The Value of Money

A couple weeks ago I wrote a post addressing the question 'why does money matter?'. I hope I laid out a clear explanation of the role of money in our economy and how many mainstream economists misunderstand just what it is at its most fundamental level.

The basic insight is that money is credit or an IOU, and not a commodity nor a representation of a commodity (or commodities). So if money is credit, then what gives it value?

The metallists, those who believe money is like a commodity or a 'fiat' representation of commodities, believe money gets its value from that commodity or commodities. That is, they believe money gets its value from gold or in more modern times, from the bundles of goods a currency area produces.

I wondered about this question long ago, why is gold so valuable? I just didn't get why a mostly useless shiny metal would be so coveted by the Egyptians, Romans, or Europeans. Then I took a money and banking course in college that provided me with an explanation. Gold and other precious metals were used as money because they were easily molded into small, transportable coins. And because of its moldability, it could be divided into larger and smaller coins with varying values with markings to protect against counterfeiting. This mostly satisfied my curiosity. I though, 'oh, the people of Egypt (or wherever) were smart enough to figure out that this commodity, of all the commodities available to them, would serve best as money because of its inherent properties'.

Later in the course, however, I learned of an alternative approach to money that completely flips this view on its head. This is the Chartalist view that regards money as credit. To them, all money is an IOU or credit and anyone can then create money as long as someone is willing to accept it. Monies fall into a sort of hierarchy of acceptance with the most worthy creditors (or debtors) at the top and the worst at the bottom.

And it is here were we find the key to money's value. It isn't anything based on intrinsic worth of the commodity used to represent the IOU, it is rather the acceptability of the IOU. The most acceptable IOUs have more value!

Republicans Want Tax Increase

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

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.

The truth is, neither side gets it...

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

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

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

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?

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?

Krugman on Taxes and Medicare "consumers"

Here are two very good reads from Paul Krugman. The first is a response to those who refer to Medicare patients as "consumers". His point, I think, falls in line with CST and the dignity of the human person. I think this line of thought should be extended to all "markets" because we are primarily persons and not primarily consumers and thus we should be treated as such.

Patients are not Consumers

The second asks what taxes are for. Those who have read my posts will know that taxes simply act as a drain on the economy by taking away our purchasing power. This is necessary to maintain the value of the dollar and regulate effective aggregate demand. Krugman is right in pointing out that state governments or any governments who are not sovereign in their own currency (Eurozone) must tax in order to remain solvent. Governments sovereign in their own currency do not have this constraint. The Fed doesn't so much PRINT money as it does change the number in our electronic bank accounts. The constraint on sovereign government debt is inflation, not solvency. Here he mentions MMTers which stands for Modern Money Theory (which is less theory and more operational description).

I don't think the effect taxes have on aggregate demand is a secondary issue. In fact, I'd say its primary when we're in a recession. His best observation is this: "We have lots of excess capacity in the economy; the government can easily buy more goods and services without requiring that the private sector buy less." But his next conclusion is wrong, there is no good reason to address the deficit now, and the only reason to address it later is out of concern for inflation and not solvency.

His last paragraph is sadly true. There are many Ph.D. economists who still hold to ideological economies that don't exist, but use lots of fancy jargon to indicate they know what's going on.

What are taxes for?

Do read Krugman's posts! They are short and easy reads.

Taxes and Income

Some graphs on taxes and income:


















Posts will probably fewer and farther between in the next few weeks as finals are approaching...

Response to "It's NOT the Deficit, Stupid" Questions

I was asked a few questions by a reader regarding my post "It's NOT the Deficit, Stupid".

Here are the questions and my responses:

Reader:

I read your blog post about the deficit, and I have a few questions. I get what you are saying about taxes and government spending. I also understand how politics play a hand in this. What I don't quite understand is how we got in this mess in the first place. I would assume that we have our current national debt because we spent more than we issued taxes for, correct? My next question is how does the government go about alleviating the debt it has? I know that the Clinton Administration had the government in the black for the first time since the depression. How would they have done it?

Me:

1) You say how we got in this "mess". The mess that we are in is not government debt, but a failing economy. and what I mean by that is that the economy is underproducing what it could produce. There is unemployment and underutilized capital resources.

2) We have what many think is HIGH government debt because of the deficits run over the preceding years. Clinton did indeed run a surplus which proved to be detrimental to the economy by in part causing the recession in 2001. Bush ran really high deficits to pay for wars and help the economy. Spending was increased on wars mainly and taxes were decreased, mainly to the rich. Before that, Reagan ran the highest deficits since World War II and increased the overall debt substantially. It is also noteworthy that during these high deficits, the economy did pretty well, even though I would argue Reagan's economics were very flawed, but that is for other reasons I won't get into right now.

Then the Great Recession hit. When that happened government “revenues” (again, a misleading term) plummeted because business and personal incomes plummeted. Spending also increased because of automatic stabilizers kicking in such as unemployment insurance. So in this case, a lot of the federal deficit was an automatic symptom of the downturn.

A couple of stimulus plans were also passed, one being mainly a bailout of big banks to save the financial system from ruin and causing a much worse recession. This too added to the deficit; and, remember, all the deficit is is “revenues” minus “expenditures” where revenues are paid taxes and expenditures are what the government buys. It is NOT a LACK or SHORTAGE of funds.

It is also important to note that when the federal deficit increased automatically and because of the stimulus state and local government spending decreased because they CANNOT spend more than they collect in tax revenues because they do not control the currency like the federal government does.

3) The reason our economy is failing is NOT because of deficits or federal debt. It is for many other reasons that I can’t get into now, but a lot of it has to do with the housing bubble , deregulation of banks, and even illegal actions or fraudulent loans by the banks.

4) the total federal debt reflects the amount of bonds that the private sector holds. This gets tricky to say in an easy to understand way but when the government spends the Fed changes numbers in bank accounts. The net result is an injection of reserves into the economy. The Fed, in order to keep the federal funds rate (that’s the interest rate that the news is always talking about when Bernanke and crew change or keep it the same) at the level they set, must sell bonds to the nongovernment sector in order to deplete the reserves that the government puts in. In other words, they sell bonds to prevent inflation and zero interest rates. So right now, the total outstanding debt is what the government promises to pay the bond holders at a future date. The government will have NO PROBLEM paying these debts. They are not insolvent. Paying these debts off puts reserves back into the economy as it is a form of government spending. To bring down the overall level of debt, the government would have to run a surplus as they did during Clinton’s administration. In other words, they would have to pay off more bonds than they sold. THIS WOULD NOT BE A GOOD THING TO DO IN OUR CURRENT STATE. We need higher deficits to get the economy back to full employment. Then we can talk about bringing down the deficits.

As a side note, it is also important to know that the federal debt IS the amount of savings (held in bonds) in the nongovernment sector. If we want to have a net savings in the nongovernment sector, the government necessarily has to have debt, it’s an accounting identity. Note, however, that part of this savings is held abroad, notably by the Chinese government. This isn’t a bad thing, it’s just the way it is. China cannot exercise any power over us because they hold a sizable portion of our debt. In part, it is their way of holding down their currency so that they can grow their exports further.

Good Policy Suggestions

Here are some are good policy ideas to improve the efficiency and equity of our economy from Joseph Stiglitz, a Nobel prize economist, professor at Columbia University, and former chief economist of the World Bank.

Below are some selected quotes and paraphrases from this paper by Stiglitz published on December 2, 2010 through the Roosevelt Institute, which was focused on the political problem of reducing the deficit. I do not believe that the deficit is the issue, but rather the long term overall situation of the economy and Stiglitz seems to agree though this paper has as its explicit goal improving the economy through reducing the deficit, though I believe his implicit goal is not so much concerned with deficits as it is with overall economic well-being. I hope the quotes and paraphrases will illustrate what I mean. I added emphasis to the points I thought were most striking or important and I believe these ideas are largely in accord with Catholic Social Teaching, particularly the goals of social justice and economic welfare for the society as a whole.

Politically the task of deficit reduction is enormously difficult.

At the head of the list of reforms are measures which increase both efficiency and equity.

Given the enormous increase in inequality that has occurred in the U.S. over the past three decades, any measure that harms those at the bottom should also be unacceptable.

What matters is not the deficit itself or the short-run national debt, but long-run levels of the national debt. The single-minded focus on deficits and short-run debt is thus fundamentally misguided.

There is no magic number that represents the appropriate size of the federal government.

A larger government, but one focused on investments, could be associated with a smaller deficit.

This paper is not about political compromises, [but about] principles of efficiency and equity.

These first ideas in particular are based on the premise that what is important is the long-run national debt, not the short-run deficit. Just like it may pay for a business to borrow in order to increase long-run profitability.

Public investment can yield high returns.

Three factors contributing to opportune investments today: 1) there has been underinvestment for years, 2) the borrowing interest rate is at record low levels, and 3) the economy is operating significantly below capacity.

Historically, public investments in education, technology, and infrastructure have yielded returns that are in excess of 7.5%.

Corporate Welfare

Corporate welfare consists of billions of dollars to enrich the coffers of corporations.

The net beneficiaries of such corporate welfare are by and large wealthy Americans.

Two categories in general need to be addressed: subsidies to agriculture and agribusiness and subsidies to producers of fossil fuels.

Most of the money of agricultural programs goes to corporations and Americans who are better off than average.

There are easy fixes, e.g., by limiting the benefits to those whose income is below $100,000 and limiting payments to, say, at most $100,000 per farm.

[Particularly bad are] the excessive payments to the pharmaceutical companies under the provisions of the Medicare bill, which restricted the government’s ability to bargain with them on prices.

Efficient auctioning of the rights to use natural resources can lead to greater efficiency.

Taxation

Our tax system is neither fair nor efficient.

Much corporate welfare takes the form of special treatment within the tax code.

A small increase in the tax rate on the top 1%, say 5% of their income, would generate revenues equal to between $1 and $1.5 trillion. Currently, most of these individuals pay effective tax rates that are far below the “official” rates because of their ability to take advantage of tax preferences and loopholes. Eliminating these tax preferences and loopholes would go a long way towards achieving this limited increase in taxation.

One proposal that has been widely discussed is to tax all forms of income the same, i.e., eliminate the preferential treatment of dividends and capital gains, the benefits of which go disproportionately to upper income Americans.

In the end, the special treatment afforded to dividends and capital gains did not have the benefits promised: instead of household savings increasing, the savings rate plummeted to new lows after the enactment of the Bush tax cuts.

There is moreover no justification for taxing those who work hard to earn a living at a higher rate than those who derive their income from speculation.

Rather than an across the board reduction in the corporate income tax, far better would be a tax reform that would encourage investments in jobs in the United States, and that would encourage investment in research and development.

There is a class of taxes that actually increases economic efficiency—taxes which discourage activities which generate negative externalities sometimes referred to as Pigouvian taxes.

The repeated bailouts of banks have led to a distorted and inefficient economy. Taxes can be used both to undo these distortions and contribute to deficit reduction.

Probably nothing did more to enhance the sense of injustice around the world than the receipt of huge bonuses by those responsible for the economic crisis, even as the banks were being bailed out by taxpayers who bore the brunt of the costs of the banks’ misdeeds.

A well-designed bonus tax could thus encourage incentive structures that align behavior of those in the financial sector with the long term interest of society, contribute to a broader sense of societal fairness, and simultaneously contribute to deficit reduction.

Among economists there is a broad agreement that the repeated bailouts have led to a problem of moral hazard with excessive risk taking and an excessively large financial sector.

The Obama administration at one point talked about a tax based on leverage and size, designed to discourage excessive leverage and size.

More Efficient Expenditure

There are some areas of public expenditures where the objectives of the government programs could almost surely be achieved at lower costs.

The single most important area of discretionary expenditures is military. Americans could obtain more security at lower cost.

We spend billions on weapons systems that don’t work against enemies that don’t exist. With America’s military spending approximately equal to that of the rest of the world combined, it is clear that there is a lack of balance.

America’s moral authority is more important than its military power.

Military expenditures do not contribute to our economic strength.

Direct conflicts impose costs that extend decades into the future, through health care and disability costs for the returning vets.

Final Points

Deficit reduction, it should be remembered, is not an end in itself, but a means to other objectives. If done the wrong way, our growth can be impaired, our society can become more divided, and the capacity of both our country and our government to deal with the challenges facing it can be impaired.

The reason that we have the myriad of the distortions and inequities that we have identified is because of the influence of special interest groups who so far at least, have been willing to sacrifice the national interest to their own.

Other data:

The effective tax rate was 23% for the top 1% and 21% for the top 5%, markedly lower than the legislated rate of 35%.

Median income has declined by some 5% over the past decade and was in decline before the recession.

Poverty has increased from 11.9% in 1999 to 14.3% in 2009.

The upper 1% of Americans accounted for an average of some 22% of the nation’s taxed income during 2004-08.

65% of the income growth during the Bush expansion was captured by the top 1% of families.

Myths about the Deficit, Part 1

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

For more on this topic see:

http://moslereconomics.com/2009/12/10/7-deadly-innocent-frauds/
http://neweconomicperspectives.blogspot.com/2010/11/keep-deficit-ditch-doves.html
http://tomgreenthumb.tumblr.com/