Monday, September 5, 2016

Next President must employ fiscal policies

Today, I submitted this to the Albuquerque Journal. I'm sure they won't publish it, because they highlighted the Macguineas article with a complementary Editor's note. Gotta keep trying.
Unless we understand what our fiat money is and how it works in our economy, we will continue to think we must balance our national budget or suffer dire consequences just like a household. That leads to the confusion of the Journal editor, who praised a “policy expert,” Maya Macguineas, for her column on September 3rd as the answer to, “What should the next president’s plan be for the national debt?” Both the editor and Macguineas are misinformed.

This quote from another expert, Warren Mosler (Soft Currency Economics II, 2012), tells us almost all we need to know.

“The concept of fiat money can be illuminated by a simple model: Assume a world of a parent and several children. One day the parent announces that the children may earn business cards by completing various household chores. At this point the children won’t care a bit about accumulating their parent’s business cards, because the cards are virtually worthless. But, when the parent also announces that any child who wants to eat and live in the house must pay the parent, say, 200 business cards each month, the cards are instantly given value, and chores begin to get done. 

“Value has been given to the cards by requiring them to be used to fulfill a tax obligation. 

“Taxes function to create the demand for federal expenditures of fiat money, not to raise revenue per se. In fact, a tax will create a demand for at LEAST that amount of federal spending. A balanced budget is, from inception, the MINIMUM that can be spent, without continuous deflation. 

“The children will likely desire to earn a few more cards than they need for the immediate tax bill, so the parent can expect to run a deficit as a matter of course.”

That was then. Now credit is money, and gold is just another commodity.

The children may trade among themselves exchanging cards for services or real goods. However, they can not create cards. So, the net financial resources that children can save come from parental deficit spending. 

If there are not enough chores or the wages are too low, some children will not be able to pay their rent. Then we have involuntary unemployment and deflation. There is no need for unemployment as long as there is work to be done and workers available, the parents can always come up with more cards.

We could push the model further to include banking and trade with the neighbor’s children. In a fiat monetary system, the prosperity of the children is managed by the parents making sure that there is full, productive employment. To prevent inflation parents can increase taxes, which take cards away from the children. Then the deficit will take care of itself.

The deficit hawks cite scary consequences due to high private savings, but those consequences just don’t happen. 

Deficits drive interest rates down not up, because federal spending puts money into private bank accounts, which in turn increases reserves in the banking system. Then to maintain interest rates, government has to pay interest on bank reserves and/or sell Treasury securities to reduce the reserves. 

Interest on treasuries, which constitute the “debt,” stimulates the economy as it is income to the private sector not a cost.

We can always have enough cards for entitlement programs as long as we invest in the facilities and personnel necessary to staff them. 

Our economy is not about having or not having cards, it is about allocating our productive resources. We can not afford to continue to let those resources go to waste; we always have enough cards to employ resources productively. Then GDP and private savings will grow appropriately, and the deficit hawks can find something better to do.

The next President and Congress must employ fiscal policies to invest in the education, employment, and well being of the people. And, if they must, war. Our nation can achieve shared prosperity.

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