Money and Gold: A Primer

 Duane and I have been working on this for a while. We are attempting a common sense approach to understanding our monetary system. Hopefully, we will stimulate readers to delve more deeply into the working of a sovereign fiat monetary system.

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The US currency is no longer based on a gold standard. That has huge implications for all financial policy decisions made by the US government. That change in our monetary system completely changes the way we should think about all monetary and fiscal operations.  There is no longer any equivalence in financial management between households and the federal government. Unfortunately, the wrong belief that our monetary system is constrained as if our currency were still on the gold standard continues to cripple our nation’s sustainable economic growth in the name of “fiscal responsibility.”

Nixon Did It

In 1933 President Roosevelt took us off the gold standard domestically to implement his successful New Deal program. But, the value of our money was still tied to the value of gold through foreign trade. Gold was the means of payment for all imports.

In 1971, President Nixon officially defaulted on international gold payments. That action had the effect by 1973 of changing our money to a nonconvertible, fiat currency with a floating foreign exchange rate.

Federal officials in Washington struggled for years to come to grips with the relationship between gold and currency. In the mid-70s they gave up any pretense of a dollar to gold monetary relationship. It is little wonder that to this day our currency is not widely understood. This lack of understanding has had a devastating impact on our fiscal and monetary operations.

Federal policy decisions based on gold standard beliefs are largely responsible for the massive wealth inequality in America today.

The Monetary Base and Inflation

Under a gold standard, a nation’s monetary base (Currency in circulation + Bank vault cash  + Bank deposits) depends on the amount of its gold supply and the value assigned to it. The only ways to expand the monetary base to promote economic growth are to arbitrarily inflate the value of gold or obtain more gold through mining or exports.

Simply stated, a nation must create money to buy gold from either gold miners in the private sector or foreign trade surpluses. Then the gold rests in government vaults and the private sector holds the money.

Having spent its money to buy gold, government must tax or borrow it back for its own expenditures. This familiar way of thinking about our currency persists to this day despite Nixon’s decision in 1971.

Under our current nonconvertible fiat system all that gold-centric thinking is wrong. We must rethink everything about how we manage our monetary base, where our money comes from and where it goes, how we manage inflation, and what we gain or lose in foreign trade. Our correct understanding of these issues impacts our ability to recognize whether policies help or hurt the economic and social issues that concern us every day.

The Federal Reserve Bank (Fed), or private banks acting as Fed agents, issue all US dollars.  There is no other source. The detailed double-entry bookkeeping that records fiscal transactions is beyond the scope of this note. But, the entries reveal that:

• The federal government creates money when it spends and destroys money when it taxes.

• Banks, accredited by the Fed, create money upon issuing loans and loan repayments destroy money.

So, the monetary base is flexible and varies according to the needs of government and the private sector to buy goods and services.

There is no limit to the amount of money the federal government can create. But, there is a limit to the nation’s productive capability, which includes labor, natural resources, and equipment. Interestingly, the New Deal initiated in 1935 demonstrated that we can manage our productive capacity to employ all who want to work.

Inflation will rear its ugly head if the federal government tries to buy more than the country can produce. When the country turned its productive capacity to win World War II, measures were taken through price controls and rationing to contain inflation.

For decades since WWII, the productive potential of the nation has been underutilized. That is, federal government spending has been below that necessary to use all the nation’s available resources including labor.  In fact, government practice has been to enforce involuntary unemployment on the labor force to maintain a buffer stock of unemployed labor.

Think about it. The Fed, through its management of the federal funds rate (the interest rate at which banks borrow in the federal funds market) tries to control inflation by assuring that 3% to 5% of the labor force remains unemployed. This buffer stock of unused labor keeps wages low to prevent dollar devaluation, which is inflation.

Buffer stocks are nothing new; they have been used to control the price of grain with the government guaranteeing the price of a commodity. To assure a minimum price farmers would receive for their crops, government would buy excess grain and store it in times of plenty. Then it would sell grain at the same price in bad growing seasons.

A buffer stock of some sort is always needed to preserve the value of a sovereign currency. In the past we used gold. Now we use the price of unemployed labor. Wouldn’t it be much better if we used the price of employed labor by implementing a federal jobs guarantee (JG)? The JG would establish the minimum wage and other conditions of employment. Business firms would then have to meet or beat these minimum terms when hiring.

We must control inflation. We can do that by abolishing involuntary unemployment and implementing the JG. That will ensure that everyone who wants a job can have one at a livable wage and provide useful public service.

Deficits Matter; We Need Them

If government taxes less than it spends, those dollars, pejoratively called a deficit, remain in the private sector to grow the economy. When government decides to spend more than it taxes, it borrows by selling US Treasury securities that soak up the dollars not destroyed by taxes. Then, the “deficits,” as US Treasuries, remain as assets in the private sector.
So, the total sum of US Treasuries outstanding is a record of the dollars not taxed out of existence since the beginning of the republic. That sum, trumpeted with alarm, is called the national debt, an economically meaningless historical record that causes much political consternation and misunderstanding.

Under a gold standard, as stated above, government must tax or borrow from the private sector to obtain funds to spend.

Under our fiat system, a system that people have used for most of human financial history, it is obvious that taxation and borrowing can not take place unless there is already money in private hands. So, like the gold standard, the federal government must first spend funds into private hands before it can collect taxes or sell treasuries.           

Think about it.  When one earns a dollar, one can only consume, pay tax, or save. Nothing else is possible. When one uses money to consume, the recipient of that money has the same three options. Any money saved is money not taxed away. We see that savings are possible only when the government spends more than it taxes. That is, the federal government must run a “deficit” and increase the national “debt” to make private savings possible.

Many politicians advocate reducing the national debt. Some promote a balanced budget amendment to the Constitution. Doing that would prevent any possibility of creating private savings. Economic stagnation, recessions, or depressions would become more common.  The chart below illustrates the situation. Federal deficits correspond to private savings.

To retire the national debt would mean retiring all US Treasuries, which would eliminate all private savings. The chart clearly shows that the reduced deficits during the decade leading up to 2008 resulted in reduced private savings that lead to the Great Recession. Let’s hope that future presidents understand what deficits mean, learn from the consequences of Bill Clinton’s deficits, and don’t repeat his mistake.

Taxes Matter; We Need Them

We have seen that federal spending is a separate federal government financial operation and must precede taxation. Still, taxes are necessary for the following reasons.
Taxes

• legitimize our currency. They create demand to acquire the tax credits (dollars) that government accepts in payment of taxes.

• are a means of averting inflation by reducing demand for consumption.

• inspire commerce to earn tax credits.

• can penalize lawbreakers.

• can reduce wealth inequality.

Borrowing; We Don’t Need to do It

Under the gold standard, government sold interest-bearing assets, US Treasuries, to preserve its gold supply. Treasuries were an attractive alternative to potential buyers of gold, and they served as convenient collateral in financial transactions.

Under a fiat system, government has no need to borrow, because government can create as much money as needed to achieve its objectives within the constraints of its available resources.  But there remains a market demand for US Treasuries in private sector financial transactions and for risk-free income. So, the selling of Treasuries to match deficit spending has continued as a financial practice as a matter of superfluous law.

Also, the Fed buys and sells treasuries to adjust the quantity of reserves in the banking system  to defend its funds rate target. However, the Fed could defend its rate target as well without Treasuries by simply paying interest on bank reserves just as it has done since 2008.

Banks Are Important

Bank lending creates most of our money. As private loans must be repaid with interest they add no net financial assets to the private sector. However, in the absence of federal deficits, the monetary base will grow as long as lending outpaces repayments and will decrease whenever payments outpace lending.

Indeed, acting for the government, the Fed issues money on a monopoly basis as needed by the economy. The Fed sets the price, the federal funds rate, at which banks can borrow money. Then the Fed supplies all that is needed in the overnight federal funds market at that price.

Many otherwise knowledgeable people still wrongly think that the money supply is limited as if it were based on gold and that any increase in the monetary base causes inflation. Further, common thought holds that competition between private and federal borrowing will “crowd out” private borrowing by driving up interest rates. The common belief that there is a fixed money supply, as with a gold standard currency, causes government and private companies to compete for money. Thus, if the government uses too much money, the interest rates go up and crowds out borrowing for private businesses.

In fact, contrary to common thought, federal government deficit spending increases the monetary base and will “crowd in” private investing if government spending is appropriately targeted into the domestic economy.

Because the Fed manages it, the federal funds rate is a policy variable not controlled by market influences. Bond vigilantes are artifacts of the gold system and do not exist in a fiat monetary system. Let us be glad the gold system is gone.

Trust Funds Are Misunderstood

Unlike a gold based monetary system, federal government saving has no meaning in a fiat system where needed money is always available.

So, there is no need for Medicare and Social Security Trust Funds, which are government savings accounts. Therefore, projected budget shortfalls are no real threat to Medicare and Social Security. The threat is embodied only in current laws that need to be changed.

Congress can always make the necessary funds available. But, with funds alone it can not make the necessary personnel and facilities readily available. That takes proper federal government management, foresight, planning, and funding necessary to ensure that care facilities and care givers are available as needed.

Foreign Trade Is Misunderstood

Under a gold system, imports would draw down a nation’s gold bullion reserves. So, countries would try to balance trade to maintain their monetary base. US trade was well balanced until the early 1970’s when the gold standard no longer applied. President Trump’s trade policies, which make use of tariffs to decrease imports, models the Gold standard. In that case exporters are winners of gold and importers are losers.

Under the fiat system, a nation trades its own plentiful currency for imports of products or services from foreign workers using foreign resources. Thus, exports are costs to us, as the products of American workers result in benefits for another nation. In what is called the “real terms of trade” the importer is the winner as its residents enjoy an improved standard of living.

It is true that imports tend to increase involuntary unemployment in the US. However, as stated above, under a fiat system the nation can eliminate involuntary unemployment and stabilize the value of the currency with a JG.

Conclusion

In the early 1990’s a heterodox school of economics rediscovered these insights into a fiat monetary system. Since then the school has codified its work in many publications, lectures, symposia, and college text books under the moniker of Modern Monetary Theory. Its work establishes that the fiat monetary system reveals fiscal policy space not available under gold standard constraints.

The school encourages any country with a sovereign, nonconvertible, fiat currency with a floating foreign exchange rate to maximize its productive capabilities to the benefit of all its residents.

Programs like universal healthcare for all, free college education at public institutions of higher learning, superior public education system, modernization of our transportation, water & sanitation infrastructure, and addressing the climate crisis with the urgency it demands are not radical.  They are achievable within the constraints of our available resources.

Unemployment indicates that federal deficits are too small and fiscal stimulus should be implemented. Inflation indicates that the limits of productivity are being tested. Then remedies such as taxes, spending cuts, or regulations are in order.

Republican Senators Denounce MMT

This is a short version of the previous post. I submitted it to the Washington Post on May 11. It was not published.
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Five US Senators propose a Resolution to condemn Modern Monetary Theory. They are as misguided as those condemning the Copernican view of planetary motion. MMT takes an enlightened look at economic practices staring us in the face.

Current economic policy depends upon maintaining a consistent level of unemployment to manage inflation. Consider that! Government enforces involuntary unemployment to prevent inflation.

MMT proposes to prevent inflation by assuring full employment with a federal job guarantee. Resource availability demands that deficit spending be limited to that required for full employment. That’s a lot more than currently allowed.

 MMT shows that government spending is not limited by available dollars. It is limited by available real resources that include manpower, raw materials and productive capacity. Households must live within their means; sovereign nations must live up to their means.

Government fiscal austerity has backfired around the world giving rise to tremendous wealth inequality and the consequent rise of populism. The economic insights provided by MMT show that there is room for much more federal fiscal stimulation of the economy.

MMT is backed by decades of study and scholarly publications. The policies proposed by MMT would result in more equitable distribution of wealth, full employment, and maximum use of our nation’s productive capacity. Why would anyone condemn that?

Senator Thom Tillis is Wrong to Condemn Modern Monetary Theory-MMT

This was submitted to the Raleigh New & Observer on May 4. It was not published.
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Of all the economic practices that have been or might be implemented by our federal government five US Senators propose a Senate Resolution to condemn the one practice that promises to do the most good. They apparently admire those practices that continue to enrich the top 10% at the expense of the less fortunate. They cling to the old rationale that the federal government must balance its budget like a household or burden future generations with debt. MMT shows them to be wrong.

Senator Tillis and two of his Senate Banking Committee colleagues along with two other Senators demonstrate with this ridiculous resolution that they favor their rich donors over the rest of us. They take issue with federal deficits proposed by “radical Socialist policies” that will “explode our national debt” and burden future generations. It’s a familiar refrain used to restrict government spending that would benefit us all.

MMT is a study of the fundamental fiscal and monetary operations at work in our economy. On the basis of simple accounting arithmetic MMT recognizes that in our economy a federal deficit provides a surplus in the private sector. Because the government issues our money, it is not constrained like a household budget. Deficits don’t burden future generations; they enrich them.

Current economic policies depend upon maintaining a consistent level of unemployment to manage inflation. That means government enforces involuntary unemployment to prevent inflation. MMT proposes to prevent inflation by assuring full employment with a federal job guarantee. Deficit spending must be limited to that required for full employment.

Government enforces involuntary unemployment on millions of potential workers.

MMT shows that government spending is not limited by available dollars. It is limited by available real resources that include manpower, raw materials and productive capacity. Households must live within their means; sovereign governments must live up to their means.

Fiscal ignorance is not limited to Republican conservatives. Too many Democrats also worry about deficits and think that government deficits “crowd out” private investment, because there is a limited money supply. This ignorance also leads to the notion that deficits cause interest rates to increase. MMT understands that interest rates are set and controlled by the Federal Reserve Bank.

MMT understands that money is created by both government spending and bank loans. And, money is removed by federal taxes and loan repayments. So, when the private sector is overburdened with debt, government spending can keep the economy humming. Obviously, Senator Tillis and his Banking Committee cohorts don’t understand banking and government fiscal operations.

Current economic practices put money in the pockets of the rich in the hope that money will “trickle down” to the rest of the population. That has never worked anywhere in the world. MMT understands that our economy runs on sales. So, putting more money into the population will result in more sales creating demand that will encourage investment.

Government fiscal austerity has backfired around the world giving rise to tremendous wealth inequality and the consequent rise of populism. The economic insights provided by MMT show that there is room for much more federal fiscal stimulation of the economy.

MMT is backed by decades of study and scholarly publications. The policies proposed by MMT would result in more equitable distribution of wealth, full employment, and maximum use of our nation’s productive capacity. Why would anyone condemn that?

Modern Monetary Theory Makes Sense

 I submitted this to the Raleigh News & Observer on April 7. It didn't sell.
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On March 31 The N&O published a New York Times OpEd by Robert Shiller titled “Modern Monetary Theory Makes Sense, Up to a Point.” Shiller like many of his mainstream colleagues, which include Krugman, Summers, Rogoff and others, doesn’t quite get the essence of MMT. They all agree that it is OK for government to run fiscal deficits sometimes, but maybe not too much. How much would appear to be anyone’s guess.

MMT is to mainstream economics what Copernican planetary theory was to the prior Ptolemaic view. It’s no wonder MMT is attacked without being understood. MMT gives us an entirely new perspective on our economy.
MMT focuses on achieving full employment, while the mainstream focuses on reducing federal deficits, which are government spending in excess of taxes.

MMT explains that deficits are normal and necessary for a rich country like ours. Moreover, it tells us how large the deficits should be. Deficits need to be large enough to achieve full employment for anyone willing and able to work. Mainstream economists obsess about achieving balanced federal budgets at least in the long term.

National Debt is equivalent to Private Sector savings. Your family share is what you own.

Mainstream economists preach that taxes and borrowing fund government expenditure. MMT teaches that the government must spend before there is money to be taxed and borrowed.

Mainstream compares government finances to those of a household or business. It also insists that when government competes for a limited supply of money private investment will be “crowded out.” MMT shows us that the federal government can purchase goods and services limited only by available resources. Government competes with business for those productive resources not for money.

The mainstream does not tell us how the money supply comes into being. It just exists in limited quantity as a veil behind which things happen. MMT explains that money is created by both federal deficits and bank loans and that the money supply expands and contracts depending on demand.

Further, MMT correctly regards the Federal Reserve Bank (Fed) as the monopoly issuer of US dollars. It sets the price of money, the Federal Funds Rate, and supplies all that the economy demands at that rate.

Under current monetary principles the Fed manages inflation by the morally indefensible practice of limiting employment opportunities for workers as it raises interest rates based on unemployment statistics. It tries to force 3% to 5% unemployment or some 4,500,000 to 7,500,000 people to maintain a pool of unemployed workers. That keeps wages low.

MMT employs taxes and borrowing as tools to manage inflation. Also, MMT seeks to achieve full employment through a Job Guarantee that maintains a pool of federal workers (managed at local levels) employed at a livable minimum wage. Businesses can draw upon this pool, if they meet the minimum standards set by the Job Guarantee. This practice would enforce a minimum wage and eliminate parasitic employers (those relying on food stamps to supplement wages).

We need only look at history to recognize the value of federal deficits. Our nation has been running deficits for over 200 years. In that history government has run a significant surplus seven times. And each time the surplus was followed by a terrible depression or recession. Most recently were the surpluses run by president Jackson (1835), who was widely acclaimed for paying off the national debt. Then came the surpluses before the Great Depression, followed by those run by president Clinton, who is also widely praised. During the decade leading to 2008 federal surpluses and low deficits, drained financial resources from the private domestic sector, which led to the Great Financial Crisis.

MMT urges the country to expand its productive output to the maximum and provide all residents with a decent living standard. Ambitious programs like the Green New Deal, universal health care, investment in education and infrastructure are well within our capabilities. It’s not about our nation living within its means, but up to its means. That is making America great.

In Defense of MMT

This is a response to a George-Will article published in the Albuquerque Journal. For the fun of it I submitted it to the Journal last week. It is an update and revision of the letter I previously submitted to the Raleigh News & Observer. Gotta keep trying.
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George Will, a great wordsmith, sells newspapers. But, his column in the Journal on March 14, which dismisses MMT (Modern Monetary Theory) as a late-night commercial hoax, exposes his economic naiveté. Will and the economists he quotes, Summers and Furman, are members of an old-boys club, which includes Paul Krugman. That self aggrandizing club has been slow to grasp the essence of MMT.

MMT represents an economic model to replace the so-called Neoliberal model that over the past half century has resulted in massive shifts in wealth to the rich at the expense of the poor and not-so-rich. Indeed, the disappearing middle class has been well documented.

The Neoliberal model obsesses about national deficits and debts, which it misunderstands. And, through its adherents’ inexorable influence on our Congress, it extracts tax benefits for the rich. The model promises investments by the rich will cause trickle-down wealth for everyone. That has not worked out well anywhere!

Results of neoliberal policies

MMT recognizes the power of a state issued, sovereign, fiat currency. Federal spending creates money in the economy while taxes, in effect, destroy money. We call the difference between spending and taxes a deficit, and deficits accumulated over time we call the national debt.

The Neoliberal model by design or ignorance fails to recognize that US Treasury securities, which are private assets, make up the national debt to the penny. Imagine that! The infamous National Debt Clock is also the National Savings Clock. We don’t pay off the national debt. It remains as the record of net private assets created by government deficit spending since our republic began.

Government can not run out of money as long as it does not promise to convert it into something it can run out of, like gold. Of course, the world rejected the gold standard when President Nixon took us off the international gold standard in 1971.

So, unlike households and businesses, there is no financial limit to government spending. But, MMT recognizes that there is a real constraint on spending, because there is a real limit to productive resources; labor, equipment, infrastructure, and natural resources.

Therein lies a caution. The purchase of more goods and services than the nation can produce will cause inflation.

Implied in the above is the counterintuitive fact that government, again unlike households and businesses, does not need to tax or borrow to spend. Taxes and borrowing, the sale of treasuries, are useful to avert inflation.

Actually MMT is not so modern. Marriner Eccles, who was FDR’s Fed Chairman, helped steer the nation out of the Great Depression in the 1930s. Eccles understood that our great nation had the productive capacity to afford everyone a decent standard of living. Beardslee Ruml, 1946, Chairman of the Fed Reserve Bank of New York, published Taxes for Revenue are Obsolete. Abba Lerner, 1943, advocated full employment in Functional Finance and might be the father of MMT. He would balance the economy not the budget.

The economic lessons of the 1930s and 40s fell under the sway of Milton Friedman, a major proponent of free-market capitalism, in the 1970s. He might be the father of the Neoliberal model. But, we credit Warren Mosler with rediscovering the MMT model in the early 1990s and stimulating solid academic research. That research is published and available to those willing to learn.

With insights provided by MMT we are going back to the future with the realization that this great country can afford a Green New Deal, including a federal job guarantee, and universal healthcare. MMT gives us the vision to look beyond misunderstood deficits and debt to focus on what our nation can do with its great productive capacity.

There is a stark difference between households that must live within their means and sovereign nations that should live up to their capabilities. Don’t be persuaded by the knee-jerk reactions from the old-boys club.

AOC is right about a Green New Deal

Today I submitted the following to the Raleigh News & Observer. It felt good to write something again.
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Alexandra Ocasio-Cortez is well known and both maligned and praised around the world as is her signature, audacious proposal for a GND. When asked recently on a TV program how she would “pay for” such an ambitious program, she answered with aplomb, “The same way we pay for our military.” To paraphrase, the government writes a check and government checks don’t bounce.

She has learned about Modern Monetary Theory (MMT), a description of the way our economy works that is gaining widespread traction with economists. MMT is also both maligned and praised around the world. It represents an economic model to replace the so-called Neoliberal model that over the past fifty years has resulted in massive shifts in wealth to the rich at the expense of the poor and not-so-rich. Indeed, the disappearing middle class has been well documented.

The Neoliberal model obsesses about national deficits and debts, which it misunderstands. And, through its unconscionable influence on our Congress extracts tax benefits for the rich. The model promises investments by the rich will cause trickle-down wealth for everyone. That has not worked out!

https://www.youtube.com/watch?v=_HKhP0nzaAM

MMT recognizes the power of a state issued, sovereign, fiat currency. That federal spending creates money in the economy and taxes in effect destroy money. We call the difference between spending and taxes a deficit, and deficits accumulated over time we call the national debt.

The Neoliberal model by design or ignorance fails to recognize that US Treasury securities, which are private assets, make up the national debt to the penny. Imagine that! The infamous National Debt Clock is also the National Savings Clock. We don’t pay off the national debt. It remains as the record of net private assets created by the government for public use since our republic began.

Government can not run out of money as long as it does not promise to convert it into something it can run out of, like gold. Of course, the world rejected the gold standard long ago.

So, unlike households and businesses, there is no financial limit to government spending. But, MMT recognizes that there is a real constraint on spending, because there is a real limit to productive resources; labor, equipment, infrastructure, and natural resources.

Therein lies a caution. Attempts to buy more goods and services than the nation can produce will cause inflation.

Implied in the above is the counter intuitive fact that government, again unlike households and businesses, does not need to tax or borrow in to spend. Taxes and borrowing, the sale of treasuries, have other purposes beyond the scope of this note.

Actually MMT is not so modern. Marriner Eccles, who was FDR’s Fed Chairman, helped steer the nation out of the Great Depression in the 1930s. Eccles understood that our great nation had the productive capacity to afford everyone a decent standard of living. Beardslee Ruml, 1946, Chairman of the Fed Reserve Bank of New York, gave a paper entitled, Taxes for Revenue are Obsolete. Abba Lerner, 1943, advocated full employment in Functional Finance and might be the father of MMT.

The economic lessons of the 1930s and 40s fell under the sway of Milton Friedman, a proponent of free-market capitalism, in the 1970s. He might be the father of the Neoliberal model. But, we credit Warren Mosler with rediscovering the MMT model in the early 1990s and stimulating solid academic research.

With insights provided by MMT we are going back to the future with the realization that this great country can afford a GND, including a federal job guarantee, and universal healthcare. MMT gives us the vision to look beyond misunderstood deficits and debt to focus on what our nation can do with its great productive capacity.

There is a stark difference between households that must live within their means and sovereign nations that should live up to their capabilities. AOC is on firm ground.

A Choice: Fed Interest Rate Hikes or a Job Guarantee

The JG is getting a lot of press. This is an attempt to call attention to it. I submitted it to the News & Observer but they didn't bite. Perhaps I pack to much information in it. An article could be written on almost any paragraph.

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Political discussions are sizzling as politicians listen to academics touting the advantages of a federal Job Guarantee to target full employment.

For decades the Fed has raised interest rates to fight inflation. After all, the Fed’s mandate is to maximize employment and achieve price stability. So, when the Fed thinks inflation is lurking, it raises interest rates to slow economic growth. Its rationale is based on the out-dated Phillips curve that indicates inflation increases as unemployment decreases. Accordingly, the obvious solution to rising inflation would be to increase unemployment. 

Conventional economists seek the elusive NAIRU (Non-Accelerating Interest Rate of Unemployment). It sounds spooky and is spooky. It posits that there must be some level of unemployment at which prices are stable. The Fed seeks that level through adjustment of interest rates.

That’s right! The goal of the Fed is to reduce job opportunities in order to control prices and maintain the value of the dollar. In doing so, it ignores the tremendous costs of unemployment. Not only does an idle worker contribute nothing to GDP, unemployment payments rise, and the sociological costs are huge. Adding to the misery, the victims of enforced unemployment are often looked upon with scorn.

In the end, the Fed’s action is counterproductive. Increased interest rates raise the price of everything, which is the very definition of inflation. And, through the resulting increased rents people pay, it provides more opportunities for the rich to disadvantage the less fortunate. It is a national policy that most conventional economists support. But it just doesn’t work.

Fortunately, there is an alternative. Marriner Eccles, FDR’s Chairman of the Fed understood it. We named the Fed building in Washington after him and forgot that he knew our great nation has the productive capacity and ingenuity to provide a decent living for everyone. 

During Eccles’ tenure the WPA (Work Progress Administration) thrived and offered jobs to the able and willing. In the 1990s, Warren Mosler, a hedge fund manager, reawakened economists to Eccles’ insights.

Academic authors see the JG as a federally funded, locally administrated program to hire any willing and able worker at a living wage with benefits. The range of possible jobs would have few limits and could include filling potholes to replacing water and sewage systems. And from directing traffic to providing health care. 

The JG would set the minimum wage and a standard for working conditions. Private firms would be free to offer higher wages or better working conditions to hire the workers.

The JG would be countercyclical to and dampen the business cycle by expanding in down times and contracting in good times always maintaining full employment.

Perhaps most important, the JG would counter the corrosive sociological consequences of unemployment and inequality. Critics citing the costs of the JG should first consider the costs of these consequences. The costs and benefits of a JG have been researched thoroughly in the academic community.

Fundamental to the thinking behind a JG is the realization that our economy is not driven by production as viewed by advocates of trickle-down economics. Instead, the economy is driven by sales, which in turn, stimulate production. So, by providing work and wages the federal government stimulates demand to which production responds. 

It is time to make a choice. We can keep the system of enforced unemployment, with all its sociological consequences, to provide a pool of unemployed workers looking for work at low wages. Alternatively, through the JG we can establish a pool of employed workers willing to accept work at wages above a livable minimum.

Academics pushing the JG idea are Professors Darity and Hamilton at Duke University, Tcherneva at Bard College, Kelton at Stony Brook, Fullwiler at University of Missouri, Wray at Levy Institute, and others all of whom are looking at our economy in a refreshing and enlightened way.

Dan Metzger is a retired physicist, living in Chapel Hill, with an interest in how the economy works.  

President Trump gets Foreign Trade Wrong!

I rewrote the last article published in the Albuquerque Journal and submitted it to the Durham News & Observer. It didn't fly.

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In fighting a war, generals on the battlefield know that a frontal attack is not always the best tactic. A flank attack is often a better move. And, so it is with foreign trade.

President Trump sees trade deficits, import expenses in excess of export income, as a bad deal and surpluses as a good one. Where we have trade deficits the frontal attack is the president’s tactic of choice. He plans to impose tariffs on some imports, which makes those goods more expensive. That’s not a win! Let’s take a closer look. There’s a better option.

When we import we increase our standard of living by purchasing something we want after considering price, quality, and availability. The president thinks we are not paying enough for some things. He wants us to pay more or do without those goods thus lowering our standard of living. 

This applies to the president’s most recent targets, lumber from Canada, cars from Germany, steel from Canada, Brazil, and North Korea; and aluminum from Canada and Russia. President Trump now invokes national security to rationalize tariffs to benefit workers in the metal industries. He could achieve his nominal objective by requiring the military to source its needs domestically while allowing the rest of us to buy at the lowest prices.

Other countries like to export to us so they can get US dollars, which are the widely favored foreign exchange currency. Exporters give us real goods in exchange for our depreciating dollars. Who is the winner in that exchange? In real economic terms of trade, the winner is the importer, who gets real stuff for mere paper or computer digits. The exporter bears the real cost as its productive labor is serving a foreign economy.

In real terms of real trade, our trade deficits make us winners not losers. So, what is the down side of being a winner? When we spend into a foreign economy rather than our own the result is higher unemployment. 

The dilemma is this. We must reduce our standard of living by limiting imports to maintain employment or suffer increased unemployment to enjoy a higher living standard. 

The frontal attack favored by President Trump is to impose tariffs to the consternation of trading partners, who may counter with reprisals. The flank attack is to learn how to deal with unemployment in general. We can do that, although we haven’t since the New Deal in the 1940s.

A federal Job Guarantee (JG) would provide work for anyone willing and able to work. It would be federally funded and locally administered to serve the public. This would provide a pool of employed workers that businesses could draw upon when they decide to hire. 

Workers would earn a minimum wage with benefits. The program would set a national minimum wage and maximize employment. Unlike the much ballyhooed Basic Income Guarantee (BIG), the JG would be countercyclical to inevitable business cycles. That is, it would increase when business hiring is weak and decrease when business hiring increases. 

The cost of the JG would be less than one might think, and it would be superior to the BIG. The work done would add to GDP, while an idle worker adds nothing. And, it would reduce the costs of unemployment benefits while increasing tax revenues. There is considerable literature on the subject generated by its proponents. The JG would help to maintain consumption demand and profits for business.

When we manage our unemployment by employing all able workers, including immigrants, we can enjoy the benefits of imports and increase our GDP. The end result is a better standard of living for all our inhabitants. That’s making America great!

Trump ’n Trade - A better standard of living for all

I submitted this little piece to the Albuquerque Journal. My last submission before I cancel my subscription to that neoliberal rag. Actually Vera finds the New Mexican much more informative. This was published in the Albuquerque Journal North on June 9.

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In fighting a war, generals on the battlefield know that a frontal attack is not always the best tactic. A flank attack is often a better move. So it is also with foreign trade.

President Trump sees trade deficits, more import expenses than export income, as bad and surpluses as good. So, where we have trade deficits the frontal attack is the president’s tactic of choice. He talks about taxing the imports to make them more expensive. Let’s take a closer look. There is a better option.

When we import we increase our standard of living by purchasing something we want, say lumber from Canada or cars from Germany, after considering price, quality and availability. The president thinks we are not paying enough for these things. He wants us to pay more or do without these goods thus lowering our standard of living. 

Other countries like to export to us so they can get US dollars, the widely favored foreign exchange currency. They give us real goods in exchange for our depreciating dollars. Who is the winner in that exchange? In terms of real goods, the real economic terms of trade, the winner is the importer. The exporter bears the real cost as its productive labor is serving a foreign economy.

In real terms of trade our trade deficits make us winners not losers. So, what is the down side of being a winner. When we spend into a foreign economy rather than our own the result is higher unemployment. 

The conundrum is this. We must reduce our standard of living by reducing imports to maintain employment or suffer increased unemployment to enjoy a higher living standard.

The Current Account closely matches Trade Balance deficit. Also, current account closely matches the Capital Account, the measure of capital leaving US. We can afford it. See https://fred.stlouisfed.org/graph/?graph_id=192470&rn=7163

The frontal attack is to tax our trade deficit as proposed by Speaker of the House Paul Ryan and threatened by President Trump. The flank attack is to learn how to deal with unemployment in general. We can do that, although we haven’t since the New Deal in the 1940s.

A federal Job Guarantee (JG) would provide work for anyone willing and able to work. It would be federally funded and locally administered to serve the public. This would provide a pool of workers that businesses could draw on when they decide to hire. 

Workers would earn a minimum wage with benefits. The program would set a national minimum wage and maximize employment. Unlike the much ballyhooed Basic Income Guarantee (BIG), the JG would be countercyclical to inevitable business cycles. That is, it would increase when business hiring is weak and decrease when business hiring increases. 

The cost of the JG would be less than one might think, and it would be superior to the BIG. The work done would add to GDP, while an idle worker adds nothing. And, it would reduce the costs of unemployment benefits and add to tax revenues. There is considerable literature on the subject generated by its proponents. The JG would help to maintain consumption and profits for business.

When we manage our unemployment by employing all able workers, including immigrants, we can enjoy the benefits of imports and increase our GDP. The end result is a better standard of living for all our inhabitants. That’s making America great!

Conservative economics yield poor results

I submitted this to the Albuquerque Journal on May 7, 2017. They didn’t publish it. Well, I’ll admit  it is a bit strident, so I’ll try to do better next time. But, these are strident times.

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The only thing more wacky than Robert Samuelson's column in the Journal on Saturday morning was its title, "Health entitlements consuming more GDP.” So called entitlements don't consume GDP, they add to and are a part of it. Samuelson complains that “entitlements” make up too much of GDP. 

A large fraction of health care costs make private investors rich, which means we have a health profit system and "care" takes a back seat. The fix would be more care and less profit.

Then we have Social Security, that the rich don’t need to care about. But, most old people care. When they buy things; food, clothing, smart phones, cars, they contribute to the economy. They consume, but they don't consume GDP.

As Samuelson observes, after we add in defense and other discretionary spending, Federal spending adds up to 15-20% of GDP. I think it should be more. For those, who think it is too much, we can do what any third grader can understand: Increase GDP! 

How do we increase GDP? We increase consumption, which typically makes up 75% of GDP. How do we increase consumption? We increase the income of workers by giving them a greater share of the benefits of our increasing productivity. It does not help GDP to give tax breaks to the rich. They don't spend more. They have no reason to invest in more production when customers have little money in their pockets. 

From Tcherneva 

real-world economics review, issue no. 71 

For almost a half century, we have followed the neoliberal, free market, trickle-down economic myth and have paid for it with a sluggish economy. Workers have not benefited from increased productivity. By now we should realize that the neoliberal paradigm exploits labor, the environment, legislatures, and ignores the arts and sciences to enrich the few at the expense of many.

Unfortunately, the neoliberal emphasis on nonproductive financial products has increased the  well known wealth gap. The financial sector acquires over 40% of corporate profits. This becomes overhead on everything we buy including productive labor. This overhead is the main reason our labor costs are not competitive. 

Samuelson concludes with the old neoliberal bugaboo over federal deficits. This is just a myth to convince us that federal spending must always be avoided in favor of privatizing public services to gain more profit. 

Federal spending increases demand for goods and services. Too much spending will cause inflation only if our productive capability falls short of demand. Meanwhile, deficits add to private savings, and the government can buy anything that is for sale in US dollars including labor.

So, government can be involved in increasing GDP. It can afford to hire staff for healthcare, teachers and facilities for a more capable work force, workers to build infrastructure, and to support senior citizens with a decent retirement. Our children and their children benefit from wise federal spending without having to pay off the national debt. They don’t owe it; they own it.

Samuelson and other neoliberals would have us believe it's all about money. It's not. It’s about allocation of our productive resources, which are people and facilities. We can afford anything we can do. It is not about living within our means; it’s about living up to our means.