In the previous two posts in this series I’ve examined four ideas that Warren Mosler has called “deadly innocent frauds,” (difs) and that others have variously referred to as myths, scares, and lies. Three of the difs — that Government deficits create a debt burden for future generations, take away non-governmental sector saving, and that social security is broken are all “deadly innocent frauds,” supporting the idea that deficits must be avoided, even if we have to suffer through extreme economic downturns to avoid them. These frauds, like the fourth dif that Government spending is operationally limited by the need to tax and borrow, all serve to reinforce the idea that Government can’t do anything about a bad economy without doing more harm than good. The contrapuntal ideas that Government can create money, and is not operationally limited by the need to tax and borrow, there is no debt burden on future generations that limits production or consumption, deficits don’t subtract from, but add to non-governmental savings, and Government checks including Social Security checks don’t bounce, all reinforce the idea that Government deficit spending is not to be avoided, but, on the contrary is something we can and need to do to avoid the economic and human waste of unnecessary economic recessions and depressions. In this part of the series, I’ll review more of Mosler’s difs and discuss their political implications.
Mosler’s fifth dif is: “The Trade Deficit is an unsustainable imbalance that takes away jobs and output.” The normal arguments for this dif (according to me, not Mosler) are that if other countries give us more in goods and services than we give them, then we 1) build up unsustainable monetary debts and 2) lose jobs and outputs because we are not producing those goods and services here in this country. As trade imbalances accumulate over time, our monetary debt grows larger and we, as a nation, lose industries that have been producing the goods and services we get from abroad, and therefore continue to lose jobs and output until, eventually, we may become de-industrialized and our workers, in increasing numbers find themselves out of jobs, careers, and all that depends upon them.
Mosler opposes this line of argument by noting that “the real wealth of a nation is all it produces, plus all its imports, minus all its exports.” This is basic economics. But it’s important to stop for a moment and reflect on why it makes sense. Real wealth is the sum total of valued goods and services possessed by an entity. It is not money, which is only the medium of exchange. We produce goods and services, i.e. real wealth. We also import goods and services, also real wealth, from abroad. But when we export real goods and services, what we are doing is sending real wealth abroad. So we are subtracting from our net wealth when we export. So why export, one might ask? Because we need the foreign currency gained from exporting in order to import. But what happens when other nations want to export to us so badly that they let us import even though we don’t have their currency to pay for it, and they allow us to owe them for what we buy in our own currency?
Well, the answer is that they are giving us wealth on credit, and agreeing that we can pay them for that wealth using our own currency at some future time. Which means, in other words, that they are sending us their wealth, and are agreeing that we can pay for it with a medium of exchange that our Government can create at will, and that is not real wealth, but only a warrant backed only by the value of the current and future economic output of the United States of America.
As Mosler says: “. . . a trade deficit increases our real standard of living. How can it be any other way? And the higher the trade deficit the better!” Or to put this in terms of his counterpoint to the fifth dif:
”Imports are real benefits and exports are real costs. Trade deficits directly improve our standard of living.”
So, the greater our trade deficits, the more wealth others are shipping us, without us having to ship them real wealth in return. Well, what about the monetary debts that are accumulating say, obligations to China, and others? Those debts are all in US currency. And we, or our children, can make as much of that as we want without producing anything to send to China in return. So where is the debt burden, and the unsustainability in these accumulating debts? The answer is that there is none. Well, what about the problem that by our importing goods and services from China in such a profligate way, we are hollowing out our own industries and productive capacity, and destroying jobs and the lives of our workers over here? Isn’t this an unsustainable burden on us? I think there are two points to be made about this. One made by Mosler and one of my own.
Mosler’s is that we can always use fiscal policy to develop new industries and to keep our people working so that we are using our full productive capacity to create wealth, while also importing whatever China or other nations are willing to export to us on credit. So, to amplify his view, the fact that we accept imports that drive us out of certain industries doesn’t have to mean de-industrialization or unemployment here. It’s all up to us. We can take foreign imports at the expense of domestic productive activity, or we can take them, and ramp up our own economic activity in areas where there are no imports that are less expensive than what we can make ourselves. In particular, in our current situation there is all kinds of work to be done in re-building our infrastructure, re-inventing our industries along green lines, fighting climate change, cleaning up the environment, and educating our ourselves. If other nations can free our labor force to do this kind of work, while they export to us various goods and services on credit, then we only get richer and suffer not at all. To have things work this way however, we have to have economic policy that will keep our people working and moving forward, we cannot afford to have periods in which people are unemployed when there is important work to be done.
My own point about the possibility of long-term unsustainable burdens, or at least negative consequences from a trade imbalance is that imports of certain kinds can, indeed, be harmful to the United States. But the harm, in this case, doesn’t come from the short-term economic effects of those imports on productive activity, which remain beneficial, but rather from their effects on certain other values, such as our ability to provide for our national security, or our ability to produce certain components such as computer chips that are important to industry and manufacturing across the board.
To the extent that, because of imports, we lose the capability to manufacture certain materials and products, and need to rely on other nations that may not be friendly to us for these in times of conflict, we allow these imports to hurt our military self-sufficiency and also, perhaps our industrial self-sufficiency. While I haven’t studied this link between imports acquired on credit, and a declining industrial foundation for supporting military capability, closely, I have the impression that the trends since the 1980 have been toward increased external contracting of military production, and the weakening of our industrial base in national security-related areas of manufacturing. In addition, the more the industrial capacity to make computer chips and other products is shifted overseas, the more reliant we are on continued favorable trading relationships with other nations who may not always be friendly, to maintain our own economy.
The significance of this point is that while the general economic principle that “Trade deficits directly improve our standard of living”, is correct, nevertheless with respect to certain products and industries we may not want to follow the principle because of political, security, moral, or long-run economic considerations, even though we know that not doing so will cost us economically.
Mosler’s sixth dif is “We need savings to provide the funds for investment.” To see what’s wrong with this dif, we have to pay attention to the difference between macro and micro levels of the economy. At the individual level, saving is one way for someone to accumulate enough money to make a capital investment. It’s not the only way since individuals can also seek and get grants and loans for investment, but, nevertheless saving money and later using it for investment is a very common pattern and clearly underlies this dif. At the macro level, however, savings get us into the Keynesian paradox of thrift. Since if spending doesn’t equal all income, some of what is produced in the economy will remain unsold. Thus, at the macro level savings detracts from consumption and create a slackening of demand, which, turn, can lead to less profits and investment and future production of wealth, and greater unemployment, unless there are compensating factors.
One possible compensating factor is using credit. When someone saves, someone else can absorb the slack demand created by savings, by borrowing money in order to consume existing products. If that happens to the same extent as savings, economic output is fully consumed. Another possible compensating factor for savings in lifting demand is Government expenditures which immediately adds to savings, that, in turn, can be consumed, and so lift demand. Regardless of these compensating factors, however, we can see that, whatever the situation at the micro or individual level, at the macro or societal level, savings has a depressive effect on economic activity and investment, which is why we have ourselves a dif here.
The counterpoint to this dif is that far from savings being necessary for investment, “investment adds to savings.” To see why this is true, we have to reflect on what capital investment really is. Namely, it is the use of money to produce instruments or tools, that play a part in producing valued goods and services (i.e. wealth). Since this is the case, the investment in the capital goods comes first, and these goods are then used along with paid labor to produce output. But it takes time to produce output. So before there is output, there is labor, and pay for the labor, which can’t be used to consume the output because it is not yet there. So, the pay given to labor leads to savings, until those savings can be consumed by spending them on the future output.
This reasoning may seem a little convoluted because workers receiving pay can consume any number of other things even though the immediate products of their labor are not yet available. But viewed from the macro perspective, somewhere in the system, the time lag between production and consumption has an effect resulting in those earning money saving for goods and services that they want which are not yet available. So, the counterpoint that “investment adds to savings” holds.
Warren Mosler points out that belief in the dif that “we need savings to provide the funds for investment”, is very damaging because it has led modern economies to divert real resources away from productive sectors of the economy to the financial sector. And he says that this dif:
” . . . drains over 20% annually from useful output and employment- a staggering statistic unmatched in human history.”
In fact, government deficits are much less inflationary than they would otherwise be, because they are compensating for the slack demand created by increasing diversion of resources to the financial sector. Pension funds, IRAs, and other tax advantaged savings institutions, are harmful to the economy because their net effect is to remove a substantial part of the aggregate demand we need to fully consume our industrial output and our imports. Then we need greater private sector credit expansion and Government deficit spending to fill the gap created in aggregate demand by our misplaced emphasis on savings as necessary for investment.
Nor, is this all the damage done to our economy. In addition, the existence of “massive pools of savings,” has led to the creation of a sub-industry of thousands of pension fund managers and more thousands of brokers, bankers, and financial managers to service them. In itself this is a great diversion of people and human resources away from the productive portion of our economy, to the segment devoted to financial manipulation.
Mosler’s final dif is yet another one directed at the harm caused by Government deficit spending. It is: “higher deficits today, mean higher taxes tomorrow.” While there is a good chance that this is often literally true, it is not because, as deficit hawks would have it, we need to have the higher taxes to pay borrowed money back to reduce the national debt. Instead, we may well have higher taxes because we need them to moderate a booming economy that, in part, resulted from greater Government deficit spending. In other words, if Government increases spending to create greater demand in the private sector, and to create the conditions where our output and imports can be consumed, and we have full employment, then we may reach the point where we begin to see price inflation in the economy. At that point, higher taxes ought to be imposed by the Government to prevent over-heating of the economy. In other words, Mosler’s counterpoint is:
”Higher deficits today when unemployment is high will cause unemployment to go down to the point we need to raise taxes to cool down a booming economy.”
So, while the dif suggests that the burden of debt repayment resulting from deficits, is a bad thing; the counterpoint suggests that there will be higher taxation only after our economic woes are over, and everyone is experiencing prosperity, a good thing, and a price we may all be willing to pay.
The common thread in the three difs I’ve discussed in this part is that they’re all beliefs that counsel false economy and that, to the extent we follow them, lead to less national prosperity and wealth than we would otherwise enjoy. The sixth and seventh difs both lead to less economic activity and higher unemployment; and the fifth dif, in effect, counsels us to forgo opportunities to increase our national wealth through trading. The seventh dif, also, is like the first four in that it is another support for deficit hawkism, and a counsel against deficit spending, that is sorely needed in a time of slack demand and high unemployment. Taking all 7 of Mosler’s difs together, we see the outline of an ideology whose effect is to cripple American potential in both the immediate and the longer term. The 7 difs together constitute a 19th century economic ideology appropriate for a nation with a commodity monetary system, rather than a 21st century economic ideology appropriate for a nation with a fiat monetary system. In Part Four of this series I’ll discuss Mosler’s 7 difs in light of earlier work by Robert Eisner, Rick Boettger, and Francis Cavanaugh, and develop a synthesis.
(Also posted at the Alllifeisproblemsolving blog where there may be more comments)