Wednesday, February 19, 2014

Economists and politicians need to step into the light.

Today, I submitted this to the Albuquerque Journal as a Letter to the Editor. 

The Journal editorial page on Tuesday, February, 18 included a column by Robert Samuelson that concluded correctly, “To regain relevancy, economists are searching for a new light bulb - or better use of the old. Meanwhile, most are still sitting in the dark.” And, that includes Mr. Samuelson.

That new light bulb is shining brightly in those who recognize that our economic system changed fundamentally when President Nixon took us off the gold standard and introduced modern fiat money with a floating exchange rate. 

Modern Money Theory is a new light for a better economy.

Those who understand and embrace the insights of Modern Money Theory that anticipated the Great Financial Recession, foresaw the Eurozone crisis, and explains how federal deficits help a listless economy know full well that our economy need not struggle as it has. 

Samuelson fears federal deficits and supports austerity while searching hopelessly with the OECD for answers to why austerity has not worked out well. He need look no farther than the new lightbulb shining in his face. Deficits are the source of net savings in the private sector. They stimulate consumption and reduce unemployment.

He and other economists sitting in the dark are bewildered that the trillions of dollars the Federal Reserve has poured into the economy have not caused the expected inflation. They still refer to Quantitative easing (QE) as stimulus when obviously it is not.

The answer is simple. When the Fed buys Treasuries (or other financial assets) from Jane, the total financial assets of Jane remain the same. It’s a straight up asset swap. It only changes Jane's preferences for assets (cash or something riskier). However, fiscal stimulus, government buying goods and services from Jane, actually increases Jane’s financial assets.

It’s quite clear, QE fails to stimulate the economy, because it tries to increase one's spending out of existing income. Fiscal stimulus works, because it increases one's spending out of increased income.

To the delight of many including Republicans, Democrats, progressives, and conservatives the deficit is falling fast and according to the Congressional Budget Office will be at or below 3% of GDP this year and the next two. Alleluia, our economy will be saved! Or, will it crash like other economies around the world that have followed the same policy of austerity? We are fortunate to have been on austerity-lite. 

As the deficit has fallen unemployment has remained high, capacity utilization has declined and with it industrial production, which has been declining overall since mid 2010. Year over year retail sales and mortgage applications are falling. 

The weak stimulus of the 2009 American Asset and Recovery Act has disappeared and our economy languishes unnecessarily. Inflation is too low while unemployment is too high. That likely will continue until economists and politicians realize that deficits and national debts are terrible metrics for steering the economy. Inflation and unemployment would be much better in an enlightened economy.

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