Tuesday, September 1, 2015

The Journal gets it wrong

Today, I submitted this to the Albuquerque Journal. My wife says they will cancel our subscription. I can only hope...

At the top of your Op-Ed page on August 28, you had a Ramirez cartoon that was so wrong it needs to be called out. The cartoon depicted poor old Uncle Sam supporting a huge burden of national debt on his back while disparaging the irresponsible debtor countries Greece and Puerto Rico. The cartoon implied that our national debt is a burden and that it is similar to and just as irresponsible as the debts of those two unfortunate countries. It just ain’t so! The implications are wrong and misleading.

This neoliberal cartoon appeared atop the Albuquerque Journal Op-Ed page.

First, our national debt is nothing like the debts of Greece and Puerto Rico. Neither country controls the currency in which its debt is denominated. The only way Greece can obtain euros and Puerto Rico dollars to pay their debts is to export more than they import. Failing that, as they do, the governments must tax their private sectors more than they spend into them. Over time, as we have seen, the private sector becomes impoverished. 

A country, like ours, that issues its own currency can always service its debt, because it issues its own currency. If needed, we can devalue our currency, but that is not an option for currency users like Greece or Puerto Rico and, we might add, our own states and households.

Second, when loans go bad both creditors and debtors share the blame. It takes two to tango. Debtors can overestimate their ability to pay, and creditors can underestimate the risks. Always, it seems, the creditors gain the advantage over the debtors. We have seen it play out in old-time melodramas where the despicable landlord threatens to have his way with the poor and lovely damsel. Then the villain retreats under a chorus of boos and a hail peanuts. The Greeks and Puerto Ricans are not so easily saved.

In the eurozone we have seen the plot again as the rich creditors drain the Greek economy, impoverish its people, demand sale of state real assets at fire-sale prices, and nullify democratically passed legislation. 

Puerto Rico is a colony of the US. In previous decades it was normal to exploit colonies for wealth extraction. Now, in this supposedly civilized global economy Puerto Rican citizens are left with reduced Medicare, poor bankruptcy protections, and adverse action taken by our Congress. Instead of protecting our colony in troubled times, we have made it vulnerable to predatory Wall Street vultures.

Finally, you still don’t understand the national debt and the deficits that contribute to it. Yet, it is very simple. When the government spends a dollar to buy something from the private sector, someone gets that dollar. Economists will verify there are only three things that one can do with the dollar: 1) Spend it, 2) Pay taxes, or 3) Save it. If spent, someone else gets the dollar and has the same three choices and so on. Ultimately, the dollar goes to pay taxes or is saved.

If the dollar pays taxes, it balances the budget. If the dollar is saved, it is a government deficit. Government deficits are private savings. We don’t pay off government debts; that would take away private savings. Government debt, unlike household debt, is not a burden but a boon. 

Get with it, or you will continue to bolster the neoliberal paradigm that is favored by despicable landlords and undermines our economy.

Monday, June 22, 2015

The Trans-Pacific Partnership is a terrible deal

In his June-17 Op-Ed Professor Allen Parkman described very well the how trade among nations benefits all parties. He gave a qualified nod to the Trans-Pacific Partnership (TPP) on the basis that if some trade is good, more is better. 

For some three decades after World War II mutually beneficial trade occurred with our trading partners. We helped the European and Japanese economies recover. So, they provided markets for us, and we for them. 

Then it all changed with the expansion of the neoliberal economics of the past forty years. Instead of investing in and upgrading our manufacturing facilities, large domestic companies moved their production facilities to underdeveloped countries to exploit their labor for quick profits. Investment in underdeveloped economies were minimal, so markets were not developed for us. 

The US economy became the market for the goods now produced abroad. As a result our trade deficits exploded by a factor of ten over those experienced before the neoliberal expansion. As Prof Parkman noted, countries that import benefit by acquiring real goods in exchange for currency of unknown future value. But, the magic is lost without programs to employ the workers, who lose their jobs as a result of persistent trade deficits.

Now we have the TPP, which is less about trade than subordinating democratic governments and their laws to the interests of big business profits. That is part of the neoliberal agenda. 

TPP negotiations are in secret and led by Michael Froman, a protege of Robert Rubin. Froman followed Rubin to Citigroup before returning to government. As a graduate of Citigroup management he is in good company with the corporate representatives, who participate in the negotiations.

The TPP is doubling down on the provision called Investor-State Dispute Settlement (ISDS), by strengthening existing ISDS procedures intended to protect investors. According to “The Economist,” The ISDS will, “give foreign firms a special right to apply to a secretive tribunal of highly paid corporate lawyers for compensation whenever a government passes a law to, say, discourage smoking, protect the environment or prevent a nuclear catastrophe.”

Another problem with TPP

Claims of billions of dollars, either settled or in arbitration, include Occidental Oil Company against Ecuador over a contract termination, a Swedish utility operator against Germany for shutting down nuclear plants, Phillip Morris against Australia and Uruguay over anti-smoking messages. In 2011, 2012, and  2013 there were over 50 ISDS dispute settlement cases. 

Other cases involve the fossil fuel industry going after Quebec for a ban on fracking, and a large French company contesting minimum wage increases in Egypt.

On the financial front, “Public Citizen” has reported that TPP would forbid countries from banning risky toxic derivatives. Also, it would prohibit policies to deal with “too-big-to-fail” banks and banks that would speculate with our savings. In addition, TPP would prohibit the proposed “Robin Hood” taxes on Wall Street speculation.

The neoliberal dogma extolls the free market on the one hand, and demands guaranteed profits on the other. How’s that supposed to work?

The TPP is a terrible deal. To demand that we submit our democratically formed laws and procedures for review by some secret, supranational authority is an assault on Democracy and the prosperity of Main Street.

Wrapping it up.

Friday, May 22, 2015

Why doesn’t our economy work for everyone?

This is a bit of a rant. Thanks to Duane for getting me focused on what I really wanted to say. 


Due to the anemic recovery of our economy from the Great Financial Crisis (GFC) of 2008, too many people are struggling. They have little hope of regaining their former economic condition or climbing out of poverty. But, we wouldn’t know it from the rosy reports of the mainstream media (MSM). It offers seemingly optimistic headline unemployment rates as evidence of recovery.

Apparently the MSM does not recognize that the total industry capacity utilization is below 80% and falling. Also, the civilian labor force participation rate is at a 40-year low and decreasing. Over 10 million people are unemployed or underemployed, and most current income increases are going to the top 1%. Worst of all, many children needlessly go hungry. Yet, politicians and pundits are hell-bent on cutting government spending as if it were a problem.

Civilian Labor Force Participation Rate

An old Mark Twain quote seems appropriate:

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

The unquestioned premise that federal austerity is good policy, which the MSM supports, has gone on too long. In 2010 President Obama established the so called Deficit Reduction Commission and appointed two deficit hawks, Alan Simpson and Erskine Bowles, as co-chairmen. In his testimony before the Commission renowned economist Professor James Galbraith rejected the austerity premise outright. 

More recently, in March the US Senate Committee on the Budget held hearings titled “The Better Way: The Benefits of a Balanced Budget.” Despite the biased title, a distinguished political economics professor, Mark Blyth, testified that there are no such benefits. Moreover a balanced budget would harm the economy. 

Contrary to widely accepted theory and worldwide experience, the MSM clings to the false austerity premise. Its basis is the neoliberal paradigm codified in 1989 by the ten commandments of the Washington Consensus. These commandments are not applicable, because they fail to recognize that our economy uses a fiat monetary system not a gold-standard. 

Deficits and debt-to-GDP ratios have preoccupied mainstream economists, politicians, and the MSM. Consequently, they missed the most important point; exploding private debt caused the GFC. Only a few heterodox economists foresaw it, because they focused on the whole economic picture including private debt. A retrospective study by Richard Vague, co-founder of two credit card companies, has shown that financial crises worldwide are caused by rapid increases in private debt.

The austerity required to implement the neoliberal commandments, since the GFC, has weakened economies around the world. Because of its fiscal stimulus in 2008, America has fared better than most. But, thanks to its commitment to these commandments, America takes the prize for inequality of income and wealth. 

The MSM should ask: “Who benefits from reduced government deficits and debt when the real culprit is private debt?” And, “Who benefits from reduced financial and environmental regulations?” Also, “Who benefits when underfunded public programs fail, so they “need” privatization?” The answer to each is, the financial elite!

With a fiat monetary system, a country can manage its economy for shared prosperity with full employment and stable prices. Why then would the “best Congress that money can buy” continue thinking and acting like we still have a gold standard?

The answer lies in this self-indicting quote recalled from the real gold-standard days of 1863. To their associates in New York, the Rothschild brothers of London wrote,

“The few who understand the system will either be so interested in its profits or be so dependent upon its favours that there will be no opposition from that class, while the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests.”

Financial interests, supported by a compliant MSM, are ruling our world while leaving millions of people in financial servitude. To grow our economy we need to get rid of the gold-standard, neoliberal paradigm that works only for the elite and take advantage of our existing fiat system that will work for everyone.

Thursday, May 7, 2015

Gold standard or fiat: Why it matters

Most people especially pundits and politicians do not understand our fiat monetary system. Their understanding is based on a gold-standard system, which we gave up completely in the mid 1970s. Here we look at simple, basic differences between these two monetary systems. 

For simplicity, we will imagine colonizing two islands with primitive but productive populations. Both islands have a culture, but have not established monetary systems. They barter goods and services as best they can, and they are poor by our standards but content.

We arrive at each island intent upon establishing production of goods and and services within a capitalist economy based on a monetary system. 

Gold Island

To get the gold we need for our monetary system, we offer paper money to the people to mine gold. They are not at all interested until we demand that they pay taxes with the money we pay them for the gold. Of course, there will be some unpleasant consequences should they not pay their taxes. Taxes are always imposed through coercion.

Gold Island: Spending limited by amount of money. 

This is similar to the actual experience of the British when they colonized part of East Africa late in the 18th century. They imposed hut taxes enforced by the threat to burn down the huts of delinquent tax payers.

By imposing taxes we have made the population unemployed. And, they will have to work to earn the money needed to pay their taxes. 

This may be a strange notion to some. Introduction of a monetary system causes unemployment through taxation.

At last, the miners take the money in proportion to the amount of gold they deliver. In terms we understand the miners and those who feed and house them are the private sector. Our government now has the gold, which it buries in a safe place. And, the private sector has the money with which to trade among themselves.

The private sector can set up banking to facilitate loans between those who wish to save and those who wish to invest in business development. Historically banks have extended the money supply by issuing their own bank notes. That’s a practice leading to bank panics.

As the island prospers we want the government to provide armed forces for our defense. Also, we want it to establish a legal system that protects ownership of our property and punish those who steal. Other services might include health for the poor and walking canes for the elderly the better for them to go dumpster diving.

Because the private sector has the money, the government must borrow from or tax the private sector to get back the money it needs to provide services. This puts government and the private sector in competition for the limited amount of money available. The more government spends the less money remains in control of the private sector. As a consequence, there is pressure from the private sector to keep government and its spending small.

The advantage of a gold standard is that the value of money and prices are stable. But, there are disadvantages. Banks might lend too much and be unable to cover depositor withdrawals leading to panics. There may be too little money available to provide for the poor, sick, and disabled. Also, competition between the private sector and government for money causes interest on loans to rise. Most important, with a fixed amount of money the economy can not expand to accommodate a growing population. This leads to constant unemployment.

Fiat Island

As we need no gold, we offer our fiat money to the people for work we want them to do. When they demur, we impose taxes or else. This coercion, as on the gold island, causes unemployment so that people work for the money that will be accepted for taxes.

Fiat Island: Spending limited by available workers.

Unlike Gold Island, the quantity of Fiat Island money is not limited. Government can provide services without interfering with the private sector. There is no need for government to tax or borrow to spend. Where Gold Island is limited by the amount of money available, Fiat Island is limited by the number of willing workers.

When government does tax or borrow it is retrieving money that it has already spent. This is also true on Gold Island. The difference lies in what is bought. On Gold Island it is gold; on Fiat Island it can be whatever can be done with the available workers.

Banking can be set up as either private or public functions. In either case government must allow banks to create money for private investment. And, government controls the interest rate at which banks obtain money.

With both the government and private business able to spend at will, there might be too much money in circulation. When people have too much money to spend, demand for products exceeds our productive capability, and inflation occurs. Inflation manifests as increased prices for goods and labor. 

Taxes are a ready remedy for inflation. Government and private spending put money into circulation. Taxes take money out of circulation. This allows control of the economy through appropriate spending and taxation (fiscal) policies. Another tool against inflation is interest rate (monetary) policies. The cost of borrowing is set by Government and can influence how much the private sector borrows to spend.

Or, the economy can deflate, the opposite of inflation. If the private sector borrows too much, debt service may become a problem, and people will reduce consumption. 

Why it matters

Anything that causes reduced consumption results in unemployment. Such causes are taxes, consumer decisions to save rather than make purchases, increased interest rates, or decisions to import from abroad. Under a fiat monetary system, government can offset reduced consumer demand by hiring the unemployed at a fair minimum wage.

A fiat system allows government more options than the gold standard. There is no reason that anyone should go without a job or suffer substandard wages.

Government budget decisions will always involve political interactions. And, there will be clashes among different points of view. Under a gold standard private business is at the center of discussions and the push is toward a smaller government role. A fiat system puts government at the center of regulating the economy, and it can make fiscal and monetary decisions looking at how they effect the whole economy.

Around the world, nations with fiat systems are running their economies as if they were on a gold standard. Politicians spread fear of running out of money to convince their electorates to make decisions against their best interests. Running out of money is not a problem with a fiat system. One might wonder if this fear mongering is because of ignorance or undue influence by big business.

Wednesday, April 15, 2015

A balanced federal budget is dangerous

This is a rewrite of the previous post. It starts and ends the same, but the argument is different. Hopefully, it is easier to follow, because it is important.

On March 11, 2015 the US Senate Committee on the Budget held hearings titled “The Better Way: The Benefits of a Balanced Budget.” But, a distinguished political economics professor, Mark Blyth, testified that there are no such benefits. Moreover, a balanced budget would be harmful to our economy. 

Prof. Blyth’s testimony was in stark contrast to those of the Committee for a Responsible Budget and the Business Roundtable, who also testified. They echoed the deficit hysteria that has obscured rational discussion of the federal debt and how it affects our economy.

It is a fallacy to think the federal debt is like a household mortgage that we must repay with interest in a certain time. If we fail to pay, the mortgage holder may repossess our property. Federal debt has no time limit, so we never need to pay it off.

Federal debt is an asset of the private sector and consists initially of Treasury securities. By law, the Treasury sells securities to cover federal deficits. These securities are rock solid investments for pension funds and are risk-free collateral. Their only financial burden now and in the future is interest service. For the most part, that interest is income to the domestic economy.

We should remember that our fiat monetary system replaced the old, gold-standard system years ago. Since then, federal spending is not limited by a fixed amount of money. It is limited only by the availability of productive workers and facilities. Deficit spending puts unemployed workers back to work, and the risk-of-inflation bugaboo exists only if we are already at full employment. 

Our economy consists of a federal sector and a domestic private sector. Within the private sector every financial asset has a corresponding debt. Financial assets and debt net to zero. The private assets associated with federal debt involve no corresponding private debt. Those assets can remain as savings in the private sector for as long as the republic exists. To the penny, “national debt” equals net private savings.

Let's not be stupid.

To be crystal clear, when federal spending exceeds revenue from taxes, we have a federal deficit. Likewise, a private sector deficit occurs when the sum of everyone’s spending including taxes exceeds their income. When one sector has a deficit the other will have a surplus. But, there is another sector to consider. 

Year after year, we have imported more from the rest of the world than we have exported to it. This causes a persistent outflow of financial assets from our economy to the foreign sector. As a consequence, one or both of the domestic sectors, federal and private, will sustain a deficit. Simply put, the sum of domestic deficits will equal the foreign deficit. It’s a matter of bookkeeping.

If the federal sector somehow manages to have a balanced budget, financial assets will go out of the domestic private sector. We can bet that within that sector Main Street will take the hit.

We should understand that, without full employment, federal deficits help grow the domestic economy. And, it will shrink if federal deficits do not make up for the foreign trade deficit. “Balanced budget” is just a euphemism for austerity. 

A more harsh form of austerity is when the federal sector must run a surplus in the face of a foreign deficit. That would be like Greece!

Still, we have Presidential candidates, who offer up balanced-budget myths. A favorite is, “We must not saddle our grandchildren with a burden of debt.” According to Prof. Blyth they might as well say, "Let’s shrink the economy today so that the parents of today earn less money and pay more for services. That will make sure that their grandchildren grow up poorer, with a smaller economy, and a worse education.”

We must not condemn our grandchildren to such a future! Unfortunately, on our present course of austerity we will.

Monday, March 23, 2015

The benefits of a balanced federal budget

On March 11, 2015 the US Senate Committee on the Budget held hearings on “The Better Way: The Benefits of a Balanced Budget.” A distinguished political economics professor, Mark Blyth, told the Committee there are no such benefits. Moreover, a balanced budget would be harmful. 

He acknowledged that our intuition tells us that to spend more than we earn leads to bad outcomes over time. To take on debt now to spend more brings on future debt and interest payments that result in having less in the future. This leads to the idea that saving is always better than spending. When applied to the federal government this idea is wrong and counterproductive.

It is a fallacy to think that the federal debt is like that of a household or firm, which we must pay off in a certain time. Otherwise, the mortgage holder may repossess our property. Federal debt has no time limit, and we never need to pay it off. Government issues the money it borrows. So, it can always make its interest payments, most of which return as income to the economy.

Prof. Blyth reminds us that government debt is an asset of the private sector and consists of Treasury securities. By law the Treasury sells securities to cover federal deficits. These securities are rock solid investments for pension funds and are risk-free collateral. To say we want less government debt is to say we want less private assets. Further, paying down the debt takes financial assets out of the private sector.

About sustainability of government debt, Prof. Blyth points out that only three things matter. They are the rate of growth of the debt, the rate of growth of GDP (Gross Domestic Product), and the rate of growth of population. If these are growing, as they can in the US, promises made now will be redeemed in the future by a larger population and a larger economy. Then our federal debt as a share of GDP can decline, and our ability to service the debt increases. 

Because of the financial crisis, recent increases in debt relative to GDP resulted from a combination of increased deficits and reduced GDP. We can trace the financial crisis back not to government debt but to an explosion of private debt. Private debt is the real villain in this story.

A country with a sovereign, fiat currency can always pay its bills. It can not become insolvent. That means the concept of saving has no meaning for a sovereign state. Thus, it makes no sense to save financial assets today so that the country can meet its commitments tomorrow. So, it is important to invest financial assets today to assure that real assets are available in the future. No amount of future financial assets can enable our grandchildren to access a health facility or cross a bridge that does not yet exist. 

Prof. Blyth noted that we can invest government debt in long-term developments. Private investment prefers short-term developments leading to profit.  He pointed out that the National Institute of Health has provided about 40% of the R&D in the biotechnology and pharmaceutical industries. Other government developments benefited, for example, Apple, Inc. It integrated into its iPhone the TCP/IP Internet protocol, the GPS network, and the touch screen. These Department of Defense developments helped make Apple, Inc. the most valuable company in the world.

Prof. Blyth contends that following current myths leads to unfortunate consequences. "We can not saddle our grandchildren with a crushing burden of debt." and "We need a painful budget today to protect future generations." are two such myths. They translate to "Let’s shrink the economy today so that the parents of today earn less money and pay more for services. That will make sure that their grandchildren grow up poorer, with a smaller economy, and a worse education."

We need not condemn our grandchildren to such a future! Unfortunately, on our present course of austerity we will.

Thursday, February 12, 2015

Strive for shared prosperity

Albuquerque Journal columnist Winthrop Quigley, in recent columns complained that there were too few rich people in New Mexico to stimulate the economy. His discussion was interesting, but I took issue with the following letter to the editor.


In his UpFront columns on February 5 and 7, Mr Quigley presents some interesting discussion on the state of wealth in the state. However, he fails to consider the role of sales upon which capitalism runs. Investments are made in anticipation of sales and fail if sales are not forthcoming.

Mr Quigley champions the mainstream, neoliberal line that investment by the rich drives the economy. That is the decades-old, failed, “trickle-down” story that leads to the idea that we need to coddle the rich so we can all prosper. So far that isn’t working.

Rich people putting money in the stock market doesn’t create jobs. That is just a manner of saving. It’s nice to have some rich people around; they are the result of a prospering economy not necessarily its wellspring.

Sale of products, from socks to computers, drives investment in production. One doesn’t need a rich uncle to expand her business. If there is consumer demand and a good business plan, a commercial bank can make the loan. Bank credit is largely the source of investment funds in the whole economy. It is not widely recognized that commercial banks create money upon making loans. Contrary to the common view that saving deposits create loans, the opposite holds; loans create deposits.

Rich people are nice to have around.

Banks will not loan to build inventory that will go unsold. The empty restaurant does not hire more busboys. And, no producer increases production unless sales are increasing. 

In the absence of federal fiscal stimulation, which could be done readily without raising taxes, the state must find ways to increase customer demand in addition to creating new businesses. Of course, great products create their own demand, if people have money to spend. To bootstrap itself the state will need to generate more revenue and increase consumer demand.

As a start, higher minimum wages create more customers with money to spend. Right-to-work legislation is just a way to keep wages low. Higher wages may threaten a single business, but across the whole economy higher wages mean more sales. To free up funds for current consumption, the state might create incentives to refinance loans for those deep in debt.

Investment in more and better education should be a high priority to develop a more capable workforce. The young are our future. Rather than an expense, they are an investment for all of us.

Although the state has programs to assist new businesses, it will require more revenue and new approaches. A gasoline tax with a sliding rate to keep the price constant would counter severance tax losses. Perhaps the state should expand the New Mexico Finance Authority into a public bank to increase its ability to fund development. A more progressive tax structure would help. Also, the state might add tax-backed bonds at lower rates to its panoply of offerings.

By pursuing both sales and investment, we can have more rich and fewer poor people. That is shared prosperity.

Thursday, January 15, 2015

A new light shines in the US Senate

This was submitted to the Albuquerque Journal and the Santa Fe New Mexican today. If either publishes it, I'll update this post.

Senator Bernie Sanders has lit a spark in the US Senate Budget Committee. Recently appointed ranking minority leader of that committee, the Senator has tapped Prof. Stephanie Kelton as his Chief Economist. Such appointments usually go unnoticed but not in this case. Already the appointment is being cussed and discussed, because Prof. Kelton advocates alternatives to the economic policies that have failed us for the past thirty years.

Prof. Kelton was recruited from her job as Economic Department Chair at the University of Missouri - Kansas City. Yes, the “show me” state. This department is an intellectual center of Modern Monetary Theory (MMT) that describes the way a sovereign, nonconvertible, fiat currency with a floating exchange rate actually works in the economy. Much confusion in the economic world today stems from a basic misunderstanding of how a fiat currency differs from one based on say, gold. This sheds a whole new light on the way we view current news and political discussions.

MMT recognizes that household and state budgets are not the same as the federal budget, because the US government is the only source of US dollars. The US government stands opposite the private sector on our national balance sheet. That is, federal deficits become private assets.

The private sector by itself cannot accumulate net savings. In our economy one household’s spending is another’s income. If one household saves by spending less than its income, it will prosper. But, if all households save there will be less spending overall, and less income overall. So, the economy will suffer unless the saving of some is offset by the borrowing of others. However, federal spending puts dollars into the private sector, so federal debt provides net private savings to the penny. Strange as it may seem, the highly scorned National Debt Clock is also the National Savings Clock. 

This chart from the CBO has been annotated to show that recessions tend to occur after periods of low deficits.

While liberals and conservatives argue about how to balance the federal budget, MMT realizes that balancing the budget can weaken the economy. The MMT understanding of monetary operations is consistent with observations of economic recessions following periods of too-small federal deficits and that federal surpluses are even worse. Presidents Bill Clinton and Andrew Jackson have in common that both were praised for running federal surpluses even though both were followed by devastating economic collapses. History shows that over the last 200 years each of the seven periods of significant federal surplus was followed by a depression. 

MMT also realizes that inflation can arise from too much spending by either the federal government or the private sector. Recently, our economic woes resulted not from federal deficits but from the private sector’s inability to pay its bills. 

MMT advocates alternatives to the policies of austerity that have led the economies of many nations around the world down the rabbit hole. Prof. Kelton brings new light by which we might find our way out of the hole.