The 2013 Legislature should approve Medicaid Expansion: It's the right thing to do.

Responsible people in elected positions, who know better, have been allowing conservatives to get away with repeatedly telling us that “the federal government is just like a family, must balance its budget, and can’t spend money it doesn’t have."  The effect of that hoax on working Americans is devastating and is being used as justification by conservatives to prevent our federal government from investing in our public institutions and services  as our Framers intended when they wrote the Founding Documents.

The constant repeat of this conservative myth by the media each day, including TV, the newsprint, and the internet for the past three decades has fixed this myth as common wisdom.

It’s past time to begin calling a “spade” a “spade and to stand up for the truth even though it goes against the common wisdom.

I wrote the following letter to the editor of our local newspaper, the Helena Independent Record, in response to a published letter that claimed as his reason for denying Medicaid expansion in Montana was that "our federal government was broke and would not keep up its promise of funding support of the program."

Mr. Hull in his Friday letter “against Medicaid expansion” made several incorrect statements.

The projected benefits to Montana of accepting the Medicaid Expansion coverage were developed by a non-political University of Montana Research Center, not by Democrats as claimed by Mr. Hull.

The biggest error is his apparent belief that the federal government “has no money except what it gets from taxes from all the states and taking that money hurts the economy.” 

 Exactly the opposite is true. 

The United States government is the source of all dollars in circulation (see the U.S. Constitution, Article I, Section 8).  Therefore, the US government always has enough dollars to buy anything available for sale in US dollars. 

When the federal government spends money, it purchases goods and services from the private sector. So, it is income in your pocket book.  Only a portion of that new spending gets withdrawn from circulation by federal taxation.  The rest stays in circulation to fuel economic growth.

State governments, on the other hand, do require your tax money to fund the public services (see U.S. Constitution Article I, Section 10).

So, any public service not funded by the federal government must be funded through state and local taxes, which ultimately increases the tax burden on all Montanans.

Is this what we want?

Accepting Medicaid expansion is the right thing to do for multiple reasons.   Most importantly, it is a moral thing to do!

I applaud Governor Bullock and Democratic legislators for their commitment to Medicaid expansion for Montana.

A Nation Must Live Up to its Means

Today, the Albuquerque Journal published the following as its "Other Voices" column in the Santa Fe section. They gave it the title "Government must deficit spend." I like mine better.
Update: This same letter was published in The Albuquerque Journal Business Oulook on March 25.

The Journal article “Belt tightening” by Kevin Hall in the March 8 Business section was so wide of the mark that it should not stand without rebuttal. The most revealing quote was from Terri Cole, president of the Greater Albuquerque Chamber of Commerce, asserting that few would disagree that both private business and the federal government “must live within their means.”

The whole article is based on the popular myth that the federal government must live within its means just like a household or private business. Bill Dunkelberg, of the National  Federation of Independent Business, rightfully lamented layoffs of 7 million small business workers. Our unemployment crisis is due largely to the wide acceptance of the government-is-like-a-household myth. Those who adhere to this myth do not understand how the economy works and cause great suffering by unnecessarily permitting prolonged periods of high unemployment.

The federal sector differs from the private sector in that the government creates the money we use. Government creates money when the private sector borrows from banks, thereby increasing private debt. And, Government creates money when it purchases goods and services from the private sector thereby increasing public debt. What money government does not retrieve in taxes from its spending contributes to the public debt and remains as savings in the private sector.

The only limit to the amount of money government can create is the availability of productive resources that might be for sale. In an economic downturn such as the one from which we are recovering too slowly, the government can employ unused productive resources without fear of inducing inflation or pushing up interest rates or destroying the stock market.

Means - Use them all.

Inflation is the result of overall demand outstripping both our ability to produce and our ability to increase production. Our budgeting process obsesses over deficits when we should be concerned with the real economy and how we deploy our immense productive capabilities both for the public good and private enterprise. To endure, our economic system must provide sufficient purchasing power to enable our people to consume all the real economic goods and services that the nation can produce.

Contrary to repetitive remarks about a “spending problem in Washington,” unemployment underlies our current crisis. People taken as a whole are spending much less than their income, as they prefer to save and pay down debt. One person’s spending is another person’s income. When spending plummets so does income and people get laid off. High unemployment is not due to lazy workers; it is due to bad public policy.

The federal government has the capability and responsibility to spend, yes deficit spend, to put people back to work. The problem with the deficit is that it is too small to support needed recovery toward a healthy economy in which productive capacity is fully utilized.

That productive capacity is the nation's “means,” which includes both public and private workers and its businesses and equipment. Private businesses, households, state and local governments must live within their means. The federal government must assure that the nation lives up to its means.

Accepting Medicaid Expansion is wise economics

The Montana state legislature is debating whether to accept the Medicaid Expansion program.  The governor and the Democratic legislators are supportive, but the Republicans are voicing opposition based on their stated concerns that the federal government's debt is unsustainable and therefore it cannot be counted on to continue its funding commitment to the state in the future.  I wrote the following letter to the editor of the Helena Independent Record.

Almost all of Montana’s Republican legislators say they will not support Medicaid expansion for our state because the programs impact on the federal government’s budget is of vital concern. 

They claim the federal government is broke, the deficit is out of control, and it will have to borrow from the Chinese putting the future of our children and grandchildren at risk of unsustainable future debt.

None of the above claims about our federal government are true.  They are myths.

Here are some Civics, Macroeconomics, and History 101 facts.

•  Only our federal government can coin or print money and regulate the value thereof (U.S. Constitution Article I, Section 8).  The federal government is the sole source of all dollars in the world’s economy.  It can never go broke.

• Our government does not borrow money from China.  China obtains U.S. currency by selling Chinese produced goods to American corporations that end up on our store shelves (like Wal-Mart).  They use their cash to buy U.S. bonds that earn interest.

• When the federal government spends more in a year than it takes in from taxes that money stays in your and my pockets and is our income.

•  After WWII, the federal debt to GDP ratio was 120%, much higher than it is today.  Yet, the government increased spending, the country’s economy grew, and unemployment decreased to near zero.  That war debt has never been paid off, yet our economy has grown substantially and we are all better off today than our parents were.

We must learn from our history, stop obsessing over our national deficit, and concentrate on real job creation like our leaders did in the post-WWII economy.

Medicaid expansion provides a unique opportunity for enormous sustainable growth of Montana’s economy bringing new jobs to our rural communities.  Please ask your legislators to vote to accept it.

A Fiat Currency Makes a Difference

The Albuquerque Journal OP-Ed Page published the following this morning with the title "High Debt Ratio Not a Big Deal - We are a country that can service our own debt." The only changes they made to the original text was to double the number of paragraphs. That edit improved the piece, I think.
                            

In his article of January 19, Professor Gisser discusses some solid economic points about our economy that would mostly be true if we were still on a gold standard. Fortunately, since 1971 we have had a fiat currency with a floating exchange rate.

Consequently, we can always service our debt and have no chance of becoming another Greece, and the Fed, not the external market, establishes the interest rates on the Treasury securities that constitute our public debt (and net private savings).

Further, there is no reason to believe that a 100% debt-to-GDP ratio or more is a matter of great concern. There would be concern for a household but not for a government that issues its own sovereign currency.

The Fed might decide to raise interest rates in anticipation of inflation. But, inflation is a very distant threat when there is excess productive capacity, which we have with millions unemployed. The production lost from those unemployed resources is gone forever.

Professor Gisser cites some past administrations to bolster the idea that tax decreases increase federal revenue. But, he doesn’t tell the whole story. Sometimes tax decreases work the other way.

Not mentioned by Professor Gisser were the rapid rises in deficit after both the Reagan tax cut of 1981 and the Bush II tax cut of 2001. Not noticed by most critics of public debt is that private debt soared to 300% of GDP at the height of the crisis.

It was the private sector that couldn’t pay its bills.

The non-intuitive fact is that the economy cannot be managed effectively by looking at tax revenues and deficits. By simple accounting identity, high government deficits correspond to high private saving and net foreign imports.

The government has no control over the private sector’s desire to save or to import.

Consequently, the deficit is largely beyond government control. Better metrics would be unemployment, use of productive capacity, and inflation.

Contrary to media and political hype, our large deficits are not due to profligate government spending but to high unemployment. Austerity, which passes for responsible fiscal policy, is actually irresponsible as it tends to increase unemployment.

A country that issues its own currency has both the ability and responsibility to spend counter-cyclically to economic cycles to maintain a healthy economy.

Obama Has Another Chance to Abolish the Debt Ceiling Forever

In the last few days the Republican-controlled House has decided to increase the ceiling for a few months. So, the Republicans put their sword back in its scabbard for use at another time and circumstance of their choosing. Obama now has time to reconsider his options to get rid of the debt ceiling forever.

On its face the debt ceiling is a farce in the present-day economy. Its roots lie in laws passed during World War I when the US was still on the gold standard. Its effect is to deny the administration the means to accomplish spending already approved by Congress. It is unlawful for the administration to refrain from making approved expenditures; at the same time, it is unlawful to exceed the debt ceiling. Something has to give, and two viable options exist.

Natural log of net private savings

First, Section 4 of the 14th Amendment to the Constitution says in part,

“The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”

Although it appears to the layman that this would render the debt ceiling unconstitutional, legal scholars have argued both ways on the issue. So far Obama has refused to take up the fight, which might be litigated finally by the Supreme Court. During litigation Obama could boldly pay the nation’s bills.

Second, and preferable, a two-year old proposal to mint a $1-trillion platinum coin1 has resurfaced. Legal scholars have generally agreed that it would be legal for the Treasury to mint such a coin. Economists, including highly regarded Paul Krugman, have conceded the economic feasibility of the coin solution.

The Treasury, by law, can create coins as money out of thin air and a bit of metal just as the Fed can create money out of paper (or computer keystrokes). After depositing the coin in its checking account at the Fed, the Treasury could then write checks on its account without borrowing. Of course, many people, who know neither what money is nor how it works, were aghast at such shenanigans while, at the same time, apparently comfortable with the farcical dilemma presented by debt ceiling.

As the Treasury pays bills out of its coin-enhanced account at the Fed, bank reserves increase. Eventually, if the Fed decides to undo quantitative easing, which also increased bank reserves, it will have to sell Treasury securities to drain the excess reserves. Only at that time, all excess reserves including those enabled by the coin would be converted into Treasury securities that we call debt. That is, excess funds in bank reserve accounts would be converted into savings accounts.

To date, Obama has rejected both the 14th Amendment fight and the platinum coin loophole as means to obliterate the debt ceiling threat forever. Instead he is permitting the Republicans to use this irrational debt-ceiling weapon whenever they like.

In failing to challenge the debt ceiling he is allowing himself or the Senate to be coerced into cutting benefits from the cherished safety nets of Social Security, Medicare, and Medicaid. Perhaps, that is what he wants.

1. With fiat currency the nominal value of the piece of currency does not depend on the market value of the material of which it is made. The difference is called seigniorage and is profit for the Treasury.

Currency Issuers and Users - Euro

Bishop John Shelby Spong is one of my favorite writers and progressive thinkers. Recently my friend Don called my attention to a recent weekly letter by the Bishop reporting on a trip to Europe with comments on its economy. Only recently would I have found the temerity to lecture the supreme lecturer. But, I did with the following comment on his website.

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Your interesting essay might have shed a different light on austerity in Europe had you appreciated the difference between a currency issuer like the US, UK, Sweden, and Hungary and a currency user, as are the states in the European Monetary Union.

After President Nixon took us off the gold standard in 1971, all major countries have had fiat currencies with floating exchange rates. In the early 1990s a growing community of heterodox economists centered at the University of Missouri Kansas City have been studying how a fiat monetary system functions. This community foresaw the trouble in the EMU as it was being constructed in the mid 90s, it foresaw the current global recession, it explains why the S&P downgrade of US debt was a non-event, and why the Fed's quantitative easing has been ineffective. The insights of this community provide some perspective on your observations in Europe.

The UK has imposed austerity on itself consistent with the neoliberal dogma dominating current global economic practice. And, it is suffering the inevitable consequences as you observed. A currency issuer unlike a household, business, or US state government has the policy latitude to deficit spend until the unemployed productive resources are fully employed. It can do this counter-cyclicly to normal business cycles to maintain a healthy economy. The UK is unnecessarily causing human suffering throughout the land.

Euro is not a sovereign currency

Members of the EMU do not have this policy latitude. As users of their currency, they are under a de facto gold standard where the euro takes the place of gold. To obtain euros they must either borrow them or be net exporters in trade with other euro nations. The members of the EMU have given up their monetary but not their political sovereignty. So, unlike states in the US, there is no avenue for a central government to share the prosperity of the whole for the common good.

Germany has reigned as the dominant mercantilist exporting to the other EMU nations, thereby enriching itself at the expense of the others. Now Germany is reluctant to take its boot off their necks and is imposing, along with the IMF, draconian austerity with the inescapable results - high unemployment especially among the youth, severe human hardship, falling GDP, and increasing deficits. The political unity once expected from the monetary alliance has not yet developed and might be threatened by increasing civil unrest.

The antidote to the depression is expansion of the monetary base to employ the unemployed. The European Central Bank, which issues the euro, could issue euros (the equivalent to mining gold) to relieve the crisis, if its charter permitted it. Such action would tend to be inflationary in regions of nearly full employment. Germany, having suffered the Weimar hyperinflation, will have nothing to do with the slightest hint of inflation.

So far, the ECB has kept the lid on debt defaults by purchasing member state bonds to keep interest rates from exploding disastrously as only a central bank can do. However, its charter and Angela Merkel are making sure that it can’t do more. The EMU states may muddle through after a long time, if civil unrest does not intervene Arab-spring style or worse.

You rightly observe that there is little difference in the plight of EMU states between those with conservative or liberal governments. Neither has much policy discretion, and like here in the US, the difference between conservative and liberal economics is the intensity of their devotion to austerian dogma. They are both basically and unfortunately neoliberal.

As one who has put religious myths in proper perspective, you might enjoy ongoing efforts to do the same with economic myths that are causing worldwide suffering and forestalling progressive objectives.

References:

http://neweconomicperspectives.org/2012/12/deprogramming-progressives-indoctrinated-into-supporting-austerity.html

http://macrobits.pinetreecapital.com/tag/euro/

http://www.nakedcapitalism.com/2010/08/guest-post-modern-monetary-theory-%E2%80%94-a-primer-on-the-operational-realities-of-the-monetary-system.html

http://www.modernmoneyandpublicpurpose.com/blog.html

http://www.alternet.org/story/155040/the_truth_revealed_about_debt_and_deficits?page=0%2C0

Representative Pearce is Confused

This post was printed as a letter-to-the-editor in the Albuquerque Journal North twice. First on Wednesday, Dec 26 with the title Pearce Wrong on "Printing Money" and again on Sunday, Dec 30 with the title Rep Pearce Gets Money Lesson. Either the Journal staff really liked it or, more likely, they were just confused. Thanks to the Journal for the exposure!

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On the Journal's Nation page for December 22, Michael Coleman quotes Representative Pearce as saying "...we're just printing money because we can't even borrow it. Somebody needs to say this is ludicrous."

Confused

Representative Pearce's statement is shockingly ludicrous. Presumably, Pearce is referring to the Federal Reserve Bank buying US Treasury and mortgage backed securities. He and others, who refer to this action as printing money, apparently forget that the securities were purchased previously by drawing down bank reserves on the part of banks or their clients. When the Fed purchases these same securities, bank reserves are restored as the Fed takes possession of the securities. It is merely an asset swap. The net effect of the swap is that interest is paid to the Treasury instead of to the former holders of the securities in the private sector.

The second part of the quote, that we "print" this money "because we can't even borrow it" is equally ludicrous. Where does Pearce get the idea that we can't borrow money - that is, sell treasuries to the non-government sector? Even at historically low interest rates, Treasury securities are being purchased at every Treasury auction. In fact, such auctions never fail. In purchasing Treasury securities banks are just trading reserves, which earn little interest, for securities that earn more interest. It is just another asset swap.

Pearce's ludicrous statement implies that he thinks buying securities with "printed" money is equivalent to selling securities. Of course, the two operations are the opposite.  The first increases bank reserves; the other decreases reserves.

Representative Pearce's confusion is representative of the confusion of the nation's leaders. It leads to self contradictions and poor solutions to our economic problems.

Connecting Modern Economics with Progressive Politics

Connecting Modern Economics with Progressive Politics

As Los Alamos scientists and engineers working on nuclear weapons, our sole interest was accurately defining the problems and researching, developing, and implementing workable solutions.  Our jobs involved objective assessment of situations, separating the wheat from the chaff, and bringing people together with the right skills to fix problems.   Politics never entered the problem solving processes.

In retirement, several longtime Los Alamos colleagues and friends concerned over the political “wars” in Washington preventing us from addressing Climate Change began discussing how we might contribute to a solution to get our country moving in a positive direction.  We believed we had the right credentials and technical knowledge to address the issue and wanted to find some way to influence our elected officials.  Needless to say, we have not been successful!

Along this path, Dan started digging into economics to see if there was an economic component to the climate change issue that could make the argument for addressing carbon emissions more compelling to our Congressional decision makers.  In the process he found that economic issues were the most important consideration in almost every issue our country faces. 

Dan discovered a group of academics advocating an approach to Macroeconomics called Modern Money Theory (MMT) that is more an explanation of the way a sovereign’s fiat currency works , if unencumbered by needless restrictive legislation, than it is a theory.   

Needless imposed legislative constraints, like the “debt ceiling“ and the obsessive fear over an expanding “national debt,” are causing law makers to make unnecessary and destructive budget cuts that are killing jobs, hurting our economy, and preventing our government from investing in almost every phase of our national public service needs, including now urgent climate change issues.

Unfortunately, both Republicans and Democrats have fallen into the trap of believing economic myths driving our governments decision making in the wrong direction: “our federal government’s finances are no different than a household’s finances, it is going broke, it needs to increase tax revenue or borrow money from China to support our national debt, and it must make major cuts to our safety net programs to survive. “  

All of those often repeated statements are wrong, yet they are so firmly entrenched in our current culture that peoples’ eyes glaze over when they hear anything that conflicts with these myths.

Most people do not understand macroeconomics on any level, but conservatives purposely trumpet these myths to achieve their ideological small government, privatization agenda.  Claiming our government is running out of money is literally the only way to get citizen voters to accept cuts to our social safety net programs as necessary to prevent our country from going bankrupt.

Our challenge is to find better ways to communicate to all citizens, public policy makers, and advocates of progressive policies the message of how money and our banking system really work and the key role the federal government plays in sustaining full employment for all those wanting work.

 

Arguments for saving Social Security, Medicare, and Medicaid from destruction and making the necessary investments to improve our “public common good” would be enormously strengthened by an understanding and integration of MMT principles into our discussion of all the critical issues of our time.

My hope is that others will join us in this quest!