Tuesday, August 19, 2014

It’s time to change federal fiscal policy

Today I submitted this to the Albuquerque Journal. My tendency to try to say too much with too few words has made me a bit hesitant, but I decided to give it a shot. It seemed timely after I read Milbank's column. 

My heart sank Sunday, August 17 as I read Dana Milbank’s column in the Journal entitled “American optimism is a thing of the past.” Surveys show that most Americans think the next generation will not do as well as we have.

No doubt, our current economic policies have harmed the future of our grandkids. Mainstream economists blame it on “secular stagnation,” and suggest we will have to live with slow growth and high unemployment.

As we have observed, the Fed has been unable to stimulate the economy with its purchases of privately held securities. The-Powers-That-Be tell us that government must tighten its belt just as households must. So, the White House brags about lower and decreasing deficits. TPTB tell us there is no alternative. Well, there is an alternative; the die is not yet cast.

For years TPTB have told us that our high public debt and deficits would cause interest rates to rise, and we would be unable to service our debt. That didn’t happen, because the Fed sets interest rates. TPTB didn't know that.

Also, TPTB told us that “money printing” by the Fed to purchase private securities would cause inflation, even hyperinflation. That didn’t happen, because those purchases were just asset swaps. Nobody ended up with more money in their pockets. TPTB didn't know that.

Additionally, TPTB said that the excess reserves caused by Fed security purchases would lead to a lending binge by banks and debase the dollar. That didn’t happen, because banks don’t lend reserves. TPTB didn’t know that reserves stay in the banking system.

TPTB still believe we have a trickle-down economy, but we know now that it’s really a trickle-up economy. TPTB shut down government last year over debt ceiling negotiations because of a wrong-headed aversion to deficits and debt, not knowing there is little to fear from either.

Why do we continue to listen to TPTB when they are consistently wrong.

We live in a demand-driven economy where my spending is your income. Workers are paid to produce goods and services. If all workers spent all their income, demand would be such that all products would be consumed. But, there are inevitable “leakages” in total demand. 

We need to renew infrastructure. It's a matter of available resources not money.

Some elect to save part of their earnings. Unless others spend more than they earn not all goods and services are consumed. Then producers cut back production causing unemployment.

Another leakage is spending on foreign imports. While imports have many benefits, they result in reduced demand and unemployment here at home.

Taxes are also a leakage, if they are greater than government spending. But, if taxes are less than government spending, the resulting deficit increases demand and reduces unemployment. High unemployment means that federal deficits are too low to make up for leakages.

Federal spending and taxation are fiscal operations that we always have available to stimulate the economy, especially when the Fed’s monetary operations fail as they have these past seven years. We are prevented from employing fiscal policies by the deficit and debt scare tactics of TPTB, of course.

Deficits reduce unemployment, the costs of unemployment benefits, and the human suffering caused by involuntary unemployment. For our economy, there is nothing closer to a free lunch than putting the unemployed to work.

A household’s debt represents a financial asset for their bank and has to be repaid. The “national debt” is completely different as it represents financial assets for the whole private sector and never has to be repaid. Rather than a burden on our grandchildren those assets will be passed on to them.

It really boils down to this. Whether we rely on Social Security, pensions, or private portfolios we need a highly educated, productive work force to support us in our old age. With well constructed fiscal policies, we can assure that our kids and grandkids will have the knowledge, education, and infrastructure to provide for themselves and us.

Now is the time. Let’s get people, who understand basic monetary operations, into Congress and newsrooms.

Related Reading

Demand Leakages: The 800lb Economist in the Room

American optimism thing of the past