMTers) lack explanatory power. I feel that we are up against many myths that have cropped up for various reasons, some legitimate and some not so much. My goal is to reveal those myths and present evidence to the contrary so that others may be convinced as I am. I am not seeking it for my own sake or my own agenda, but for others’ sake. I think understanding money as I do will lead to less suffering in our world at the hands of long held myths about government finance.

It is quite perplexing to me why there are so many learned economists and politicians who think that our government's finances work like a household's--namely that we can go bankrupt and that therefore we should have a balanced budget amendment. I have my guesses to why that is, but no clear answers.

FWIW, the economists and politicians are probably very different groups in this regard. Many politicians seem to have very simplistic ideas of economics, but Harvard PhDs like Mankiw, not so much. I agree.

From what I've read of Mankiw's stuff, I don't at all get the impression that he supports a balanced budget amendment. He doesn’t. He seems to follow the basic consensus that in periods of economic trouble the government should run a deficit and that in good times it should move towards balance or surplus. What he does seem to hold, however, is that there is a serious limit to how large a deficit a country should run for how long, and his concern in the quoted editorial is that the US seems to be pursuing a policy of spending significantly more than it takes in long term. He is right to be concerned. I am not convinced from his arguments that he understands why, however. He seems concerned about interest rates and insolvency rather than the inflation that MMT’ers say would be the symptom of too large a deficit.

If I'm following the stuff that I've read over at New Economic Perspectives right, it seems like for many MMT folks the idea is that you never want to run a surplus (correct, because running a surplus takes away the net savings of the private sector. If the private sector wants to run net surplus or net savings, then by definition, the government balance or the foreign balance has to run net deficit) and it almost doesn't matter how big you let your deficit get, so long as you have a sovereign currency. Sort of. There is no solvency issue so long as we have our own currency, but inflation could get out of hand if we ran deficits willy-nilly. I think Mankiw is basically staking out the ground that although we have a sovereign currency (and one which is pretty much the world reserve currency at that) we can't behave like Greece long term and expect that to work out. Shouldn’t use Greece as an example because of their lack of sovereign currency. I don’t know a whole lot about Greece’s debt run-up (what led to it that is) but their problems are mostly because they don’t have a sovereign currency and no comparison can be made to the U.S. in this regard. We can and probably should run a deficit (especially now) without any solvency issues or bond market issues, but if we went crazy then we would certainly see inflation.

July 20, 2011 11:27 AM

Darwin said...

I believe that the the point of their seemingly overenthusiastic proscriptions (including my own) is so that others understand MMT and remove the constraints of misunderstanding (for the constraints are set not by how the money system really works, but rather by people's understanding of the money system).

I'll try to dig a bit more into this in a minute, but I think the response I want to float to this is that it might well be that one of the constraints on the money system (at least in avoiding effects that we might not much enjoy) is that those responsible for managing the currency behave in a way more or less in line with the more traditional understanding of what a currency is. In this sense, while MMT may be descriptively accurate as a method of analysis (I should be really clear here and elsewhere that being self taught and dealing with pricing, I feel comfortable with micro questions in a way that I simply don't on macro, so I tend to have an approach of trusting authorities I understand to some extent rather than arguing from first principles) if the Fed and government behaved as if it were, this might actually cause it to behave in some other way. I think what you are saying here is that if the authorities act according to what I’ll call the mainstream paradigm, then the masses will behave as if that is how it works and this is what causes a constraint. If so, then yes we are seeing that very clearly in the debate about the debt ceiling. A needless, but voluntary constraint. That is what I am trying to remove. I am trying to show that it is only a constraint if we choose it. Completely arbitrary and not based on good economics. I argue that the money system will behave as MMT’ers describe it no matter how the authority acts. But awareness of MMT understanding could lead the authorities to act in a way that would benefit the nation instead of causing it ruin.

You didn't really address any of the theory however. ... If I missed what you meant by "the bounds of reality and expectation" then please explain further, so that I don't misunderstand you.

I'm not unconscious of the difficulties of going up against a PhD student fan of MMT in an attempt to express objections to the theory, but here it goes: (I appreciate your attempt, I think you are well-read and wrote a great response, and I am still just a student and don’t really consider myself an expert)

Reading through the MMT Primer being put up at New Economic Perspectives and at overview posts such as "MMT Explained to Mums", it seems to me that part of the argument here is that since the government issues currency, that it doesn't need to worry about where money "comes from" in issuing currency. It seems to me that so long as there is a basic expectation that a government intends to maintain a balance between its revenues (via taxation) and it's spending, this is probably true. However, if it basically says, "Look, we control the currency and we're simply going to spend how we like, pay for it via debt, and if you ask how we'll pay for debt we'll simply print you dollars," it will pay a steep price in both the interest rates that lenders will demand on bonds and the demand for dollars in general (inflation.) I don’t think that is what they are saying, though I see how one could take it that way. Money is created by govt spending (and by bank loans, but lets ignore that for now, because it muddies things a bit and isn’t necessary for this explanation). Money is taken or destroyed away by taxes. It doesn’t really come from anywhere, it is simply created. Excessive creation is inflationary, destruction deflationary. Govt spending through money creation allocates resources towards what is spends its money on. Taxes make sure that it can obtain those resources by creating a demand for the currency to pay those taxes. So, they (remember, the they here is the government who we elect. I grow frustrated with those who think the government is some institution that controls us. It is an institution elected by the people for the people, though many choose to abstain from their right to vote and otherwise participate) can spend how they like, but there are certainly consequences. They don’t pay for it via debt, debt issuances are simply another drain on reserves (to help control inflation) and offer an interest bearing savings account to holders of cash or reserves. Interest rates are mostly set by the central bank (this is something I need to do more reading on, but I can try to find you sources if you want more explanation here). Inflation on the demand side will only get out of hand when resources are used up, but as it is right now, there are lots of idle resources (unemployment, unused capital, etc). So the cue for larger deficits is underutilized resources, the cue for smaller deficits is inflation and full employment.

July 20, 2011 11:27 AM

Darwin said...

Reading through all the talk about why things are budgeted the way they are, it seems to me there are two arguments being put forward for why we should decide that deficits and debt simply don't matter for the government:

1) Full employment will be achieved via the government employing everyone to do useful stuff, and this will create so much value that it will pay for itself. I think that they do think it will pay for itself, but that that isn’t the most important part of employing everyone who wants to work. There are many ways to provide useful work, unfortunately many people see the government paving roads that don’t need paved. I agree with them that that is not useful and not good use of deficit spending. But simply providing an income to everyone will boost demand even if they provide a little bit on the supply side our economy will be in better shape than paying unemployment insurance to people who sit at home all day and we end up squandering potential output.

2) The wealthy are keeping a lid on inflation to benefit themselves, but if we spent like crazy without worrying about how to pay for it and inflation resulted, this would basically just have the effect of depreciating the wealth of the wealthy and making us all more equal.

Of these, 1) strikes me as engaging in some weak form of the socialist calculation problem -- in other words, it assumes that the government guaranteeing to employ everyone (willing and able to work) would result in enough useful work being done to actually make us better off because of the value of the work done would equal the value spent in employing everyone. I would tend to think that's highly unlikely, in that I don't think any one really knows what it is that everyone is most valuably employed doing. Difficult administrative decisions are required here, but again is it better to put someone to work doing something somewhat useful or to let them produce nothing at home? As such, I think the value produced would be less than the value spent, and it might even be worse than useless in some cases in that people might be payed to do things less valuable than what they would have been doing otherwise. Here I have two questions: Is working better than not working (for those willing and able to work)? And what would these people be doing otherwise? You are also getting into the issue of ‘value,’ which is tricky because of how to define it. Do you mean in dollars? Utility? Spiritual value?

You pose many problems here to the ELR (Employment of Last Resort) proposal and it is these things I would love our debate to be focused on. I feel that if we can get past the bankruptcy concerns and all that nonsense we can focus on “okay, so we need a deficit, how do we spend it?” I think that that should be our focus and one where conservatives make many useful arguments that many proponents of MMT would rather ignore, because they tend to be very liberal. I would love to have a conversation with you in particular on these issues (taxes, specific policy proposals, etc) sometime, because you seem full of wisdom on many of these.

On 2), it strikes me that while the kind of chaos caused by high inflation (something which seems to be denied would result if the government only spent to the point of full employment, but I have real trouble imagining would not result from the policies advocated, and is the only thing which would have the advertised effect of taking down the value of the holdings of the wealthy) does in fact hurt the wealthy, it hurts the poor a whole lot as well.

I am not as good at the inflation stuff as I need to be yet, but having read the proposals of my professors I do not think inflation will be a problem until we reach max utilization of resources. High inflation isn’t good, and so it is to be avoided. High unemployment is also not good and so it is to be avoided. Recently, however, economists and politicians are more afraid of inflation (because of “massive deficits”) that hasn’t transpired and its been 2 years+ since deficits rose dramatically. They seem to pay little attention to unemployment (I do not consider reducing deficits as a serious attempt at reducing unemployment for many reasons) and that concerns me greatly, for it is my belief that unemployment is a bad thing in and of itself, not simply for the lost output, but also because it is part of our human vocation for it is how we create just as God created us and our world. Inflation is only bad (to me) if it causes unemployment or lost output or instability, which it can, but until it does we should worry about the real problem. And since we know how inflation works (via MMT and other bright monetary scholars) we have the tools to bring it down if it gets out of hand.

For a policy proposal that you might consider more favorable than the ELR as a means of increasing our deficit I suggest watching Mosler’s address to the Tea Party 2 years ago: http://moslereconomics.com/2009/09/29/tea-party-address/

July 20, 2011 11:28 AM

Debt Ceiling and Balanced Budget Amendment

2011-07-20T11:31:00.000-05:00

What would happen if the government doesn't raise the debt ceiling in time?

To avoid default, the Treasury would prioritize interest payments, which means a lot of other bills won't get paid.

Chairman Bernanke said that this could cut 6% off of GDP and send the US into another recession with GDP going from positive to negative. How does that help boost sales or business confidence?

However, falling GDP means falling revenues which means more spending cuts, and revenues falling further.

It also means the automatic fiscal stabilizers of rising transfer payments will not be funded by deficit spending and therefore not provide the support they have provided in all prior downturns.

For the first time the US would experience an unchecked downward spiral, which could make the downturn that much more severe than the Fed Chairman suggested.

This likely would transfer to other nations for the drop in US consumer, business, and govt spending will mean a drop in sales for euro zone exporters, possibly sending that region into negative GDP growth and falling govt revenues.

This means their current solvency and funding issues further deteriorate as the entire euro zone could experience a funding barrier and general default.

While the ECB can, operationally, write any size check required to fund the entire region, it doesn’t want to do that, and can be expected to wait until things deteriorate sufficiently to the point were there is no other choice.

Ironically, the US debt ceiling, a seemingly innocuous relic of the gold standard, where it once served to protect the nation’s gold supply and should have been eliminated when the US dollar ceased to be officially convertible into gold, could now bring down the entire world economy, and threaten the world social order as well.

Paraphrased and quoted from here.

Similar effects could be expected with a Balanced Budget Amendment. House Republicans and even Senate Republicans (at least my senator, Jerry Moran, sent out an email saying he approved a BBA) are championing a Balanced Budget Amendment (BBA) as the solution to our fiscal woes.

I don't know what they think will happen if such an amendment were to pass, which is very highly unlikely, but it seems they believe that consumer and business confidence will go up and the crowding out (that they think is happening) will stop and businesses will begin to invest again; or I could be even more pessimistic and think that they are intentionally tanking the economy so as to win elections in 2012 ala Paul Krugman, but I really don't think that's the case.

Taking away a large chunk of deficit spending through a BBA would likely result in a large drop in GDP, followed by further drops in revenue, which would then require a further drop in spending...and you see how this cycle is self-defeating right? It would certainly accomplish the goal of a smaller goverment, but I don't know what good it would do for the common good. It would take away many needs of millions of people. Social order would be very difficult to maintain. Many evil regimes came to power amidst times of economic turmoil.

I also don't think that those who champion balanced budgets and deficit cutting understand that doing so would undermine their efforts to balance the budget. The government would certainly be reduced in size, but would the private sector take up the task of providing for the needs of those who aren't provided for by the market? What business invests when consumers aren't buying their products/services because a chunk of their income was taken away?

We could have a smaller government as the Republicans desire, but we can't have a smaller deficit (or no deficit) and not expect to face economic turmoil. We must have a deficit and we must raise the debt ceiling, or better yet abolish such a concept altogether (what's the point of a debt ceiling?). We can decrease government by reducing spending and taxes by more than spending or increase government by increasing spending and taxes by less than spending, and that should be the debate!. But the debate has been about how to reduce the deficit and on that note I disagree greatly with both sides.

Can and Can't vs. Should and Shouldn't

2011-07-19T10:50:00.001-05:00

Greg Mankiw, an economist at Harvard known for his textbook and his blog, wrote an article in the NY Times a while back expressing his concern about the debt and the government "living beyond its means" by imagining the president's address to the nation in 2026. Despite his supposed expertise he makes many errors and overlooks key factors. Warren Mosler responded to his article by exposing these mistakes.

I am posting it because I think it's important for you to understand what almost everyone is thinking about the debt debate (Mankiw's article) and what people should be thinking about the debate (Mosler's response). If nothing else, you should at least be given a chance to understand an alternative that does not get any air time on tv or radio, and is not really even given a chance by most economists and politicians who wave it off like mere nonsense.

I have studied the arguments and believe very strongly that Mosler's arguments seem much more plausible than Mankiw's and the rhetoric we see and hear on tv; I also feel very strongly that you should be able to decide for yourself, but this is not possible if not given all the arguments.

Understanding government finance does not mean that government must necessarily be large (there is still much room for that debate), but it is so necessary to move beyond what the government can and can't do to what the government should and shouldn't do.

Mankiw's article (Mosler's comments in red):

The following is a presidential address to the nation — to be delivered in March 2026.

My fellow Americans, I come to you today with a heavy heart. We have a crisis on our hands. It is one of our own making. And it is one that leaves us with no good choices.

For many years, our nation’s government has lived beyond its means.

A rookie, first year student mistake. Our real means are everything we can produce at full employment domestically plus whatever the rest of the world wants to net send us. The currency is the means for achieving this. Dollars are purely nominal, and not the real resources.

We have promised ourselves both low taxes and a generous social safety net. But we have not faced the hard reality of budget arithmetic.

The hard reality is that for a given size government, there is a ‘right level’ of taxes that corresponds with full domestic employment, with the size of any federal deficit a reflection of net world dollar savings desires.

The seeds of this crisis were planted long ago, by previous generations. Our parents and grandparents had noble aims. They saw poverty among the elderly and created Social Security.

Yes, they decided they would like our elderly to be able to enjoy at least a minimum level of consumption of goods and services that made us all proud to be Americans.

They saw sickness and created Medicare and Medicaid. They saw Americans struggle to afford health insurance and embracedhealth care reform with subsidies for middle-class families

Yes, they elected to make sure everyone had at least a minimum level of actual health care services.

But this expansion in government did not come cheap. Government spending has taken up an increasing share of our national income.

The real cost of this ‘expansion’ (which was more of a reorganization than an expansion of actual real resources consumed by the elderly and consumed by actual healthcare needs) may have consumed an increasing share of real GDP, but with continued productivity this would have been at most a trivial amount at current rates of expansion.

Today, most of the large baby-boom generation is retired. They are no longer working and paying taxes, but they are eligible for the many government benefits we offer the elderly.

Yes, they are consuming real goods and services produced by others. The important consideration here is the % of the population working and overall productivity which he doesn’t even begin to address.

Our efforts to control health care costs have failed. We must now acknowledge that rising costs are driven largely by technological advances in saving lives. These advances are welcome, but they are expensive nonetheless.

Still no indication of what % of real GDP he envisions going to health care and real consumption by the elderly.

If we had chosen to tax ourselves to pay for this spending, our current problems could have been avoided. But no one likes paying taxes. Taxes not only take money out of our pockets, but they also distort incentives and reduce economic growth. So, instead, we borrowed increasing amounts to pay for these programs.

At least he gives real economic growth a passing mention. However, what he seems to continuously miss is that real output is THE issue. Right now, with potential employment perhaps 20% higher than it currently is, the lost real output, which compounds continuously, plus the real costs of unemployment- deterioration of human capital, broken families and communities, deterioration of real property, foregone investment, etc. etc. etc.- are far higher than the real resources consumed by the elderly and actual health care delivery. Nor does he understand what is meant by the term Federal borrowing- that it’s nothing more than the shift of dollar balances from reserve accounts at the Fed to securities accounts at the Fed. And that repayment is nothing more than shifting dollar balances from securities accounts at the Fed to reserve accounts at the Fed. No grandchildren involved!!!

Yet debt does not avoid hard choices. It only delays them. After last week’s events in the bond market, it is clear that further delay is no longer possible. The day of reckoning is here.

This morning, the Treasury Department released a detailed report about the nature of the problem. To put it most simply, the bond market no longer trusts us.

For years, the United States government borrowed on good terms. Investors both at home and abroad were confident that we would honor our debts. They were sure that when the time came, we would do the right thing and bring spending and taxes into line.

But over the last several years, as the ratio of our debt to gross domestic product reached ever-higher levels, investors started getting nervous. They demanded higher interest rates to compensate for the perceived risk.

This is all entirely inapplicable. It applies only to fixed exchange rate regimes, such as a gold standard, and not to non convertible currency/floating exchange rate regimes. This is nothing more than another rookie blunder.

Higher interest rates increased the cost of servicing our debt, adding to the upward pressure on spending. We found ourselves in a vicious circle of rising budget deficits and falling investor confidence.

With our non convertible dollar and a floating exchange rate, the Fed currently sets short term interest rates by voice vote, and the term structure of interest rates for the most part anticipates the Fed’s reaction function and future Fed votes. Nor is there any operational imperative for the US Government to offer longer term liabilities, such as 5 year, 7 year, 10 year, and 30 year US Treasury securities for sale, which serve to drive up long rates at levels higher than otherwise. That too is a practice left over from gold standard days that’s no longer applicable.

As economists often remind us, crises take longer to arrive than you think, but then they happen much faster than you could have imagined. Last week, when the Treasury tried to auction its most recent issue of government bonds, almost no one was buying. The private market will lend us no more. Our national credit card has been rejected.

As above, the US Government is under no operational imperative to issue Treasury securities. US Government spending is not, operationally, constrained by revenues. At the point of all US govt spending, all that happens is the Fed, which is controlled by Congress, credits a member bank reserve account on its own books. All US Government spending is simply a matter of data entry on the US Governments own books. Any restrictions on the US government’s ability to make timely payment of dollars are necessarily self imposed, and in no case external.

So where do we go from here?

WE DON’T GET ‘HERE’- THERE IS NO SUCH PLACE!!!

Yesterday, I returned from a meeting at the International Monetary Fund in its new headquarters in Beijing. I am pleased to report some good news. I have managed to secure from the I.M.F. a temporary line of credit to help us through this crisis.

This loan comes with some conditions. As your president, I have to be frank: I don’t like them, and neither will you. But, under the circumstances, accepting these conditions is our only choice.

Mankiw’s display of ignorance and absurdities continues to compound geometrically.

We have to cut Social Security immediately, especially for higher-income beneficiaries. Social Security will still keep the elderly out of poverty, but just barely.

We have to limit Medicare and Medicaid. These programs will still provide basic health care, but they will no longer cover many expensive treatments. Individuals will have to pay for these treatments on their own or, sadly, do without.

We have to cut health insurance subsidies to middle-income families. Health insurance will be less a right of citizenship and more a personal responsibility.

We have to eliminate inessential government functions, like subsidies for farming, ethanol production, public broadcasting, energy conservation and trade promotion.

The only reason we would ever be ‘forced’ to make those cuts would be real resource constraints- actual shortages of land, housing, food, drugs, labor, clothing, energy, etc. etc. And yes, that could indeed happen. Those are the real issues facing us. But Mankiw is so lost in his errant understanding of actual monetary operations he doesn’t even begin to get to where he should have started.

We will raise taxes on all but the poorest Americans. We will do this primarily by broadening the tax base, eliminating deductions for mortgage interest and state and local taxes. Employer-provided health insurance will hereafter be taxable compensation.

He fails to recognize that federal taxes function to regulate aggregate demand, and not to raise revenue per se, again showing a complete lack of understanding of current monetary arrangements.

We will increase the gasoline tax by $2 a gallon. This will not only increase revenue, but will also address various social ills, from global climate change to local traffic congestion.

Ok, finally, apart from the revenue error, he’s got the rest of it sort of right, except he left out the part about that tax being highly regressive.

As I have said, these changes are repellant to me. When you elected me, I promised to preserve the social safety net. I assured you that the budget deficit could be fixed by eliminating waste, fraud and abuse, and by increasing taxes on only the richest Americans. But now we have little choice in the matter.

Due entirely to ignorance of actual monetary operations.

If only we had faced up to this problem a generation ago. The choices then would not have been easy, but they would have been less draconian than the sudden, nonnegotiable demands we now face. Americans would have come to rely less on government and more on themselves, and so would be better prepared today.

What I wouldn’t give for a chance to go back and change the past. But what is done is done. Americans have faced hardship and adversity before, and we have triumphed. Working together, we can make the sacrifices it takes so our children and grandchildren will enjoy a more prosperous future.

Okay, so Modern Money does get a little airtime. Here is Warren Mosler on Fox News a year ago (you can see the total lack of disbelief in the host):

What do you think?

Truth Deficit

2011-07-18T14:51:00.003-05:00

Charles Clark, a well-known Catholic economist and professor at St. John's University recently wrote this for Commonweal Magazine:

Truth Deficit

Here are some highlights (my comments in red):

The recent effort by Rep. Paul Ryan (R-Wis.) and other congressional Republicans to reduce or eliminate entitlement programs has followed the same formula. The Republicans are telling voters that the country can’t afford to help the poor, the elderly, and the sick as much as it does now. They warn that Social Security, Medicare, and Medicaid are quickly running out of money, and that without cuts to these programs the federal government will soon face a debt crisis like the one now crippling Greece.

Because two of the most prominent deficit hawks are Catholic politicians (Ryan and House Speaker John Boehner), the debate about the national debt has occasioned a debate about the ethics of balancing the federal budget at the expense of those Christ instructed his followers to help (see Matthew 25: 31–46). It is therefore important that there be an open discussion about which values are guiding our collective decisions about taxes and spending.

According to Catholic social thought, this discussion should be informed by the principles of subsidiarity, solidarity, and the preferential option for the poor. But there is another value, one fundamental to most religious traditions, that also needs to be asserted in this debate —the value of telling the truth. Politicians are haggling over which programs to cut or where to find new sources of revenue, but few have challenged the dubious premises behind the debt panic.

Voters deserve to be treated like adults, not children, and this means that politicians shouldn’t say “we can’t” when they really just mean “we don’t want to.” If some members of the House and Senate don’t think the federal government should take care of those who aren’t fully able to take care of themselves—if, say, they believe it’s up to the states or private charity to do this—then let them say so openly instead of presenting their policy preference as a matter of fiscal necessity. Small-government conservatives are now using the national debt as an excuse to cut programs they’ve long wanted to cut, even when the government was running a surplus.

The biggest economic problems the United States now faces are unemployment, income inequality, and the fact that much of the financial sector still operates like a casino. Contrary to the claim of many leading Republicans on Capitol Hill, there is no reason to think that immediate cuts to government spending will help the economy—or that spending cuts can’t wait until the economy improves.

Behind the confusion on these points are four myths about national debt that have somehow become conventional wisdom in Washington and in most of the media.

The first and most basic myth is the idea that the U.S. government is about to run out of money (Modern Money!!). In fact, the U.S. Treasury can’t run out of money because it pays its bills in money it creates. If the federal government owed its debt in Euros or some other currency—or if it had, say, a gold standard, which would limit the government’s ability to create new money—then Ryan and Boehner might be right to warn of bankruptcy. But U.S. debt is owed in U.S. dollars, a sovereign currency that isn’t chained to the value of any commodity. The U.S. government could of course decide not to pay its bills (for example, by refusing to raise the debt ceiling), but it can never lose its ability to pay them. When politicians and journalists say that the United States is in danger of becoming the next Greece, Ireland, or Portugal, they are ignoring the fact that these other countries no longer have a sovereign currency. They must pay their debts in Euros, the supply of which they do not control. They are thus like California, New York, and all the other states facing big budget deficits: they can solve their fiscal problems only by selling bonds or raising taxes. They cannot create more money.

The second big myth is that deficit spending is “crowding out” private-sector spending and investment. Only when an economy is at full capacity will an increase in government spending crowd out private-sector spending.

The crowding-out argument is based on an eighteenth-century economic theory called “Say’s law of markets,” according to which supply creates its own demand and economies are always either at full employment or tending toward it. More than two centuries of experience with capitalism has shown that this is not normally the case. Periods of high (involuntary) unemployment are as characteristic of capitalism as are innovation and rising productivity.

This brings us to the third myth about the federal government’s debt: that the problem is primarily about spending. In fact, the main problem is insufficient revenue.(Here, I agree and disagree. I agree that a lot of people are too focused on "runaway" spending. I disagree with his view that insufficient revenue is the problem. It may be the reason for the large deficit along with the automatic stabilizers, which I do agree with, but taxes or revenue drain the economy of reserves and function to maintain the value of the dollar. The government doesn't need revenue to spend, as noted by the author above, revenue's main function is to create a demand for the U.S. dollar. So, though the main reason for the deficit may be a drop in revenue, more revenue is NOT the answer, because that means more drains on the economy. However, I do think that if the deficit is going to be reduced, it is better that the rich stomach the increased taxes than the poor endure the decreased welfare support). It is probably a bad idea to raise taxes when the official unemployment rate is still around 9 percent. But the fact is, Americans are not generally overtaxed. No matter how you measure tax rates, ours are among the lowest in the industrial world—as much as 20 percent lower than those in some comparably rich countries. Politicians tell us that U.S. corporations face the second-highest marginal tax rate among the major economies, but with all their loopholes and tax subsidies American corporations actually end up paying much less in taxes than corporations abroad. Taxes on corporate income in 2008 amounted to 1.8 percent of our GDP; the average for OECD (Organization for Economic Co-operation and Development) countries was 3.5 percent.

If the federal deficit is as big a problem as both parties say it is (it isn't!), then we could substantially reduce it by paying higher taxes (we could, but that isn't the answer, and may actually increase deficits by further hampering the economy).

The last big myth that distorts our discussions about the nation’s debt is the idea that only the private sector can create wealth, and that the government is essentially parasitic. This bias against public services and public employment might make sense if your only goal is to make profits for owners of capital. But the idea that the shuffling of money on Wall Street is nobler or more important than what school teachers or nurses do ought to be deeply troubling to all Christians. As Benedict XVI noted in his last encyclical, Caritas in veritate, the Catholic tradition considers wealth to be necessarily connected with well-being, and it distinguishes between creating wealth and capturing it. There are nonproductive ways to get rich. Once we acknowledge that creating wealth is not the same as making a profit, we see that governments create wealth all the time—and that without government involvement there would be very little wealth creation at all (a point Adam Smith understood much better than some of his current disciples). Governments build roads, schools, dams, and countless other things that contribute to the capital stock of the nation. Governments define and protect property rights, without which the only private wealth would be whatever you could personally defend. Most of the large accumulations of private wealth stem from government contracts, special tax treatment (subsidies), or the privatized benefits of government investments in research. Finally, some of the government’s debt is private-sector wealth (it owes that money to someone), so when the U.S. government reduces its outstanding debt, it also reduces private-sector wealth, here or abroad. We should also remember that every time the federal government has moved to sharply reduce its debt a major recession followed (which modern money theory explains quite nicely).

The church teaches us to promote the common good, to help the poor and marginalized before we help ourselves, to see in them the face of Jesus. The first Christians called this “the way of life.” The earliest manual on Christian practice, the Didache (50–150 AD), warns us against following the way of death, the way of those who “have no mercy for the poor, do not work on behalf of the oppressed…who turn away from someone in need, who oppress the afflicted, are advocates of the wealthy.”

How do we help the poor and oppressed in a twenty-first-century economy? Before we allow representatives of the Tea Party to slash government spending on programs for the elderly, the sick, and the unemployed—modern programs that were designed to meet modern needs that neither Adam Smith nor our Founding Fathers could have anticipated—we should demand solid evidence that the richest country in the history of the world really cannot afford to take care of its most vulnerable citizens. We should make sure we are not reducing our commitment to the least of our brethren so that the richest 5 percent can grab an even larger share of the country’s wealth. The urgent danger facing us now is not that America is about to drown in debt, but that discredited, ahistorical economic theories will scare us into abandoning our most important values.

Examining CV, Part 7

2011-07-11T13:11:00.004-05:00

You can find parts 1-6 here: Part 1, Part 2, Part 3, Part 4, Part 5, Part 6.

Examining the rest of chapter 3, we see that Pope Benedict XVI continues his discussion of morality and ethics within the economic and political spheres.

Locating resources, financing, production, consumption and all the other phases in the economic cycle inevitably have moral implications. Thus every economic decision has a moral consequence.

Hence the canons of justice must be respected from the outset, as the economic process unfolds, and not just afterwards or incidentally.

He also draws attention to the fact that economic life is a multi-layered phenomenon with three subjects: the market, the State, and civil society; and that recently the market and contractual exchange have been favored by public opinion.

[Economic life] requires contracts, in order to regulate relations of exchange between goods of equivalent value. But it also needs just laws and forms of redistribution governed by politics, and what is more, it needs works redolent of the spirit of gift.

The economy in the global era seems to privilege the former logic, that of contractual exchange, but directly or indirectly it also demonstrates its need for the other two: political logic, and the logic of the unconditional gift.

He reminds us that we all must strive for solidarity, "a sense of responsibility on the part of everyone with regard to everyone;" and that "[the pursuit of solidarity] cannot therefore be merely delegated to the State."

He also reminds us yet again that "without gratuitousness, there can be no justice in the first place."

We need what Pope Paul VI called for in Populorum Progressio:

The creation of a model of market economy capable of including within its range all peoples and not just the better off. He called for efforts to build a more human world for all, a world in which “all will be able to give and receive, without one group making progress at the expense of the other”. In this way he was applying on a global scale the insights and aspirations contained in Rerum Novarum, written when, as a result of the Industrial Revolution, the idea was first proposed — somewhat ahead of its time — that the civil order, for its self-regulation, also needed intervention from the State for purposes of redistribution.

We need more than just a binary model of market-plus-State society:

In order to defeat underdevelopment, action is required not only on improving exchange-based transactions and implanting public welfare structures, but above all on gradually increasing openness, in a world context, to forms of economic activity marked by quotas of gratuitousness and communion.

He then calls for a "profoundly new way of understanding business enterprise," noting the risks and dangers of today's common form of business enterprise.

One of the greatest risks for businesses is that they are almost exclusively answerable to their investors, thereby limiting their social value. Owing to their growth in scale and the need for more and more capital, it is becoming increasingly rare for business enterprises to be in the hands of a stable director who feels responsible in the long term, not just the short term, for the life and the results of his company, and it is becoming increasingly rare for businesses to depend on a single territory. Moreover, the so-called outsourcing of production can weaken the company's sense of responsibility towards the stakeholders — namely the workers, the suppliers, the consumers, the natural environment and broader society — in favour of the shareholders, who are not tied to a specific geographical area and who therefore enjoy extraordinary mobility.

In recent years a new cosmopolitan class of managers has emerged, who are often answerable only to the shareholders generally consisting of anonymous funds which de facto determine their remuneration.

Even if the ethical considerations that currently inform debate on the social responsibility of the corporate world are not all acceptable from the perspective of the Church's social doctrine, there is nevertheless a growing conviction that business management cannot concern itself only with the interests of the proprietors, but must also assume responsibility for all the other stakeholders who contribute to the life of the business: the workers, the clients, the suppliers of various elements of production, the community of reference.

How should the business enterprise effectively promote justice/how should we view the business enterprise?

What should be avoided is a speculative use of financial resources that yields to the temptation of seeking only short-term profit, without regard for the long-term sustainability of the enterprise, its benefit to the real economy and attention to the advancement, in suitable and appropriate ways, of further economic initiatives in countries in need of development.

And extra care must be taken into consideration by international corporations:

It is true that the export of investments and skills can benefit the populations of the receiving country. Labour and technical knowledge are a universal good. Yet it is not right to export these things merely for the sake of obtaining advantageous conditions, or worse, for purposes of exploitation, without making a real contribution to local society by helping to bring about a robust productive and social system, an essential factor for stable development.

He reminds us that "business enterprise involves a wide range of values," and that "business has to be understood in an articulated way." Because:

Business activity has a human significance, prior to its professional one. It is present in all work, understood as a personal action, which is why every worker should have the chance to make his contribution knowing that in some way he is working ‘for himself'.

"Political authority also involves a wide range of values."

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.

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 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.

And finally, Pope Benedict XVI teaches us that "globalization is neither good nor bad," and that true globalization and integration requires "a sustained commitment so as to promote a person-based and community-oriented cultural process of world-wide integration that is open to transcendence."

The processes of globalization, suitably understood and directed, open up the unprecedented possibility of large-scale redistribution of wealth on a world-wide scale; if badly directed, however, they can lead to an increase in poverty and inequality, and could even trigger a global crisis. It is necessary to correct the malfunctions, some of them serious, that cause new divisions between peoples and within peoples, and also to ensure that the redistribution of wealth does not come about through the redistribution or increase of poverty: a real danger if the present situation were to be badly managed.

Today the material resources available for rescuing these peoples from poverty are potentially greater than before, but they have ended up largely in the hands of people from developed countries, who have benefited more from the liberalization that has occurred in the mobility of capital and labour. The world-wide diffusion of forms of prosperity should not therefore be held up by projects that are self-centred, protectionist or at the service of private interests.

"In this way it will be possible to experience and to steer the globalization of humanity in relational terms, in terms of communion and the sharing of goods."

Recovery or Double-Dip?

2011-07-08T09:44:00.003-05:00

It's still amazing how economists and politicians keep predicting a recovery, in the face of overwhelming evidence that indicates otherwise.

June swoon: Economy added almost no jobs last month

It's hard to understand why this news still "comes as a shock" to economists. They continue to ignore the explanation of modern money and government finance given repeatedly by MMT'ers.

I posted just a few weeks ago about the likelihood of a double-dip recession, or at the very least a lack of recovery given the lack of overall demand and spending. And since the government shows no signs of backing off its austerity push, I stand behind my belief that the economy will continue to remain quite stagnant with little to no gains, and quite possibly more losses, in the job market.

The government isn't crowding out private spending, which I would say will be obvious to everyone when cuts in government spending don't bring about the growth in jobs politicians say will happen, but I'm not sure they will get that message. Instead, they might call for even more cuts! Oye!

The truth is, neither side gets it...

2011-07-01T13:35:00.004-05:00

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.

PLEASE PLEASE PLEASE remember that:

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.

Will we raise the debt ceiling in time? Do Republicans care?

2011-06-28T16:44:00.003-05:00

The latest on the debt ceiling talks from Ezra Klein:

A bit more information has trickled out over the last few days detailing the exact state of the budget negotiations when they collapsed. Both sides, as they often said, were shooting for about $2.4 trillion in deficit reduction over 10 years. They'd already agreed on around $1 trillion in spending cuts and were making good progress on the rest of it. But Democrats insisted that $400 billion -- so, 17 percent -- of the package be tax increases. And that's when Republicans walked.

Specifically, the Obama administration was looking at a rule that lets businesses value their inventory at less than they bought it for in order to lower their tax burden, a loophole that lets hedge-fund managers count their income as capital gains and pay a 15 percent marginal tax rate, the tax treatment of private jets, oil and gas subsidies, and a limit on itemized deductions for the wealthy.

It's almost not worth going into the details on those particular tax changes because the Republican position has held that the details don't matter: well-designed tax increases won't be looked at any more favorably than poorly designed tax increases. The point, Republicans say, is that there can't be any tax increases, full stop.

For now, Democrats are holding their ground. "Do we perpetuate a system that allows for subsidies in revenues for oil and gas, for example, or owners of corporate private jets, and then call for cuts in things like food safety or weather services?" Press Secretary Jay Carney asked. But at some point, this will cease to be a clean choice between two budget plans and begin to be a question over whether we can raise the debt ceiling. And that, Republicans are betting, is when the Democrats will stop holding their ground.

SERIOUSLY?!

First of all, not raising the debt-ceiling would be economic suicide. Second, reducing the deficit now is not going to reduce it later. It will only cause more economic hardship which will cause revenues to fall. Third, if you are going to reduce the deficit anyway, why on earth would you walk out because of a tax break for those who own private jets?! I understand the Republicans want smaller government, which means no tax increase on anyone, but that means cutting important programs (such as TANF) for the less well off.

Obama is even comprising on the budget talks, something I haven't seen from Republicans who continue to hold their ground and flirt with disaster counting on the Dems to change their stance. From Sam Youngman:

President Obama, seeking a Republican agreement to raise the nation's $14.3 trillion debt ceiling by Aug 2, will not insist that any deal include an end of President Bush's controversial tax rates on the wealthy.

Obama's tactics are coming into clearer focus: they involve seeking higher taxes not on a broad swath of high income earners but on a narrower band of the super rich, such as owners of private jets. This means that those who earn $250,000 have got a reprieve.

Why would a bunch of social conservatives, who I assume care deeply about human life at all stages because they oppose abortion and euthanasia, rather cut assistance to those in need in favor of a tax break for the super rich?

Examining CV, Part 6

2011-06-28T15:17:00.003-05:00

In Chapter 3 of CV, Pope Benedict XVI delves into fraternity, economic development, and civil society.

He first affirms that we, as humans, are made for gift and that we are often wrongly convinced that we are the sole authors of ourselves, our lives, and all of society. He reminds us that we have a wounded nature born out of original sin and that the economy has felt the pernicious effects of this sin.

Happiness is not material prosperity and economics is not autonomous from morality:

The conviction that man is self-sufficient and can successfully eliminate the evil present in history by his own action alone has led him to confuse happiness and salvation with immanent forms of material prosperity and social action. Then, the conviction that the economy must be autonomous, that it must be shielded from “influences” of a moral character, has led man to abuse the economic process in a thoroughly destructive way. In the long term, these convictions have led to economic, social and political systems that trample upon personal and social freedom, and are therefore unable to deliver the justice that they promise.

Charity, hope, truth...these things are greater than we are. Charity in truth builds an authentic human community that we alone cannot build by ourselves. Gratuitousness must be evident in society if economic, social and political development is to be authentically human.

The Pope then goes on to make very key statements regarding markets and justice that "free marketers" often ignore or reject:

In a climate of mutual trust, the market is the economic institution that permits encounter between persons, inasmuch as they are economic subjects who make use of contracts to regulate their relations as they exchange goods and services of equivalent value between them, in order to satisfy their needs and desires. The market is subject to the principles of so-called commutative justice, which regulates the relations of giving and receiving between parties to a transaction. But the social doctrine of the Church has unceasingly highlighted the importance of distributive justice and social justice for the market economy, not only because it belongs within a broader social and political context, but also because of the wider network of relations within which it operates. In fact, if the market is governed solely by the principle of the equivalence in value of exchanged goods, it cannot produce the social cohesion that it requires in order to function well.

Without internal forms of solidarity and mutual trust, the market cannot completely fulfil its proper economic function. And today it is this trust which has ceased to exist, and the loss of trust is a grave loss.

According to the Pope, it was not just a matter of correcting dysfunctions through assistance. The poor are not to be considered a “burden”, but a resource, even from the purely economic point of view. It is nevertheless erroneous to hold that the market economy has an inbuilt need for a quota of poverty and underdevelopment in order to function at its best.

It is in the interests of the market to promote emancipation, but in order to do so effectively, it cannot rely only on itself, because it is not able to produce by itself something that lies outside its competence. It must draw its moral energies from other subjects that are capable of generating them.

These statements are very strong because they rightly point out that markets alone do NOT bring about a just distribution of goods as many economists would have you believe. The solution lies not just in redistribution, but far more importantly in moral actors within markets. We must all act together toward the common good and not rely on selfish actions within a market to produce the result for us. Pope Benedict XVI continues:

In and of itself, the market is not, and must not become, the place where the strong subdue the weak. Society does not have to protect itself from the market, as if the development of the latter were ipso facto to entail the death of authentically human relations. Admittedly, the market can be a negative force, not because it is so by nature, but because a certain ideology can make it so. It must be remembered that the market does not exist in the pure state. It is shaped by the cultural configurations which define it and give it direction. Economy and finance, as instruments, can be used badly when those at the helm are motivated by purely selfish ends. Instruments that are good in themselves can thereby be transformed into harmful ones. But it is man's darkened reason that produces these consequences, not the instrument per se. Therefore it is not the instrument that must be called to account, but individuals, their moral conscience and their personal and social responsibility.

WE, as economic actors, make up markets and it is WE who are responsible for their goodness or their badness. In other words, Pope Benedict is criticizing the market harshly, not because it isn't efficient or that it is evil, but because our actions within the market aren't directed toward the common good. Those who hold that selfish actions within a market bring about the common good as is often claimed (starting with Adam Smith's "invisible hand") by economists and politicians are wrong! It is clear that this does not bring about the common good, instead we must act always for each other, within and outside the market, so as to bring about a community of charity and fraternity that provides for the welfare of all.

The economic sphere is neither ethically neutral, nor inherently inhuman and opposed to society. It is part and parcel of human activity and precisely because it is human, it must be structured and governed in an ethical manner.

What is needed?:

The great challenge before us, accentuated by the problems of development in this global era and made even more urgent by the economic and financial crisis, is to demonstrate, in thinking and behaviour, not only that traditional principles of social ethics like transparency, honesty and responsibility cannot be ignored or attenuated, but also that in commercial relationships the principle of gratuitousness and the logic of gift as an expression of fraternity can and must find their place within normal economic activity.

Because: "every economic decision has a moral consequence. Justice must be applied to every phase of economic activity, because this is always concerned with man and his needs."

Pope Benedict XVI writes that economic life needs contracts to regulate exchange, just laws and redistribution governed by poltiics, and most importantly works redolent of the spirit of gift. He calls especially for today's market economies to make room for institutions with motives other than profit-oriented enterprises, for civil society to push for greater solidarity and not simply rely on the State to do so, and for the State to redistribute when necessary to take care of the peoples who are not included within the benefits of the market economy.

When will Congress get it?

2011-06-22T14:20:00.004-05:00

This investment banker did...I came across this great article via Krugman on Bill Gross's recent comments. He is the founder of Pimco, an investment firm.

Highlights:

In a prospectus for clients, Bill Gross, a co-founder of investment management giant PIMCO, says members' of Congress incessant focus on deficit -- and in particular, the manner in which they obsess about deficits -- is foolhardy, and a recipe for disaster. What the country needs, Gross said, is real stimulus now...

"While Democrats favor tax increases and mild adjustments to entitlements, Republicans pound the table for trillions of dollars of spending cuts and an axing of Obamacare. Both, however, somewhat mystifyingly, believe that balancing the budget will magically produce 20 million jobs over the next 10 years. President Obama's long-term budget makes just such a claim and Republican alternatives go many steps further. Former Governor Pawlenty of Minnesota might be the Republicans' extreme example, but his claim of 5% real growth based on tax cuts and entitlement reductions comes out of left field or perhaps the field of dreams. The United States has not had a sustained period of 5% real growth for nearly 60 years."

...fiscal balance alone will not likely produce 20 million jobs over the next decade. The move towards it, in fact, if implemented too quickly, could stultify economic growth. Fed Chairman Bernanke has said as much, suggesting the urgency of a congressional medium-term plan to reduce the deficit but that immediate cuts are self-defeating if they were to undercut the still-fragile economy.

and in case you wondered like I did:

stul·ti·fy /ˈstʌltəˌfaɪ/ [stuhl-tuh-fahy]
–verb (used with object), -fied, -fy·ing.
1. to make, or cause to appear, foolish or ridiculous.
2. to render absurdly or wholly futile or ineffectual, especially by degrading or frustrating means: Menial work can stultify the mind.
3. to allege or prove (oneself or another) to be of unsound mind.

UPDATE: I was able to find the full article written by Gross over the weekend and he even advocates an Employer of Last Resort program (ELR), something that I believe meets the demand made by Catholic Social Teaching that the State work to provide access to steady employment for everyone.

From Gross:

In the end, I hearken back to revered economist Hyman Minsky – a modern-day economic godfather who predicted the subprime crisis. “Big Government,” he wrote, should become the “employer of last resort” in a crisis, offering a job to anyone who wants one – for health care, street cleaning, or slum renovation. FDR had a program for it – the CCC, Civilian Conservation Corps, and Barack Obama can do the same. Economist David Rosenberg of Gluskin Sheff sums up my feelings rather well. “I’d have a shovel in the hands of the long-term unemployed from 8am to noon, and from 1pm to 5pm I’d have them studying algebra, physics, and geometry.” Deficits are important, but their immediate reduction can wait for a stronger economy and lower unemployment. Jobs are today’s and tomorrow’s immediate problem.

To be clear, I don't necessarily agree with everything he says, but I do think he brings up good points to consider and I am in favor of an ELR program.

From CST:

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; as well as to create a fund out of which the members may be effectually helped in their needs, not only in the cases of accident, but also in sickness, old age, and distress. -- Rerum Novarum, pp.58
(Note: This was written before most western societies adopted any kind of welfare program)

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...and this same social justice demands that wages and salaries be so managed, through agreement of plans and wills, in so far as can be done, as to offer to the greatest possible number the opportunity of getting work and obtaining suitable means of livelihood. -- Quadragesimo Anno, pp.74

Examining CV, part 5

2011-06-22T13:16:00.007-05:00

As a segway into the next segment of CV, Pope Benedict ties his discussion on food shortages and our basic natural right to food and water to the fundamental right to life:

The right to food, like the right to water, has an important place within the pursuit of other rights, beginning with the fundamental right to life. It is therefore necessary to cultivate a public conscience that considers food and access to water as universal rights of all human beings, without distinction or discrimination.

He then very importantly draws our attention to the center of true development (which is the focus of this encyclical) and the grave evils that are preventing it:

Not only does the situation of poverty still provoke high rates of infant mortality in many regions, but some parts of the world still experience practices of demographic control, on the part of governments that often promote contraception and even go so far as to impose abortion. In economically developed countries, legislation contrary to life is very widespread, and it has already shaped moral attitudes and praxis, contributing to the spread of an anti-birth mentality; frequent attempts are made to export this mentality to other States as if it were a form of cultural progress.

Some non-governmental Organizations work actively to spread abortion, at times promoting the practice of sterilization in poor countries, in some cases not even informing the women concerned. Moreover, there is reason to suspect that development aid is sometimes linked to specific health-care policies which de facto involve the imposition of strong birth control measures. Further grounds for concern are laws permitting euthanasia as well as pressure from lobby groups, nationally and internationally, in favour of its juridical recognition.

Openness to life is at the centre of true development. When a society moves towards the denial or suppression of life, it ends up no longer finding the necessary motivation and energy to strive for man's true good.

By cultivating openness to life, wealthy peoples can better understand the needs of poor ones, they can avoid employing huge economic and intellectual resources to satisfy the selfish desires of their own citizens, and instead, they can promote virtuous action within the perspective of production that is morally sound and marked by solidarity, respecting the fundamental right to life of every people and every individual.

Similarly, another aspect tied closely to development is being denied in our time: the right to religious freedom. Both religious fanaticism that takes the form of violence in the name of God and "the deliberate promotion of religious indifference (or practical atheism) obstructs the requirements for the development of peoples, depriving them of spiritual and human resources."

The Pope writes:

Man is not a lost atom in a random universe: he is God's creature, whom God chose to endow with an immortal soul and whom he has always loved. If man were merely the fruit of either chance or necessity, or if he had to lower his aspirations to the limited horizon of the world in which he lives, if all reality were merely history and culture, and man did not possess a nature destined to transcend itself in a supernatural life, then one could speak of growth, or evolution, but not development.

We are also reminded that truth and charity are not to be separated. We cannot develop without charity and faith, as the scientific, human-knowledge-is-sufficient community would have us believe, yet charity and faith are also not without knowledge and human reason:

Charity does not exclude knowledge, but rather requires, promotes, and animates it from within. Knowledge is never purely the work of the intellect. It can certainly be reduced to calculation and experiment, but if it aspires to be wisdom capable of directing man in the light of his first beginnings and his final ends, it must be “seasoned” with the “salt” of charity. Deeds without knowledge are blind, and knowledge without love is sterile.

Charity is not an added extra, like an appendix to work already concluded in each of the various disciplines: it engages them in dialogue from the very beginning. The demands of love do not contradict those of reason. Human knowledge is insufficient and the conclusions of science cannot indicate by themselves the path towards integral human development. There is always a need to push further ahead: this is what is required by charity in truth. Going beyond, however, never means prescinding from the conclusions of reason, nor contradicting its results. Intelligence and love are not in separate compartments: love is rich in intelligence and intelligence is full of love.

An implication of this truth is that "moral evaluation and scientific research must go hand in hand, and that charity must animate them in a harmonious interdisciplinary whole, marked by unity and distinction."

The tendency to prefer short run (sometimes immediate) gains over a longer run view has had drastic consequences, especially for the poor and unemployed.
The Pope specifically draws our attention to the evils of inequality and unemployment:

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. All things considered, this is also required by “economic logic”. Through the systemic increase of social inequality, both within a single country and between the populations of different countries (i.e. the massive increase in relative poverty), not only does social cohesion suffer, thereby placing democracy at risk, but so too does the economy, through the progressive erosion of “social capital”: the network of relationships of trust, dependability, and respect for rules, all of which are indispensable for any form of civil coexistence.

In order to improve the conditions we face in our time, new solutions are needed that take into account this broader concept of reason and that above all respect the dignity of the human person.

Lost Decade, here we come

2011-06-20T17:42:00.002-05:00

From Paul Krugman:

"What you see isn’t a recovering economy that may be stumbling; you see an economy that has stopped its free fall, but hasn’t really been recovering at all.

I’d say that the burden of proof right now is on those who claim that we aren’t on track for a lost decade."

I don't really have any thoughts to add, just a question...why are we making the same mistakes that Japan made in the '90s and we made in the '30s?

The answer surely lies in our HORRIBLE misunderstanding of economics. Yet there doesn't seem to be much of a movement to change that understanding. If you do want to understand what's going on, I suggest following the "Modern Money Primer".

Examining Caritas in Veritate, part 4

2011-06-20T14:27:00.005-05:00

Part 4 will focus on CV's re-examination of the role of the State, because of the changes that have occured since the time of Populorum Progressio. Beginning in pp.24, Pope Benedict XVI notes that PP assigned a central role to public authorities because the scope of societal issues was at that time still limited to within national borders. In other words, there wasn't widespread globalization or international integration. The past 5 decades have seen considerable integration of nations which the Pope expresses in this quote:

In our own day, the State finds itself having to address the limitations to its sovereignty imposed by the new context of international trade and finance, which is characterized by increasing mobility both of financial capital and means of production, material and immaterial. This new context has altered the political power of States.

In other words, the State is limited in its ability to legislate because of increasingly integrated international relations. The Pope then calls for a re-evaluation of the State's role and believes that once it is more clearly defined, political participation by the public will increase.

The first effect of globlaization Pope Benedict XVI addresses is the downsizing of social security systems worldwide in order to attract businesses to the country:

Consequently, the market has prompted new forms of competition between States as they seek to attract foreign businesses to set up production centres, by means of a variety of instruments, including favourable fiscal regimes and deregulation of the labour market. These processes have led to a downsizing of social security systems as the price to be paid for seeking greater competitive advantage in the global market, with consequent grave danger for the rights of workers, for fundamental human rights and for the solidarity associated with the traditional forms of the social State. Systems of social security can lose the capacity to carry out their task, both in emerging countries and in those that were among the earliest to develop, as well as in poor countries. Here budgetary policies, with cuts in social spending often made under pressure from international financial institutions, can leave citizens powerless in the face of old and new risks; such powerlessness is increased by the lack of effective protection on the part of workers' associations.

He believes the situation to be so grave that the rights "of associations that can defend workers' rights must therefore be honoured today even more than in the past, as a prompt and far-sighted response to the urgent need for new forms of cooperation at the international level, as well as the local level."

He then notes that mobility of labor in the context of unemployment can be good, it can stimulate wealth production and cultural exchange; but it can also have negative effects, such as uncertainty over working conditions, psychological instability, situations of human decline, and waste of social resources.

He then reminds us of the evils of unemployment, a point I try to stress often because our nation has given up trying to decrease unemployment because of what have now been long-running fears of inflation and bankruptcy that simply haven't happened:

Being out of work or dependent on public or private assistance for a prolonged period undermines the freedom and creativity of the person and his family and social relationships, causing great psychological and spiritual suffering. I would like to remind everyone, especially governments engaged in boosting the world's economic and social assets, that the primary capital to be safeguarded and valued is man, the human person in his or her integrity: "Man is the source, the focus and the aim of all economic and social life."

He also notes that many poor countries are still suffering from food shortages and thus hunger despite the abundance of material resources we have to feed them:

Life in many poor countries is still extremely insecure as a consequence of food shortages, and the situation could become worse: hunger still reaps enormous numbers of victims among those who, like Lazarus, are not permitted to take their place at the rich man's table, contrary to the hopes expressed by Paul VI.

Hunger is not so much dependent on lack of material things as on shortage of social resources, the most important of which are institutional.

Moreover, the elimination of world hunger has also, in the global era, become a requirement for safeguarding the peace and stability of the planet.

He then proposes a proper solution:

What is missing, in other words, is a network of economic institutions capable of guaranteeing regular access to sufficient food and water for nutritional needs, and also capable of addressing the primary needs and necessities ensuing from genuine food crises, whether due to natural causes or political irresponsibility, nationally and internationally.

The problem of food insecurity needs to be addressed within a long-term perspective, eliminating the structural causes that give rise to it and promoting the agricultural development of poorer countries. This can be done by investing in rural infrastructures, irrigation systems, transport, organization of markets, and in the development and dissemination of agricultural technology that can make the best use of the human, natural and socio-economic resources that are more readily available at the local level, while guaranteeing their sustainability over the long term as well. All this needs to be accomplished with the involvement of local communities in choices and decisions that affect the use of agricultural land.

Pope Benedict XVI will go on to address other international issues that are of great concern in our time and continue to re-evaluate the role of the State in providing solutions for these problems which I will examine in part 5 of this series.

Examining Caritas in Veritate, Part 3

2011-06-17T12:47:00.004-05:00

Parts 1 and 2 focused on the Introduction and Chapter 1 of CV, which were concerned with the purpose and scope of the encyclical. Chapter 2 dives into applying this broader picture to specific situations or principles.

Pope Benedict XVI first reviews the situation today in light of Pope Paul VI's vision of development:

Paul VI had an articulated vision of development. He understood the term to indicate the goal of rescuing peoples, first and foremost, from hunger, deprivation, endemic diseases and illiteracy. From the economic point of view, this meant their active participation, on equal terms, in the international economic process; from the social point of view, it meant their evolution into educated societies marked by solidarity; from the political point of view, it meant the consolidation of democratic regimes capable of ensuring freedom and peace.

The proper role of profit and economic growth within human development:

Profit is useful if it serves as a means towards an end that provides a sense both of how to produce it and how to make good use of it. Once profit becomes the exclusive goal, if it is produced by improper means and without the common good as its ultimate end, it risks destroying wealth and creating poverty. The economic development that Paul VI hoped to see was meant to produce real growth, of benefit to everyone and genuinely sustainable. It is true that growth has taken place, and it continues to be a positive factor that has lifted billions of people out of misery — recently it has given many countries the possibility of becoming effective players in international politics. Yet it must be acknowledged that this same economic growth has been and continues to be weighed down by malfunctions and dramatic problems, highlighted even further by the current crisis.

Current socioeconomic problems plauging the world:

1) "The technical forces in play,
2) the global interrelations,
3) the damaging effects on the real economy of badly managed and largely speculative financial dealing,
4) large-scale migration of peoples, often provoked by some particular circumstance and then given insufficient attention,
5) the unregulated exploitation of the earth's resources...

...all this leads us today to reflect on the measures that would be necessary to provide a solution to problems that are not only new in comparison to those addressed by Pope Paul VI, but also, and above all, of decisive impact upon the present and future good of humanity."

More problems to address:
6) Increases in overall wealth, but also increasing poverty and growing inequalities:

The world's wealth is growing in absolute terms, but inequalities are on the increase. In rich countries, new sectors of society are succumbing to poverty and new forms of poverty are emerging. In poorer areas some groups enjoy a sort of “superdevelopment” of a wasteful and consumerist kind which forms an unacceptable contrast with the ongoing situations of dehumanizing deprivation. “The scandal of glaring inequalities” continues.

7) Corruption and exploitation are still rampant:

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

8) Int'l aid is often loaded with alterior motives:

International aid has often been diverted from its proper ends, through irresponsible actions both within the chain of donors and within that of the beneficiaries.

9 & 10) Rich countries are overly protective of their wealth and intellectual property and social norms in poorer countries are preventing authentic development:

On the part of rich countries there is excessive zeal for protecting knowledge through an unduly rigid assertion of the right to intellectual property, especially in the field of health care. At the same time, in some poor countries, cultural models and social norms of behaviour persist which hinder the process of development.

Despite all these, Pope Benedict XVI reminds us that the current economic crisis offers us "an opportunity for discernment, in which to shape a new vision for the future."

More importantly, he reminds us that "progress of a merely economic and technological kind is insufficient. Development needs above all to be true and integral."

Part 4 will take a closer look at some of these problems and other problems occuring in our time.

Ryan's "Path to Prosperity" and Catholic Social Teaching

2011-06-15T14:06:00.003-05:00

A much better economist and expert on Catholic Social Teaching than myself (not really that hard to do I suppose...haha) applies his understanding of both to Ryan's budget plan.

"Prudential Judgment and the Path to Prosperity"
Professor Charles Clark, St. John's University

In the recent exchange of letters between Archbishop Dolan and Rep. Ryan, the Archbishop writes that the truths of Catholic Social Teaching (CST) must be applied to the budget using "prudential judgment" but that this application of the principles of CST can never abide "contradicting the values they represent." The requirements of prudential judgment demand a full understanding of the issue one is addressing as well as having valid goals that promote the common good. The Ryan "Path to Prosperity" fails on both criteria: it is not based on a valid understanding of the economy (and its current problems) and its underlying goal seems to be minimizing the size of government and the taxes paid by the rich (neither of which is designed to promote the common good).

Prudential judgment is based on practical reasoning, which Aristotle tells us is based on particulars that can be otherwise, in contrast to theoretical reasoning, which is based on invariants that do not change (like gravity). The Ryan/Republican economic agenda of small government, low tax rates and privatization is all grounded in an 18th Century view of the economy, assuming that our economy is essentially the same (the laws of economics are invariant), with the hope that if we just removed state interference we would return to Adam Smith's "society of perfect liberty" (minimal government, laissez-faire capitalism). But, in fact, a 21st Century economy is fundamentally different from its 18th Century ancestor. The same rules do not apply.

The Ryan/Republican view of the economy assumes that the economy naturally tends towards full employment and sees government spending as a barrier to job creation (ignoring the fact that government spending necessarily creates jobs). If 200 years of experience hasn't shown this to be the case, why would anyone think now it will happen. It is a case of ideology over evidence. Ryan's budget asserts that reducing social protection will encourage independence and reduce poverty, yet this too is contrary to all experience in capitalist economies over the past 200 years. Countries with lower social spending have higher poverty rates, and, incidentally, have had bigger increases in unemployment during the current economic crisis. More ideology over evidence. Furthermore, Ryan states that the Federal Government is running out of money and will follow Greece in going bankrupt, yet the US, unlike Greece, has a sovereign currency, that is, the government pays its bills in money it creates. It cannot run out of money and can never fail to be able to pay its bills. (Although the US government might politically decide to not pay its bills, that would be a bad idea, since the strength of the dollar and US Bonds is based on the fact that the US has a sovereign currency and can always pay its bills). Again, ideology over evidence.

The Ryan budget's over-riding value is limiting the size of government and keeping taxes low. There is no economic evidence that growing the size of the government hurts the economy, at least not in the range of what other rich countries already have (40-60% of GDP, US is under 40%). Following prudential judgment, Ryan should engage in a comparative analysis of US spending with other rich capitalist countries. A good example of this is Sabina Dewan and Michael Ettlinger's study "Comparing Public Spending and Priorities Across OECD Countries" (Center for American Progress, October 2009), which provides a realistic look at the role of government in a 21st Century, advanced capitalist economy. Such an analysis (which is a business-like approach) would show that Americans pay twice what other rich countries pay for health care, and yet we consistently fall at the bottom in health outcomes rankings. The US provides the lowest level of social protection and has the highest poverty rates. There is no evidence that the Federal Government is too big or that its spending is a barrier to job creation. Ryan and House Speaker John Boehner can repeat this falsehood all they like, but they won't find any evidence of it.

Yet, the biggest break with reality is Ryan's placing the deficit and debt as the central concern for the common good. We are in a jobs crisis. Our financial system is at greater risk then it was in 2007. Rising income inequality is shrinking the middle class and threatening to destabilize our democracy. Ryan's budget will make all of these problems much worse rather than address them in a realistic fashion. Ryan is providing a path to plutocracy.

As an historian of economic ideas who specialized in 18th Century theories, it looks to me that Ryan and company are applying the constitutional philosophy of "original intent" to economic policy. The responsibilities of the government have grown since the 18th Century because the need for collective action on the national level has grown. In the 18th Century you didn't need a health care policy because there wasn't much that could be done; you didn't need social security because most people didn't live that long; you didn't need much economic policy because most people lived on farms and were mostly self-sufficient.

Subsidiarity calls for larger entities to step in when smaller entities cannot achieve a necessary function, first to help the smaller entity and if that will not work, to take responsibility for the function. Experience clearly shows that adequate and affordable healthcare can only be provided for all if it is funded nationally, that financial markets need to be regulated tightly and that the state has to promote greater economic equality and work to maintain sufficient aggregate demand so that unemployment may remain low. History shows that poverty rates only go down when economic growth is matched with social protection for workers and the poor (or else all the economic growth will go to the top, as in the past decade). These social goals require an active and effective federal government, one that by necessity has to be larger than 19.9% of GDP.

Enacting the cuts proposed in the Ryan/Republican budget will certainly invite a double-dip recession, which is what the Republicans need to defeat Obama in 2012. Keynes once argued that it is ideas and not self-interest that drives economic policy. In this case 18th Century ideology, defunct economics and political self-interest seem to coincide. And that coincidence has nothing to do with the moral goals outlined by Archbishop Dolan in his letter to Cong. Ryan.

Can be found here: http://www.catholicsinalliance.org/thecommongoodforum.php