Seven Deadly Innocent Frauds of Economic Policy

I was pointed to a link about how those in Washington look at the economy and money on a different blog and started reading it and found that the more I read, the more sense it made. A very good book by Warren Mosler who gives here the realities of economics.

It’s a PDF so you have to down load it and read it. It’s rather lengthy so it may take a while but it a very good read. Essentially this article debunks a number of myths and memes about how the economy and the government’s handling of it works.

Seven Deadly Innocent Frauds of Economic Policy
1. The government must raise funds through taxation or borrowing in order to spend. In other words, government spending is limited by its ability to tax or borrow.
2. With government deficits, we are leaving our debt burden to our children.
3. Government budget deficits take away savings.
4. Social Security is broken.
5. The trade deficit is an unsustainable imbalance that takes away jobs and output.
6. We need savings to provide the funds for investment.
7. It’s a bad thing that higher deficits today mean higher taxes tomorrow. 

Here are a few of the misconceptions that he presents in the first part.

Deadly Innocent Fraud #1:
The federal government must raise funds through taxation or borrowing in order to spend. In other words, government spending is limited by its ability to tax or borrow.
Federal government spending is in no case operationally constrained by revenues, meaning that there is no “solvency risk.” In other words, the federal government can always make any and all payments in its own currency, no matter how large the deficit is, or how few taxes it collects.

In other works the government cannot go broke.

How does the Federal Government Tax?
Let’s start by looking at what happens if you pay your taxes by writing a check. When the U.S. government gets your check, and it’s deposited and “clears,” all the government does is change the number in your checking account “downward” as they subtract the amount of your check from your bank balance. Does the government actually get anything real to give to someone else? No, it’s not like there’s a gold coin to spend. You can actually see this happen with online banking – watch the balance in your bank account on your computer screen. Suppose the balance in your account is $5,000 and you write a check to the government for $2,000. When that checks clears (gets processed), what happens? The 5 turns into a 3 and your new balance is now down to $3,000. All before your very eyes! The government didn’t actually “get” anything to give to someone else. No gold coin dropped into a bucket at the Fed. They just changed numbers in bank accounts – nothing “went” anywhere.
And what happens if you were to go to your local IRS office to pay your taxes with actual cash? First, you would hand over your pile of currency to the person on duty as payment. Next, he’d count it, give you a receipt and, hopefully, a thank you for helping to pay for social security, interest on the national debt, and the Iraq war. Then, after you, the tax payer, left the room, he’d take that hard-earned cash you just forked over and throw it in a shredder.

This is the one main point Warren Mosler  tries to make here from the very start. That money per se is not a tangible item like gold or silver and has not been for a very long time. It’s is simply number in a computer that are move around from one place to another.

How the Federal Government Spends
Imagine you are expecting your $2,000 Social Security payment to hit your bank account, which already has $3,000 in it. If you are watching your account on the computer screen, you can see how government spends without having anything to spend. Presto! Suddenly your account statement that read $3,000 now reads $5,000. What did the government do to give you that money? It simply changed the number in your bank account from 3,000 to 5,000. It didn’t take a gold coin and hammer it into a computer. All it did was change a number in your bank account by making data entries on its own spreadsheet, which is linked to other spreadsheets in the banking system. Government spending is all done by data entry on its own spreadsheet called “The U.S. dollar monetary system.”
Here is a quote from the good Federal Reserve Bank Chairman, Ben Bernanke, on 60 Minutes for support:
SCOTT PELLEY: Is that tax money that the Fed is spending?
CHAIRMAN BERNANKE: It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed.

So what does this mean ?

Governments, using their own currency, can spend what they want, when they want, just like the football stadium can put points on the board at will. The consequences of overspending might be inflation or a falling currency, but never bounced checks.
The fact is: government deficits can never cause a government to miss any size of payment. There is no solvency issue. There is no such thing as running out of money when spending is just changing numbers upwards in bank accounts at its own Federal Reserve Bank.

He then goes on the explain this in greater detail in part 2 and finally gives his recommendations for solving the current economic down turn. Which of course flys in the face of current Washington wisdom (yes I know a contradiction in terms)

My third proposal calls for a restoration of American prosperity through a federally-funded $8/hr. job for anyone willing and able to work. The primary purpose of this program is to provide a transition from unemployment to private-sector employment. A payroll-tax holiday and the state revenue- sharing would bring an immediate flurry of economic activity, with private-sector employers quickly seeking to hire millions of additional workers to meet growing demand for their products. Unfortunately, past recessions have shown that businesses are reluctant to hire those who have been unemployed, with the long-term unemployed being the least attractive. Transitional employment also would draw these people into the labor force, giving them a chance to demonstrate what they can do, and show that they are responsible and can get to work on time. This includes giving the opportunity of work to many of those who have a harder time finding private-sector employment, including high-risk teenagers, people getting out of prison, the disabled and older as well as middle-aged people who have lost their jobs and exhausted their unemployment benefits. While this program would involve the lowest expenditure of my three proposals, it is equally important as it helps smooth and optimize the transition to private-sector employment as the economy grows.
So, how am I uniquely qualified to be promoting these proposals? My confidence comes from 40 years’ experience in the financial and economic realm. I would venture that I’m perhaps the only person who can answer the question: “How are you going to pay for it?” My book takes on this issue and encourages the return of economics study to the operational realities of our monetary system.

One of the biggest problems we have is assuming the finance on the federal level has to work exactly the same as it does on the state, local and private business level.  Warren Mosler sets out here that not only does not not have to, it really cannot operate this way.  This is really a very good explanation and you don’t even need a degree in economics to understand. In fact such a degree may even prove detrimental to your understanding.



Comments are closed.