Federal employment policy exploits labor

This has been submitted to the ABQ Journal as a Letter to the Editor. We'll see if it flies.
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Recently, people like to find fault with the Federal Reserve Bank (Fed) for Quantitative Easing and related issues. Of the actions the Fed takes, none is more startling than its exploitation of labor.

In a growing economy, it is possible for a shortage of labor to occur and for employers to bid up the price of labor, which might lead to inflation. In response to the threat of inflation, the Fed will take action to increase unemployment to a rate usually above 5%.

That’s right, our government has a policy to increase unemployment to forestall inflation. As this policy also preserves the value of the US dollar, it is considered a reasonable price to pay. This is just another way that people get the shaft when they don’t understand the game.

There is always work to be done. There is no need for unemployment

To initiate this policy the Fed increases the cost of borrowing to cool the economic expansion and increase unemployment. When unemployment is too high, the Fed lowers the interest rate to encourage borrowing that normally stimulates the economy to employ more people.

Currently, this policy is not working well. The Fed has lowered rates to almost zero and many businesses still can't or won't borrow to invest and hire, which is necessary for economic growth when Congress limits federal deficits.

Even though unemployment is high and decreasing very slowly, investors are anticipating increased interest rates that will keep unemployment at a noninflationary level. These unemployed, whom the Fed use to guard against inflation and maintain the value of the dollar, suffer like all the unemployed. Children go hungry; crime, including domestic violence, increases; and opportunities for education are lost. 

Such is the price of this policy. Adding insult to injury, some members of our Congress will denigrate the involuntarily unemployed as lazy ne’er-do-wells.

There is an alternative to this terrible policy. Instead of a labor pool of the unemployed to manage inflation, we can have a labor pool of the employed. The pool will naturally expand or contract as private industry fires or hires, respectively. 

Every unemployed person, who is willing and able to work, can be employed by the federal government at a minimum living wage. Such a program is often called a Job Guarantee (JG).

The JG would set the minimum wage at which employers could find employees from the labor pool of people, who are already working every day. It would minimize unemployment and continue to allow employers to reduce staff when necessary. The negative social consequences of unemployment would be greatly reduced, and the Fed would be able to meet its dual mandate. While the productivity of JG employees might be less than optimal, it would be much greater than for unemployed people.

The cost of such a program would be offset by reductions in unemployment insurance, food stamps, and minimal loss to the economy of reduced consumption by households. Most importantly, it makes good sense for the government to minimize the ravages of unemployment on good people when there is a viable alternative to existing policy.

Fundamentally the JG, which requires real production, seems to be superior to the Swiss idea of an Unconditional Basic Income that was featured on PBS recently.

Neither Bitcoin nor dirty socks are money

Today, I submitted this to the Albuquerque Journal. They didn't publish my last one. I thought this one might be more fun. It was published on March 20 under the title "Bitcoins may be bartered, but they are not money."  http://www.abqjournal.com/371415

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In recent, interesting, Journal articles Winthrop Quigley has pointed out that any things can be used as currency (money) if people accept those things. Dirty socks were used as an example. Hyman Minsky has pointed out that anyone can issue money, the problem is getting it accepted. So, what is money? And, why should we accept it?

Bitcoin and old socks are just things. In order to be money things, they must represent debt. Debt is just an IOU (I owe you), and for thousands of years money has been IOUs. For Joe's old socks to be money things, Joe must be willing to redeem them for something of value say, a dollar bill, a bit of gold, or a cup of sugar. Otherwise, if Joe gives Mary a pair of old socks for an old toaster it is just a straightforward barter agreement. But, if Joe is willing to redeem the socks for something of value, Mary can give the socks in trade for something else and Joe will be in debt to that third person.

So it is with Bitcoin, which is just a thing even though it is only a number on a spreadsheet in a computer somewhere. Indeed, the dollars we generally use are mostly entries on spreadsheets at our banks. As Bitcoin is not an IOU, it is not a money thing, and any exchange of it for something is just a barter agreement. Consistent with this argument, the governments of Japan and Canada have declared that Bitcoin is not money.

A grocery store coupon is money. It is an IOU issued by a company for a limited time and is a credit against our bill at the checkout counter.

Even though an IOU is money, it may not be generally accepted. If Joe's socks represent cups of sugar, there may not be many takers, but there may be more takers for gold. Then there is the US dollar. Why is it generally accepted? After all, it offers less than a cup of sugar. 

The dollar is an IOU of the government, and it offers only itself in redemption. A ten-dollar bill will get you ten one-dollar bills. Big deal, what's the attraction in that? 

What drives our need to acquire dollar IOUs? It might be that the government has declared dollars to be legal tender or that we generally agree to use them. Actually, we all need dollars, because we must pay our taxes with them. As a grocery store coupon is a credit at the checkout counter, so a dollar is a credit against your tax bill. Even a child with no tax liability, must pay for candy with dollars, because the candy maker needs them.

A sovereign money thing is issued by a sovereign government and is a tax credit. Bitcoin was invented supposedly to bypass government money. Money in any form can not compete with state money for acceptance.

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.

Let's pick the path FDR chose

The continuous stream of Congressional "debt" crises has been crippling our main street economy, killing jobs, and creating unnecessary hardship for many Americans.  Every quote by a Republican politician regardless of subject always refers to "out of control federal government spending and unsustainable debt and the need to cut entitlements."  There not only is no push-back from Democrats, they seem go out of their way to pay homage to the "federal government debt" problem, which only  reinforces the myth that the federal government is no different than a family and must therefore balance its budget or go broke.

I wrote the following editorial published in the Helena Independent Record October 28, 2013.  The motivation was two especially scary editorials that had appeared in the same paper during the previous couple of weeks.
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FDR: "The only thing we have to fear is fear itself."

Have you noticed every time a politician speaks, we’re told we should be very afraid for our future?  “Our federal government is going broke, we’re going to have to borrow more money from the Chinese, inflation is just around the corner, and our children and grandchildren are going to be saddled with an unbearable debt burden.   Revenue is not the problem, taxes are already too high.  Spending is the problem, it’s out of control and “entitlements” are the reason.  You’re just going to have to sacrifice more.”

The fear stories range from the hyperbolic overreach (IR, October 1) of the uninformed like Joe Balyeat, the Montana mouthpiece for the fossil fuels billionaires Koch brothers, to a more respectable John Snow, former Treasury Secretary under President Bush II, who undoubtedly knows the above fear stories are not true (as reported  by Bob Brown in the IR, October 16).

We’ve just witnessed a manufactured 16 day government shutdown engineered by the U.S. Congressional Republicans that caused ~$30 billion in lost GDP, the furloughing of nearly one million federal government workers, and a narrowly averted globally catastrophic economic meltdown that would have resulted if the Republican Congress had refused to allow the government to make interest payments on holders of U.S. Treasuries.   

These fabricated crises have caused over $700 Billion in lost national GDP since the Tea Party emergence in 2010.  Republicans are intent on scaring us all into believing that the U.S. government is going broke unless we dismantle Social Security, Medicare, and Medicaid.  But it’s all nonsense.

Many have been duped into believing the “government is going broke” storyline we are being fed by this anti-government rhetoric.  But consider this: never in its entire history has the country gone broke, yet it has carried a so-called “national debt” every year of its existence except for three years between 1834 and 1837.

If Congress spending creates a heavy debt burden on future generations, why haven’t those of us alive today had to pay back past “national debt?”

Ask yourself this.  Where do the Chinese get their U.S. dollars to lend us, when the U.S. government is the sole producer of the dollar?

Also ask yourself how the U.S. government can afford to spend trillions to bail out Wall Street and its mega-corporations every time they create a private-sector bubble that bursts, yet they cannot help the citizens who were financially destroyed by the explosion.

A brief review of America’s past century is revealing.  The wealth inequities of the 1920s were remarkably similar to the wealth inequities of the decade preceding the 2007 market crash.   The real estate and stock market behavior of the 1920s was nearly identical to the markets behavior of the 1990s and early 2000s.  Market values were artificially high and the wealth gap between the ultra-wealthy and the rest of us were at all-time highs at the times of both crashes.  

The end result of both periods was complete collapse of the economy, the Great Depression of 1929 and the Great Recession of 2008 respectively.  We’re still trying to recover from the latter, and today we sit at a tipping point much like the one Franklin D. Roosevelt faced in 1933.  

Rather than cut federal spending, FDR took a different approach in taking office in 1933.  At the depth of the depression, he recognized that only the federal government had the capability to provide jobs so desperately needed.

In his inauguration speech, FDR spoke these famous words, “The only thing we have to fear is fear itself.”  

Then he brought a conservative Utah banker, Marriner Eccles, to Washington to serve as the architect of FDR’s financial markets regulatory reform and New Deal jobs Programs.  Under Eccles’ leadership, a tightly regulated financial market coupled with government deficit spending lead America into an era of unprecedented worldwide prosperity.  We built gigantic modern public infrastructures like dams, airports, highways, and schools in America while at the same time propping up the economies of war-torn Europe.  During the 1940s through the 1970s, the federal government funded public education for all, developed the atomic bomb, and sent men to the moon.  The government funded all these inspirational things that provided people with jobs and did it with so-called government “borrowing.”  

Today we again stand at a cross-road and our federal government is faced with two options: 1) continue the current path of job-killing austerity, or 2) take the FDR path to return to prosperity by directly funding job creation programs to modernize our infrastructures, fully fund our safety net programs, and fund public education and state sponsored research institutions.  

The so-called “national debt” problem is pure political fabrication.  The real crisis we face today is very same one created by the extreme wealth inequity in America of the 1920s.   It is the failure of our federal government to directly fund job creation programs to rebuild our great nation as FDR did in the 1930s.

The fact is that the private sector businesses are not the only creators of “real” jobs, regardless of what the “small government” ideologues tell us.

The choice of America’s path belongs to us voters because it is us who send our representatives to Washington to create “our future” we demand of them.  Is it job creation or is it job-killing “debt” reduction. 

The 2014 mid-term elections are looming large!

Make our monetary system work for us.

Today, I submitted this to the Albuquerque Journal. It is possibly too wonky, but I wanted to make a credible statement that there is another way to look at our national finances. The Journal published this on November 17, 2013 with the title "U.S. Monetary System Widely Misunderstood." 

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Recently Professor Stephanie Kelton, Chair of the Economics Department at the University of Missouri-Kansas City, cited an illuminating quote from a Federal Reserve document revealing that at least some people at the Fed understand our monetary system. The quote below rings quite differently from the prattle we hear incessantly from politicians and undiscriminating media, especially during the recent shutdown/debt ceiling fiasco.

“As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills. In this sense, the government is not dependent on credit markets to remain operational. Moreover, there will always be a market for U.S. government debt at home because the U.S. government has the only means of creating risk-free dollar-denominated assets (by virtue of never facing insolvency and paying interest rates over the inflation rate,...?" (St Louis Fed Publication 2157)

New York Fed Building

Professor Kelton is a leading member of a school of economists and fund managers, who realize that the monetary system changed when President Nixon defaulted on the gold standard in 1971. Since the early 1990’s this community, exploring Modern Money Theory, has published widely and has gained followers from around the globe.

Significantly, MMT followers foretold the monetary problems of the Eurozone, where members gave up their monetary sovereignty for a de facto gold standard. Thus, their debt was not in their own currency. MMTers were among those, who foresaw the private debt crisis that caused our Great Recession. Further, MMT explains why the Fed’s Quantitative Easing did not and cannot stimulate the economy and why federal deficits do not and cannot in themselves lead to high interest rates or inflation.

When we get away from the gold-standard thinking that dominates current fiscal discourse, we realize that as the monopoly issuer of the dollar the U.S. government does what monopolies do. It sets the price (short-term interest rate) of the dollar and issues dollars in the quantity desired at that price by government spending and private investment. Dollars enter the economy through bank loans, which must be paid back with interest, and through government spending. Government deficits are the only source of net saving in dollar-denominated financial assets in the non-government sector. Government debts are private assets to the penny.

Also, we realize that government spending is not contingent on our ability to borrow dollars from foreign lenders. China, for example, does not create dollars; it gets them because we buy stuff from Chinese manufacturers. With their earned dollars, China can purchase anything for sale in dollars. That includes AMC Theaters, Smithfield Hams, or U.S. Treasuries. We don't need China or anyone else to fund our government spending, they get dollars from our spending.

It is the same for Government taxes. In a fiat money system there are no dollars in the non-government sector until banks lend them or government buys goods and services. Taxes serve to retrieve money that has already been spent. Government deficits result in net saving of financial assets in the non-government sector. Likewise, government surpluses reduce savings in the non-government sector.

This is just basic accounting. If government happens to have a balanced budget (spending minus taxes is zero), the non-government sector (domestic plus foreign) will also  balance to zero. This would result in reduced savings for the domestic private sector to pay for the foreign trade deficit. Federal deficits help the domestic private sector keep its head above water.

Repeatedly, we hear both political parties extolling the virtue of reduced deficits, even balanced budgets. John Boehner, Speaker of the House of Representatives, often bellows that no household or business can spend more than its income, so neither should the government. President Obama and his bedfellows blindly accede to this demonstrable falsehood.

Because government creates the money, it is not constrained in spending like a household - not that government should spend more than is needed. Also, government is unable to save for future expenditures like a household can. Saving has no meaning for the currency creator.

Clearly, Government finances are distinctly different from household finances!

Government invests in the future by spending on research and infrastructure in the here and now and can continue until full employment is reached. Then our descendants get the benefits of real assets AND possession of the financial assets (Treasury bonds) that constitute the national debt (national net savings).

One need be neither nerd nor economist to understand the rudiments of our monetary system. Our fiat monetary system can facilitate domestic prosperity. We should demand it.

America's Main Street economy versus Wall Street

An article written by a local bank officer and published in the Helena Independent Record  on the relationship of the Fed to the rising mortgage interest rates stated that when the Fed buys Treasuries on the secondary markets it is "printing" dollars that  increase the number of dollars in the global economy.  The fact that a bank manager seemingly does not understand the Federal Reserves operation and is misleading the public from a position of supposed credibility caused me to write an article that was published on the Opinion page of the Helena IR on July 29.  My article was discussed on Professor Randall Wray's EconoMonitor blog site on July 30.

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America's Main Street economy versus Wall Street

You might have noticed that Wall Street no longer is a thermometer for measuring Main Street’s economic health.  While the stock markets have recovered from their 60% collapse caused by the 2007 Great Recession and are now at an all-time high, the health of the Main Street economy as measured by the quantity and quality of jobs is not doing so well.

Jobs being created tend to be lower paying with fewer benefits than the jobs that were lost as fallout from the Great Recession and the recent government budget cuts.  Most concerning of all is the fact that the income and wealth gap between the richest and the working American continues to increase even as the stock markets continue their advance to higher highs.

Politicians, analysts, and media pundits provide all kinds of rationale for these discrepancies between Wall Street and Main Street and the failure of the job market to improve.  Almost all are wrong.

A new branch of economics called Modern Money Theory (MMT) perfectly explains these discrepancies.  It emerged during the early 1990s and foretold the euro zone crisis and the recent 2007 Great Recession.  And, it explains why the Fed’s Quantitative Easing (QE) program has been insignificant in stimulating the economy.  QE did have an effect of stimulating the stock market’s recovery while continuing to accelerate the income and wealth gap.

MMT is actually not a theory and it has no political ideological basis.  It is an objective study of modern (fiat) money and the way a sovereign country with its own fiat currency works.  It has nothing to do with big government versus small government, and it has everything to do with our government functioning effectively as our forefathers intended, using the constitutionally mandated financial tools at their disposal.

Warren Mosler, a former hedge fund manager who made his billions from these insights, challenged the economics profession that the U.S. would be far more prosperous if we stopped basing our fiscal and monetary policies on theories designed for a country whose currency was still tied to the gold standard. 

Today, tens of thousands of professionals in academia, finance, business, and government also champion Mosler’s insights that (1) our fears about the national debt and deficit are the result of a failure to understand how modern money works and (2) that lack of understanding is holding back progress on all economic fronts in America.  

And recently, the mainstream media has begun to take notice of MMT and is beginning to print articles about the economy discussed in a MMT framework.

While the actual details of how the United States government’s financial management system works are complex, MMT describes the government’s basic financial management framework in a way that is simple and straight forward that most of us can understand.

• The U.S. government’s finances are nothing at all “like a family sitting around the kitchen table working its budget” as has been metaphorically described by countless politicians. 
• The U.S. dollar is not tied to a commodity.  It is only a medium of exchange backed by the strength and power of the United States economy.
• The U.S. government’s financial management system consists of two components, fiscal (spending and taxing) and monetary (monetary operations and interest rates control).  
• Effective financial management requires that both the fiscal and monetary parts of the government work together in sync. 

Congress is solely responsible for the fiscal part.  It literally puts U.S. dollars into the main street economy by its spending and taxing directives and policy decisions.   To be effective, Congress must put the dollars where they are needed and in the amounts needed, coupled with effective tax policies, to reach its economic and societal objectives.  

The Federal Reserve Banking system (the Fed) is responsible for the monetary part.  As the central bank of the U.S. government, it manages the federal government’s financial balance sheet.  The U.S. Treasury and all states and commercial banks, both foreign and domestic, that want to do business with the U.S. government must have an account at the Federal Reserve Bank.  

The Fed is the most misunderstood part of the U.S. government’s financial management system, and its power is greatly exaggerated.  It is only the U.S. Congress that has the power to create jobs and stimulate growth in the main street economy.  

The Fed does have the authority to change the supply of reserves in the commercial banking system by exchanging reserves with Treasuries on its central bank financial balance sheet as it is currently doing with its QE program.  This action by the Fed does have great influence on the stock markets by changing the supply of reserves in the banking system (the financial industry).  But, increases in bank reserves do not make it into the general economy until or unless banks give loans to credit worthy customers in the private sector of the economy.   Therefore, the Fed’s QE action artificially inflates Wall Street while doing nothing to grow the main street economy that we all depend upon.

Real job creation and main street economic growth comes only from U.S. government deficit spending at times when the private sector is not producing enough jobs to generate disposable income in family budgets.

Just as the Fed is the “lender of last resort” for commercial banks if they need reserves to balance their capital accounts, the U.S. Congress must be the “job creator of last resort” for our economy.  For the United States to regain its status as the most prosperous and socially mobile country in the world, Congress must create a modern work program similar to FDR’s New Deal Programs of the 1930s.

A Defense of Federal Deficits

Yesterday evening I submitted this to the Albuquerque Journal in hope of making the Op-Ed Page. Will report back later. 
This was printed in the Journal on the Op-Ed page for July 7 with the title "Build a modern version of WPA" with the subtitle "High employment is a symptom that the deficit is too small" This time I liked their title.
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As a convicted deficit denier, I offer the following as counterpoint to the Sunday, June 30 Op-Ed by Carroll Cagle.

A Defense of Federal Deficits
Preoccupation with federal deficits and debt is counterproductive. The $12 trillion national debt held by the public means that $12 trillion in assets are saved in the private sector predominantly in the form of Treasury securities. To reduce the debt, some of those savings will have to be given up. The national debt problem is minuscule compared to unemployment that has resulted in trillions of dollars worth of potential production being wasted never to be recovered.

It all comes down to customers’ demand to buy products. If demand is not sufficient for firms to sell what they produce, they will cut production by shutting down machines and laying off workers. Firms will not ramp up production without increased customer demand. That leaves government spending to prop up demand by getting money into customers’ pockets. Cutting government spending just makes matters worse. 

A photo taken during the Occupy Wall Street in New York in 2011 and posted on "The Center of the Universe"blog.

Yet, here we are with sequestration cutting government spending out of either an obtuse conviction to cut the size of government no matter the consequences or the simplistic logic that cutting spending while holding the line on taxes will reduce the deficit. Any government or private action that increases unemployment affects the deficit outcome, because tax revenue is decreased and unemployment benefits increase.

Three such actions are significant. Because these actions are beyond government control, the deficit is largely uncontrollable; it just happens. First, if a single household withholds consumption to save or pay down debt, that household benefits. If the whole private sector saves in aggregate more than usual, overall demand decreases and workers become unemployed. This is the famous “paradox of thrift.”

Second, imports bring the benefits of quality or cost to consumers. But, the spending outside our economy enriches a foreign one and results in unemployment here.

Third, increases in productivity bring benefits to the firm employing them and their customers. Again, unemployment is increased.

As we enjoy the benefits, we should have policies to deal with the resulting unemployment. Instead, we tend to demean the unemployed and let the economy languish.

Simply stated, high unemployment is a symptom that the deficit is too small. Increased federal spending increases demand by putting money into the pockets of customers. Many folks are convinced illogically that deficits inevitably lead to the dire consequences of profligacy, which are high interest rates and inflation, even hyperinflation. These are neither inevitable nor uncontrollable.

Importantly, short-term interest rates are set by the central bank in any country with a sovereign currency. Our central bank, the Fed, will increase interest rates when the economy is doing so well that the Fed decides to cool it off by making borrowing more expensive. In that case, employment will be up and the need for federal deficits reduced.

We usually think of inflation as the result of too much money chasing to few goods. Too much money in circulation can be remedied by taxing some money back out of circulation. Too little production could also cause inflation in which case the remedy is increased production. One thing the USA is (or was) famous for is its ability to rise to the demand for increased production. The two instances of hyperinflation in the modern world were after the fall of the Weimar Republic and Zimbabwe. In each, the means of production were ruined and could not be reestablished rapidly.

Around the globe economies are crashing because of ill-advised attempts to slash the deficit. Politicians have committed their careers to this mistake and must now wait it out while hoping for a miracle. The USA has been spared up until now because of it’s automatic unemployment benefits and a mini-stimulus about four years ago. Unfortunately, we now seem to be hell-bent to follow the course proven to fail.

To reverse course, we need to repeal the sequester and build a modern version of the WPA program that assisted our recovery from the Great Depression.

It’s the private not the public debt.

Today, I submitted the following as a letter to the Albuquerque Journal without the figure. Perhaps it tries to cover too much ground in too few words. But, once in a while it seems worth challenging a reader rather than just recite slogans, which is all too common in discourse.

Hey, the Journal did publish this on May 20 with the title "Austerity no panacea for U.S. debt crisis."

In his letter to Business Outlook on May 6, Paul J. Gessing took issue with those of us, who realize that federal deficits are inevitable by simple accounting rules as long as the nation runs a foreign trade deficit and the domestic private sector enjoys a surplus. We also understand that “crowding out” is not possible when unemployment is high. Then, only increased government spending or lower taxes will enable the private consumption necessary to restore jobs.

Mr. Gessing missed the point that federal R&D can bring new opportunities to private business as Business Outlook has headlined in recent issues regarding technology at the Los Alamos and Sandia National Laboratories. And, as federal R&D did in development of the space program, GPS system, Internet, weather satellites, and countless other programs.

While deficit “hawks” hyperventilate about federal deficits and debt, they overlook private debt that skyrocketed to 300% of GDP while the national debt held by the public rose to only 70%. Our financial crisis grew not from government spending but from unscrupulous, unregulated private lending. Nevertheless, all the hype is about a “Washington spending problem” while the big banks get a pass and many millions remain unemployed.

The deficit hawks repeatedly warn that someday deficits will cause high interest rates, and we won’t be able to afford interest payments on the national debt.

Having its own sovereign currency, our nation can always make its interest payments, which mostly go back into the economy. And, the short-term interest rate is not a market price but a policy variable set by the Fed. Consequently, the interest rate can be set below the GDP growth rate, which is the criterion for sustainable debt growth.

Unsustainable private debt crashed the economy, and government has the capacity to rescue it. Instead, a deluded Congress and clueless President opt for austerity.

Financial Sector Balance - Updated

In previous blog posts, we have discussed aspects of Financial Sector Balance here, here and here. We are now well into a slow recovery from the economic shock brought about by the housing bubble of 2007. This post is an update on data presented earlier and a few remarks.

Recapping, we recall that the FSB is an important macroeconomic relationship showing how financial flows balance among the Public, Private, and Foreign financial sectors. It could just as well be between Blondes, Brunets, and Red Heads, but we have no data on those sectors. Fortunately, the Bureau of Economic Analysis (BEA) has the pertinent data in its National Income and Production Accounts (NIPA).

By merely observing that when money flows between sectors an account in one sector must be debited and credited in the other sector by the same amount. So the sum of debits and credits will be zero, zip, nada, and we can write.

Public (Net Surplus) + Private (Net Saving) + Foreign (Net Imports) = 0

Alternatively, we can equate two expressions for GDP or national income 

GDP = C + G + I + NX

where C = household consumption, G = government spending, I = business investment in means of production, and NX = net exports, often written as (X - M).

Because all income devolves to households, we can write another expression as

GDP = C + T + S

where C is the same, T = household taxes, and S = household saving. Equating the two expressions for GDP and collecting terms we have

(T - G) + (S - I) + (M - X) = 0.

This expression conveys the general idea, but is oversimplified as it ignores some accounting conventions. For example, household "investment" in stocks is considered to be saving. Because business taxes are costs of production, they are included under consumption. We can assume that the BEA accountants get it right.

The figure below shows a stacked bar graph of the top-level NIPA data. This presentation shows that the terms of the FSB equation do balance to zero.

There are some interesting observations that become readily apparent.

• Net saving in the private sector requires a public deficit as long as there exist net imports.
• In the presence of large net imports and small public deficits the private sector must reduce savings and net borrow.
• As of the end of FY 2012 (September) private saving and public deficits are still abnormally high. Further, the rapid decline of saving and deficit has leveled out. 

Because the government has no direct control over imports and private saving desires, it follows that government has no direct control over the deficit. Evidence from around the world shows that austerity measures do not reduce deficits, but only make them worse. 

Finally, it must be clear that in the US a public deficit is a necessary for private net saving.

Revised April 18, 2013.



 

The piper is being paid

Previously, the Albuquerque Journal published a letter that I titled "A Nation Must Live Up to its Means." A response from one reader gave a standard conservative response that the Journal titled "Some day, the piper must be paid," but the writer never mentioned a piper. But, he did disdain the government support of Solyndra.  So, I figured that the Journal was doing its usual job of editorializing in writing titles to readers' letters and submitted the following response on April 10. To my surprise, the Journal published this letter on April 22 in the Business Outlook letters. 

The Pied Piper of Hamelin is famous for leading the children out of town after the town refused to pay him for leading the rats out. It follows, of course, that bad things will happen to our children if we don't pay the national debt.

In a letter to Business Outlook on April 8, to defend the zombie myth that federal finances must be managed just like a household, the Journal trotted out the old saw that “Some day, the piper must be payed.” 

Pied Piper - Another popular myth.

That old saw raises the questions: Who is the piper? Who will pay that piper and when? As the old saw is vague about the subject, we presume that it refers to national debt, which is an accumulation of federal deficits. Contrary to conventional wisdom, I have claimed that current federal deficits are not large enough.

Because the national debt is held by the non-government sector as assets called US Treasury securities, the piper must be the holders of the treasuries, mostly institutions and rich people, and the payer must be the federal government. The payments made are documented daily by the Treasury in its “Daily Treasury Statement.”

Looking at the statement for the last day of FY 2012 one sees that $67.4 trillion in public debt was redeemed, $68.7 trillion debt was issued, and $215 billion interest was paid over the year. This happens to the tune of over $250 billion per day. The piper gets paid every day as the public debt gets rolled over and necessarily increased. Our government can always meet its financial commitments.

Unlike a private mortgage that must be paid off, the national debt has no due date. As the nation’s economy has grown, that old debt from World War II has remained as an ever decreasing fraction of the total. Public debt is the only source of net private sector savings; it doesn’t make sense to pay it off under usual circumstances.

Rather than concern ourselves with numbers on a spread sheet, we should look at what  really matters, that is the real economy. Businesses downsized to make profits on sales to those who are employed. Demand is not sufficient for businesses, as a whole, to hire up. So, we are stuck with high unemployment and pitifully slow growth. When the private sector can’t, Government purchases from the private sector can support the demand needed for full employment.

Of course, deficits can be too large, but not until full employment is reached. Our government should make sure that all the nation’s productive resources are put to use, not cut them off as it is doing now. Then we would see GDP grow and both unemployment and deficits decline.

Rather than complaining about small, failed enterprises like Solyndra, the private sector should look to government for the high-risk R&D needed for future industry.


Daily Treasury Statements