Sunday, March 17, 2013

A Nation Must Live Up to its Means

Today, the Albuquerque Journal published the following as its "Other Voices" column in the Santa Fe section. They gave it the title "Government must deficit spend." I like mine better.
Update: This same letter was published in The Albuquerque Journal Business Oulook on March 25.

The Journal article “Belt tightening” by Kevin Hall in the March 8 Business section was so wide of the mark that it should not stand without rebuttal. The most revealing quote was from Terri Cole, president of the Greater Albuquerque Chamber of Commerce, asserting that few would disagree that both private business and the federal government “must live within their means.”

The whole article is based on the popular myth that the federal government must live within its means just like a household or private business. Bill Dunkelberg, of the National  Federation of Independent Business, rightfully lamented layoffs of 7 million small business workers. Our unemployment crisis is due largely to the wide acceptance of the government-is-like-a-household myth. Those who adhere to this myth do not understand how the economy works and cause great suffering by unnecessarily permitting prolonged periods of high unemployment.

The federal sector differs from the private sector in that the government creates the money we use. Government creates money when the private sector borrows from banks, thereby increasing private debt. And, Government creates money when it purchases goods and services from the private sector thereby increasing public debt. What money government does not retrieve in taxes from its spending contributes to the public debt and remains as savings in the private sector.

The only limit to the amount of money government can create is the availability of productive resources that might be for sale. In an economic downturn such as the one from which we are recovering too slowly, the government can employ unused productive resources without fear of inducing inflation or pushing up interest rates or destroying the stock market.

Means - Use them all.
Inflation is the result of overall demand outstripping both our ability to produce and our ability to increase production. Our budgeting process obsesses over deficits when we should be concerned with the real economy and how we deploy our immense productive capabilities both for the public good and private enterprise. To endure, our economic system must provide sufficient purchasing power to enable our people to consume all the real economic goods and services that the nation can produce.

Contrary to repetitive remarks about a “spending problem in Washington,” unemployment underlies our current crisis. People taken as a whole are spending much less than their income, as they prefer to save and pay down debt. One person’s spending is another person’s income. When spending plummets so does income and people get laid off. High unemployment is not due to lazy workers; it is due to bad public policy.

The federal government has the capability and responsibility to spend, yes deficit spend, to put people back to work. The problem with the deficit is that it is too small to support needed recovery toward a healthy economy in which productive capacity is fully utilized.

That productive capacity is the nation's “means,” which includes both public and private workers and its businesses and equipment. Private businesses, households, state and local governments must live within their means. The federal government must assure that the nation lives up to its means.

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