Wednesday, November 27, 2013

Charlie Sheen-O-Nomics

The Federal Government can't run out of money. Any economist, politician, or crazy uncle who says otherwise is an ignoramus. The government can't run out of money any more than I can run out of letters to type into this blog. Saying that the government can run out of money is like saying we will run out of emails to send to each other. Both are just forms of digital data communications, not anything physical or tangible. When I receive an email, the pixels on my computer screen change as directed by the electronic message. When I receive a payment from the government, the pixels on my computer screen change as directed by the electronic message. They are the same damn thing. Emails from my boss instruct me to do something. Checks from the government also reward or instruct us to do a myriad of different things which our legislators have deemed important to the nation. Thus federal spending is just a huge series of digital instructions. It is the QUALITY, NOT THE QUANTITY of these instructions that really matters. Instead, most people in Washington insist on obsessing over meaningless quantities which they don't even understand.


Even worse, people think we are losing the international trade game, when in the timeless words of Charlie Sheen, we are in fact "Winning!". The Chinese, and the Japanese before them, made themselves the world's slaves. They were willing to work extremely hard to send us real goods and services in exchange for....that's right, digital data. For some reason, they prefer to have digital numbers on a spreadsheet at the Federal Reserve (aka the "trade deficit") instead of the real goods and services which they produced. Why they did this is beyond me. And even worse, America thinks that it is are losing, when in fact it is winning! We have gotten all these other countries to send us real stuff, in exchange for digital data which is utterly cost-less to produce- by pressing on a keyboard! The Japanese have run persistent trade deficits with the US. You know all those checks for $2000 that we send them in the 1980's in exchange for those tiny cars? Guess what, those dollars balances are still sitting at the Fed. If they ever decide to spend those checks (ie run a trade surplus with the US), they will get significantly less real stuff than they could have in 1985. US: 1- Foreigners: 0.

I like to joke that if some clutzy intern at the Federal Reserve spilled coffee on the hard drive somewhere in the Fed's basement where all this data is stored, the hard drive would be fried, and the "trade deficit" would be gone! Just like that! Zap! What are they going to do, call the manager? We have the real fruits of their labor, and they have nothing.

This is called real terms of trade. In this crazy, convoluted world, people have come to care more about digital entries on spreadsheets instead of real, tangible things. At any point in time, the US can decide to reduce the value of existing dollars, thereby reducing the purchasing power of the previous Chinese labor. At any point in time, the US can decide to charge export tariffs on products going to China (Chinese Exclusion Laws 2.0?), or impose capital controls on Chinese claims. This too would reduce the real purchasing power of the money that the Chinese have already earned from us. Or, we could do as we are doing now, and bring down the interest rates that the Chinese earn on the dollars they already got from us, IE quantitative easing. The Chinese, and all other countries that chose to run a trade surplus with the US, put themselves in this incredibly vulnerable position voluntarily. US: 2 -Foreigners: 0.

Of course, I am in no way suggesting we do any of these things. I think the Chinese have worked very hard to improve their lives, and they deserve to earn some interest, or otherwise maintain the purchasing power, of the dollars they have earned from us. My point is that we remain in control, and can make their maintenance of spending power contingent on whatever we want. For example, I suggest we threaten to tax Chinese dollars claims until/unless they stop abusing the peaceful Tibetans, stop killing 100's of millions of sharks for their fins, or reduce their CO2 emissions.

Psssst! Here's a dirty little secret: China is also a sovereign currency issuer. There is no reason why the Chinese could not have always afforded to purchase every shoe, sock, and cellphone they were also capable of producing, and send us nothing. They would have been much materially wealthier in that scenario. They could have been real-stuff-rich, and dollars-poor, and nobody would have given a shit. WTF do the Chinese need dollars for? Do they want or even need anything that the US produces? Apparently not. Instead, they have made it their explicit policy to keep their currency weak in order to maintain their status as the world's slaves. Yes, its stupid, and they finally seem to be catching on, as are the Germans. But it works for us, so I'm not complaining, because after all, we're WINNING!

Friday, November 1, 2013

Uncle Sam Doesn't Need Your Money

As I say in the banner of this blog, the US Federal Government is the monopoly issuer of dollars and can never run out of them. This also means that our government does not need to tax our money back in order to spend it again! US policymakers learned back in the 1930's that taxes for revenue are obsolete. Doing so is a way to control aggregate demand and inflation, and is not necessary to fill the General Account at the Treasury. During weak economic times such as these, federal taxes suck money, and thus demand out of an economy that needs more, not less net spending.

Good thing Uncle Sam is hoarding all this fiat currency! The Treasury Daily Statement is a great source for keeping track of Uncle Sam's flow of dollars in and out. The daily statement from September 30, 2013 shows the numbers for all of FY2013:

*$37 billion in student loan interest and other Department of Education income in fy 13. This is up from just $18 billion in 2007, and is more than this year's estate tax revenues. Yes, lets juice young college students, while leaving the plutocrats alone!

*~$2.8 trillion in income, employment, and other taxes, which is an all time nominal high

*$75 billion from Federal Reserve Earnings that would have gone to the private sector instead

*$95 billion from GSE dividend payments (ok, maybe this one is acceptable)

....and More!

Wednesday, October 30, 2013

Economics is a Dirty Job, but Mike Rowe Shouldn't Do It, Parte Dos

*Sigh* its looks like Mike Rowe's Promoting Stupid Tour 2013 continued last week on, of all places Glenn Beck's online exclusive TV show (link, if you dare)

It was bad enough when Rowe went on Bill Maher and was able to spew his nonsense unchallenged. But appearing on the show of wild, raving neofascist lunatic Glenn Beck is a new low for Mr. Dirty Jobs. Rowe continues on his campaign to discredit four year liberal arts degrees with his folksy, visceral "wee dont need no edju-kay-shun BS. He brings up the widely discredited "skills gap" theory that "if only lazy, spoiled Americans would just take the high stress, low wage jobs the the High Holy Private Sector Job Creators(tm) are offering them" then we would fix the economy. He goes on to say "we are borrowing money we dont have" to fund higher ed. Yes Mike....we are going to run out of fiat! I always wonder how these geniuses think we paid for WWII and all the GI bill programs.

Thing is, I want to like Rowe. He does go on to say that he "isnt against college education, just against debt", which is a perfectly reasonable argument. However he doesnt make the next logical step, which is to say that the monetarily sovereign government could just as easily fund higher ed with interest-free grants instead of loans. There is no reason that higher education needs to come with enormous debt, but Rowe skips over this point and continues flattering Beck, who of course hates the idea of national populace that knows history and can think critically. Could it be that having a college education makes Beck's foaming-at-the-mouth chalkboard "lessons" seem almost ridiculous?

Rowe's comments get even more confused from there, when he says:

“This whole topic always boils down to management vs. workers…the blue, the white collar. Enough with the color of collars,” he declared. “The way to talk about work is through the context of, what are you addicted to? Are you addicted to smooth roads? …Cheap electricity? Indoor plumbing? I am. So if you share my addiction to the fruits of skilled labor, you’ve got skin in this game.  So I think if you start to engage a bigger hunk of people, not just management and not just labor, if you really start to have a conversation about work and education, about affordability, everybody can take a micro-macro look at this thing.”

Um, What?!?! Rowe's intentions are probably honest enough, but he shows no humility when making his ass-backwards arguments. He may not realize it, but he is effectively shilling for the corporatist distopian worldview where an informed electorate is an unaffordable triviality but wage slavery is "good for ya." And its not that I even have a problem with Rowe promoting blue-collar jobs, its just that he doesn't mention the reason for the deterioration of such jobs is due to the bipartisan attack on unions, not because "kids today" dont want to work hard. If we got back to 40% private sector unionization levels then maybe, just maybe, these blue collar jobs would be plentiful and lucrative. But you can't blame today's kids for looking at how their parents worked hard in blue collars jobs only to be betrayed by management, and not wanting to follow that same path. 

So Mike, please stop with the glorified s**t kicking. You're a good guy, but ya don't understand econ. From now on, please just stick to cleaning out urban sewer tunnels and leave the policy to the pros. After all, we have to make our fancy pants college degrees pay off somehow!

Thursday, October 17, 2013

Back to the (stupid) future

Understanding macro is difficult, because it has to be learned from a blank slate. There aren't many useful everyday analogies to make about macro as there is for micro, so it is more difficult to teach to most people.

So lets zoom out. Lets take an astronaut's view of the American economy. We can see the skyscrapers sticking out of the cities, the McDonald's golden arches sticking out of the suburbs, and the meth labs exploding in the countryside. You see 300 million people zipping about, trying to make the best of their lives. From this vantage point, how does it make sense for all this economic activity to be depressed for any reason other than real, physical constraints? If there are resource shortages, no infrastructure, mass starvation, disease or war, then there are real world constraints on output. But does it make sense to force 20% of our people into idleness because of a shortage of digital transactional data, known as money? No! Of course not!

Today's out of paradigm policymakers, Dems and Reps alike, are willing to allow real GDP to grind well below potential for years and force millions of people into entrenched unemployment because they think there is something magical about some deficit number. Marriner Eccles knew the folly of that sort of reasoning. He said:

I think it is unfortunate to say the least to have public attention is led into becoming alarmed over the wrong things. I very much regret that responsible leaders, however conscientiously, nevertheless mistakenly create public alarm over the solvency of the nation or the soundness of its credit. This is just what they do when they call attention to one set of facts or figures without showing their relationship to other facts and figures. Isn’t it up to us to keep our eyes on the important things?

We are 21st century human beings for God's Sake! We should be more advanced than, to quote Thomas Jefferson, our "barbarous ancestors" who thought that money was a shiny metal that had to be dug out of the ground! We now have incredibly advanced information technology, historically high standards of living and life expectancies. We can take pictures of galaxies that are billions of light years away and put chicken genomes into strawberries. But we can't understand how our 80 year old fiat currency system works?!?! How dumb is that!!!
Saving money for the future is only possible from financially-constrained private entity who sacrifices current spending in the hope of expanding their future spending capacity. So for a household, the act of saving means they forego current consumption to accumulate financial assets which will enable them to consume more in the future. 
But for the federal government, which issues its own currency, this way of thinking is useless, and even destructive. A federal budget surplus does not give us any extra capacity to spend in the future, in the same way that a budget deficit provides no less capacity for that government to spend in the future. There is no point in raising taxes on anyone or cutting spending right now, because it will only depress economic activity further.

Tuesday, October 1, 2013

The ghosts of A-holes past

Senator Ted Cruz (R-TX)

The utter insanity that has come to grip our national politics did not metastisize overnight. While Ted Cruz may be dominating the airwaves these days, he is just the latest colorful traveler on a road that was paved decades ago. In every word of Republican madness, I see the ghosts of Lee Atwater, Richard Nixon, and Ronald Reagan.

For some of our nation's history, there was a mutual, unwritten understanding among our politicians that you did not burn through the social fabric to win elections. Outright deception and playing of social and racial groups against one another used to be reprimanded by higher minded leaders, of both parties. Then along came the psychopath Richard Nixon, who's only agenda was to seek and hold as much political power as possible. Policy, if considered at all, always came second to Nixon, who was perfectly happy to let Democrats in congress pass liberal bills, as long they didn't threaten his power as president.

But in order to maintain his hold on the presidency, Nixon ventured into previously uncharted territory for national republicans- the south. Long considered a Democratic stronghold since Reconstruction, Nixon realized he could take advantage of the Democratic move toward Civil Rights by appealing to Southern racism in new, less explicit ways. His paranoid, win-at-all costs style ended up being his undoing, but Nixon ushered in the era of slash and burn cesspool politics that survives to this day.

In this era also came the rise of Lee Atwater, the brilliant, and mad political strategist who uttered the infamous phrase: "By 1968 you can’t say “n****r”—that hurts you, backfires. So you say stuff like, uh, forced busing, states’ rights, and all that stuff, and you’re getting so abstract. Now, you’re talking about cutting taxes, and all these things you’re talking about are totally economic things and a byproduct of them is, blacks get hurt worse than whites.… “We want to cut this,” is much more abstract than even the busing thing, uh, and a hell of a lot more abstract than “n***r, n***r”"

St. Ronnie the Actor was even more skillful at these divisive tactics than Nixon. He was a master at using charm and whit to disguise his radical, pro-corporate ideology. Despite his weak understanding of policy and diminished cognitive capacity, his appreciation for the art of political communication was enough to convince millions of middle class Americans to begin their experiment with political Stockholm syndrome by re-electing him/his administration twice. 

The legacy of the Southern Strategy and its shameless use of "wedge issues" to stir racial resentment and fear among the middle class remains as strong as ever today, and not just in the south. This "southification" has now spread to other areas of economic disempowerment, especially the rust belt states. It's no coincidence that some of the most rabid, radical members of Congress now come from states like Wisconsin, Indiana, Ohio, and Michigan. The engineered collapse of the white American working class had made for ripe-pickings of the modern day Atwaters, like Karl Rove, Rush Limbaugh, Frank Luntz, and the religious right demagogues.

This is why no explanation of reality matters anymore. When so many members of congress, and their constituents  are motivated only by emotion and visceral distaste for the president, no argument using logic or data has any potency. Good luck getting any discussion of sectoral balances or demand leakages through these frontal lobes! Just the mere idea that our sovereign government can spend its own currency in unlimited amounts is enough to cause heads to explode. At this point it is probably too late for these deranged maniacs to ever come back to earth and contribute positively to our society anyway. 

Thursday, September 19, 2013

Time to mature

The idea that money itself is a commodity is one of the largest impediments to societal prosperity. This mental construct of money inevitably leads to the feeling that a government can "run out" of its own money, which of course is ridiculous in the modern world. As I have said before, money is just a unit of transaction and means of facilitating commerce.

No society should ever constrict its growth through any arbitrary spending constrains, whether they be gold standards or debt ceilings. It never makes sense for any nation, at any point in time, to be producing anything less than its full capacity, and only a certain amount of aggregate spending can bring this about. Our founding fathers deeply understood the importance of money and how it could be used to bring a society to full productivity. It was for this reason they granted Congress, and only Congress, the right to coin money and regulate the value thereof. To do anything less would be to betray our founders, and betray the millions of un and under employed.

I suppose coming to this realization would be a signal of the US maturing as a nation and embracing modernity, by eschewing the Calvinist idea of money as instric worthy and embracing the human rights implications of anything less than full employment.

Saturday, September 14, 2013

The (debt) Ceiling Can't Hold Us

As the next Congressional showdown over the debt ceiling approaches, the whirlwind of Beltway discussions will once again tilt towards US debt and deficits. There are literally thousands of people Washington, DC whose job it is to analyze and comment on federal budgets, deficits and debt. There are also countless organizations and think tanks dedicated to these subjects, many of which emanate from octogenarian billionaire Pete Peterson, who funds several debt-hysteria groups such as the Concord Coalition, Fix the Debt, and the more recent, youth oriented “The Can Kicks Back”.

Unfortunately, nearly all of these groups and commentators are dead wrong. Simply, the United States Federal Government is the monopoly issuer of its currency, the dollar. The US government is no longer under a gold standard, or any other fixed-exchange rate currency regime, and thus has the ability to issue currency in unlimited amounts and pay all its debts. Article 1, Section 7 of our Constitution grants the US Congress the unique prerogative to “coin Money [and] regulate the Value thereof.” Congress has assigned this incredibly important task to two of its agents: the United States Treasury and the United States Federal Reserve. These two government agencies work in tandem to ensure that funds are always available to meet congressional appropriations.  Contrary to consistent statements from economists, budget experts, and our economically illiterate president and congress, there is absolutely no scenario in which the US Treasury can involuntary become insolvent, default on its debts, or “run out of money” (this is not the case for state and local governments, who are only currency users). Social Security, Medicare, and all other federal programs can never go bankrupt, regardless of the status of “trust funds” or other accounting mechanisms.

All such solvency concerns are remnants of the gold standard currency regime, which was ended domestically by Franklin D. Roosevelt in 1933 and internationally by Richard Nixon in 1971. Modern money is simply a means of facilitating commerce and moving real goods and services around the economy. As a fiat currency, the US dollar is no longer arbitrarily backed by the value of some shiny rock; in our modern civilization it is backed by the ever increasing productivity of American workers. So where does all this money come from? All that happens is the gnomes at the Federal Reserve sit in front of computers and type numbers into bank accounts. As Chairman Bernanke said to Scott Pelly of 60 minutes in a2009 interview: “…it’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank…we simply use the computer to mark up the size of the account that they have with the Fed.”

The job of paying the bills is almost solely in the hands of the Treasury and the Fed, with the exception of the legally and ethically dubious debt ceiling – a provision that prevents these bodies from performing their Congressionally appointed duties by mandating that they refuse to make payments on existing obligations without Congressional approval, once the debt limit has been reached.

Why does such a provision exist? Many members of Congress believe that exceeding an arbitrary dollar amount in federal spending is destructive to the country, for reasons that are to this point beyond comprehension. Attempting to induce draconian spending cuts or extreme tax increases to meet the obligations posed by this capriciously determined ceiling would be equally ridiculous, as it would depress economic growth for no reason other than self-imposed austerity. Such lack of spending has forcibly excluded millions of people from contributing to our economy. We already throw millions of people in jail for smoking some weed and prevent them from being part of the economy; why do we need to force millions of others to live in an unemployed state of house arrest?

So then what is debt, exactly? Our $17 trillion national debt exists mostly in the form of US Treasury securities, of varying maturity. These securities are simply a default-risk-free, interest bearing alternative to dollar balances. They are functionally nothing more than savings accounts at the Federal Reserve. In fact, all values of US dollar deposits and treasury securities outstanding are accounted for by the Fed. The nature of US government debt is entirely different from private debt, since no private actors are currency issuers. Further, concerns about China funding our debt are misguided; the Chinese have earned several trillion in dollar balances in their reserve account at the Fed, by selling us goods and services for several decades. Instead of making the Chinese, or any other holders of US dollars, just hold these dollar balances in non-interest bearing accounts, the US Treasury offers debt, or its securities, as an interest bearing alternative to dollar balances. The market for US Treasury securities is broad, deep, and highly liquid. Since leaving the gold standard, the Treasury has never had any problem selling all of its securities at auction, and never will. With few exceptions, there is also really no such thing as “paying down the debt.” The value of Treasury securities outstanding has increased consistently over our nation’s history, and the Treasury has been able to seamlessly roll over these securities since 1789, without any grandchildren involved. It can continue to do so into perpetuity, with interest rates determined not by markets, but by policymakers at the Federal Reserve.

US government debts serve as default risk-free asset to all private actors, and play an irreplaceable role in the global financial system. The sum total of bank reserves, cash, and US Treasury securities outstanding represent the net dollar assets of the private sector. As a simple matter of accounting, the US federal deficit equals the nominal net savings of the private sector, to the penny. Deficit spending does not subtract from anyone’s savings or “crowd out” the ability of the private sector to make investments; to the contrary, all the dollars that the government spends in excess of those which it taxes back remain permanently in the private sector. Over the course of US history, our government has added around $12 trillion more than it has taken from its citizens. The simple fact that you or I have a dollar in our pockets is proof that the government has at some point spent more than it has taxed back. In no way should this be considered a bad or unsustainable phenomenon! Here is proof:

What then is the role of taxation in a fiat currency? It is not, as most people believe, to raise revenues, for the Treasury can simply sell securities to fill its general account. Instead, modern federal taxes function primarily as a control on purchasing power, and therefore aggregate demand and inflation. We do also use the tax code to accomplish other political and policy goals, but in modern times the federal government does not need to tax back its own money before it can spend again. I am fully aware that this reality may not be palatable for some people on the political spectrum, but it is true nonetheless. Marriner Eccles, the Chairman of the Federal Reserve during the 1930’s and40’s, was one of the first men to openly and repeatedly acknowledge this new economic scenario, and correctly advocated for large government deficits; first to fight the depression, and then to fight fascism.

So what does all this mean for policymakers?  If the deficit is too small (not enough spending or too much taxation) to overcome the natural and constant desire of the private sector (which includes individuals, large and small businesses, pension funds, foreign central banks, and others) to net save, unemployment will result. And right now, the massive hangover of private debt, including mortgages, credit cards, and student loans, is preventing the private sector from borrowing, lending, and expanding on its own, no matter what kind of asset swaps and purchases the Federal Reserve may try. Therefore, it is the sole responsibility of Congress to deficit spend until the economy reaches full employment of labor and resources; nothing more and nothing less. The overriding economic concern of this spending is its ability to cause inflation, but not its creation of any arbitrary debt number or ratio. While some of this spending will certainly be considered “wasteful” by partisan observers, we must remember that absolutely nothing could be more wasteful than allowing millions of our fellow citizens to go unemployed or underemployed.

At this point, it should be clear to casual observers that the economic expertise of current policymakers is sorely lacking, and as such their policy regimes have utterly failed. The latest employment figures for the summer of 2013 have been awful, and our current employment-to-population ratio remains painfully low. So given these conditions, what might be an easy way to increase employment? How about we stop taxing it! An easing or full repeal of the regressive FICA (payroll) tax might just do the trick. Getting to full employment should be the number one priority for all progressives, because the political reality is that the American people will have little appetite for progressive reforms until the economy is strong again. Our great nation has already suffered through five years of high unemployment, weak growth, and deferred dreams, represented by the nearly $5 trillion in lost economic output since the 2008 financial crisis. Dumb policymakers aside, we the people need not allow this tragedy to continue for one more day.

The author is a 2013 graduate of the George Washington University with a bachelor’s degree in Political Science, a current graduate student in the GW Legislative Affairs program, and blogger at “All Wonks of Life.” For more, please read “The Seven Deadly Innocent Fraudsof Economic Policy” by Warren Mosler, and “Freedom from National Debt” byFormer Deputy Secretary of the Treasury Frank Newman.

Monday, August 19, 2013


When I hear people complaining about government welfare, my immediate question to them is "what government program are you talking about?" There are many federal programs that can be considered welfare; for example Medicare Part D is welfare for the pharmaceutical industry. Every single time I have asked that question, the person is unable to name the federal program they are talking about. Food stamps? Not really welfare. They are in-kind benefits that are intended as a counterciclical economic program more than anything else. What people usually talk about is a program called Temporary Assistance to Needy Families, or TANF. Contrary to perceptions of an out of control welfare state, the annual TANF appropriation was capped at $16 billion dollars in 1996, and has stayed the same since. It is available only to those who are working or engaged in "work like activities." Although TANF checks are small, the program is very effective at eliminating extreme poverty. No one on TANF is living a life of luxury, contrary to Ronald Reagan's Alzheimered rants on the subject. 

TANF makes an investment in a more stable and productive workforce. This is something we should all want for our country. The fact is a majority of welfare recipients are single women with children, foster children, or children being raised by aunts/uncles or grandparents.  Hardly creating a "culture of dependency", TANF benefits, even small ones, can give children and their families the stability they need to be more productive in the future. As any parent will tell you, an investment made into a child is the best one possible. It has the best bang for the buck. 

So I’m proud to live in a country that provides poor and middle income children and their families with some supplemental income, some food assistance, access to early childhood education, reduced school lunch. What could be better for a child than food and books? This is really common sense, and all the science agrees. Research shows that children raised poor are more likely than not to stay poor, and those that are in families that receive assistance do significantly better than those that don’t. 

And we only spend 16 billion on the federal level and another 15 or so from all the states put together. This is 30 billion, or about 1/500th of America’s GDP. So when Repubs say that 1/500th of our nations wealth that is invested in poor children is too much, that we need to cut, and cut, and cut spending, and add eligibility requirements; that is a cruelty that I simply cannot comprehend. And for what? To get savings maybe totaling the cost of a dozen F-22 fighter jets? Just allowing that thought to cross my mind sends chills down my spine. Is that really where we are as a country? That we are considering cutting these crucial programs? Nothing could be more penny wise and pound foolish.

Saturday, August 10, 2013

Economics is a Dirty Job, but Mike Rowe shouldn't do it

One of the worst "zombie economics" (thanks to PK for that gem) ideas out there is that the current unemployment crisis is due to "structural unemployment", or some chronic flaw in the American economy where workers are not trained or available to fill open jobs. This is one of those ideas that despite having absolutely no empirical support, and having been disproven over and over again by professional economists, refuses to die and keeps trudging alone, eating the brains of innocent people along the way. This is a common theme among the pseudo-economists and media talking head flacks. Even Mr. Dirty Jobs himself, Mike Rowe, went on Bill Maher last week to dispense his anecdotes about how "there are tons of jobs out there that kids these days dont want to do because they are spoiled and lazy" etc. If structural unemployment were a real problem, there would be some sort of macro data to support it, such as rapidly rising wages in the sectors that were struggling to fill job openings. In the total absence of such data, all that remain are the folksy anecdotes of people like Mike Rowe. God help us if 21st century American policymaking is based off anecdotes instead of empirical data.

These people insist that the American workforce is hopelessly unprepared for the modern economy, despite the fact that we remain one of the most productive, efficient, and highest educated workforce's in the world. The problem is aggregate demand, not enough spending in the economy, pure and simple. As Warren Mosler likes to say, unemployment is simply the evidence that the government deficit is too small, and can be easily cured by a large tax cut or spending increase. If the government does not spend enough to cover the tax liabilities that it imposes on the country, combined with the net savings desire of the private sector, unemployment will result. If the private sector is net saving, as it usually does, that savings is unspent income, which means that some amount of goods and services will go unsold, leading to unemployment. Its really that simply folks. There are some times when the private sector can spend more than its income (go into debt) to support full employment even when the government is in surplus. However this is rare and unsustainable, as evidenced by the Clinton surplus and subsequent stock market crash. This also happened to a lesser extent in the Bush years; although Bush did run deficits, they were sufficiently supplemented by the housing bubble, so unemployment remained fairly low.

As far as I can tell, these complaints about structural unemployment, are themselves the product of insufficient demand. When the economy is slack, what minor structural problems may exist become more acute, and thus win the attention of the talking heads. However if we are constantly focusing on workforce issues, we take our eye off the ball of aggregate demand. As I have said before, if the jobs are there, the skills will follow. This is how healthy economies usually work. In fact, if you believe in the efficiency of markets, as I do to some extent, structural unemployment should never really happen at all. What really bugs me is that these claims of structural unemployment serve to let bad economic policy makers off the hook. Even worse, all these talking heads are effectively blaming American workers for being inadequate, when it was really the reckless behavior of Wall Street, and the idiotic responses of Washington policymakers, that actually led to these 5 years of weak growth.

Aggregate demand is the momentum with which structural changes can be made. There is an order of things: first you get the economy going, then you change its structure. Its like pulling on the steering wheel of a car when the engine is off; without forward movement you cant change the direction anyway. From now on, Mike Rowe should leave econ to the experts, and stick to shoveling shit and doing Ford commercials.

Tuesday, August 6, 2013

Deflating inflation

Perhaps an area where modern monetary economics could grow into is about what to spend money on. For example, I think there is tremendous opportunity in making the argument of how our massive military spending does not cause inflation. We now spend over a trillion dollars a year on military, defense, and national security related items. This "welfare state for engineers and computer geeks" is money spent by the government that does not result in any commensurate production of goods and services to absorb to the new spending. Most of what this spending creates are intangible items such as "security"; what physical items it does produce are mostly either consumed abroad (bombs and bullets in wars), or not really used at all (ships, planes, all the other array of high-tech vehicles that we pay millions to design, billions to produce, whiz around the world a few times and then dump in the New Mexico desert). Then, when we spend trillions to pay all the millions of DoD, CIA, NSA, and DHS employees and their contractors, they take this money and use it to consume other goods and services in the American economy, without having produced any of their own for other people to consume. So at least half of what the federal government does is produce low-utility military surplus, and even this does not produce much inflation!

This gives you a sense of how truly large the American economy is, and how much more domestic spending we could be doing. In fact, if anything domestic spending would produce even lower levels of inflation than defense spending, because unlike defense spending, domestic spending does produce a commensurate increase in goods and services for its new dollars to consume. Some government investments, especially infrastructure and education, have enormous returns in the form of future efficiency and productivity. So as long as the new money spent by the government (injection of Net Financial Assets, or NFA) is accompanied by an equal increase in the amount of goods and services available for consumption, there will be no inflation!! In fact, because the modern American economy is so efficient, it may be possible for the money supply to increase, and the price level to actually stay the same or go down! Ha! Take that gold buggers!

Monday, August 5, 2013

Skills gap

While learning skills in college is important, the fact is that skills become obsolete. And in the 21st century, skills are becoming obsolete and an ever increasing pace, and many who are currently in the workforce are struggling just to keep up. Where jobs skills should be taught is in the workplace: by the employers, by the guild, or in an apprenticeship. That way once you have a job you have somewhere to go to update your skills without paying some outrageous tuition cost. This also helps to avoid having to make the blind leap across chasm between graduation and entering the workforce. Labor unions, before being systematically destroyed by Neo-liberal policies of both Republicans and Democrats since 1980, used to play this crucial role in the economy. Now, with unions mostly gone, every man is left for himself, to take on the financial burden of a higher education, and just blindly hope that a remunerative job somehow results.

College is really about learning how to think, because that can never become obsolete. Learning about the patterns of human nature through study of history, literature, art, philosophy, or psych/soc is invaluable. This teaches people to think differently, to ask why, to question norms, and to be suspicious of power. Any society that hopes to survive long term needs a healthy population of citizens who can think in this way. 

And when it comes to the labor market, I think Americans have comparative advantage in the humanities. Other cultures (East Asians) are very good at learning rote, mathematical, and technological skills, and for the foreseeable future are willing to put these skills to use for very low wages. But knowing how to think is not their forte, since they have seemingly tossed aside their philosophical heritage (Tao, Confucius) to instead acquire the technological skills that modern capitalism demands of them. We Americans should know better.

Monday, July 29, 2013


At least in the field of education, ideas are almost always better than products, and ideas can be free. The mentality that something has to be developed, produced, purchased, and then physically added to the classroom to improve education is based on path dependent thinking that material improvements are always beneficial. The reality is that the marginal benefit from new classroom technology is small…. Technological barriers are not really what is preventing better teaching- it’s the lack of good ideas and teaching strategies, and the failure to find these ideas and implement them across the country (in fact, technology can sometimes be distracting and therefore counterproductive to pedagogical goals).

And unfortunately for lazy or financially motivated policy makers , it won’t be as easy as simply throwing money at the problem.  Things like changing the hours of the school day, serving healthier meals, and having more physically interactive classes to keep students engaged will make the most difference.  The idea that simply extending the school day and having more “math and science” (whatever that means) will lead to better education is not realistic and intellectually lazy.

Eliminating social and psychological blocks to learning, such as feelings of inferiority or unwillingness to seek help and ask questions can make an enormous difference by getting kids more involved and excited about learning. If school age kids can see ways that they can personally improve themselves from what they are learning they will certainly be more motivated. One way to do this is by creating opportunities for field specialization, which at the latest should occur at 8th grade. By this point, the core curriculum's have essentially been repeated at least 5 years, and most kids have a good idea of their academic strengths and weaknesses.

This has a personal meaning for me too. I realized by age 8 or so that I was terrible at math. I hated it and could never seem to learn it as fast as the other kids. Although I was pretty good at writing, reading, and social studies, being forced to do math for every year of my K-12 education made me hate school as a whole. The stress and anxiety from having to take math classes (which I was terrible at) spilled over into the rest of my course work and made me hate school in general. In economics, this is called a "negative externality;  a phenomenon that all economists know is detrimental to societal improvement. And all that stress turned out to be in vain, because to this day I have yet to use anything more than simple multiplication in my daily life.

I always desperately wanted math to be taught to me in some sort of relevant context. One of the reasons I had such mental block towards mathematics was that it was taught as a bunch of abstract rules and theorems that never seemed to have any real world applicability. So instead of just teaching more out of context equations, what the mathematics curriculum going forward should do is be included in real world problems. Basic personal economic education, such as balancing checkbooks, paying taxes, saving money/investments etc. is not only severely lacking from modern K-12 curricula, but if made mandatory could act as a fantastic supplement to traditional mathematics.

Forcing all students to take the exact same coursework, regardless of their talents is foolish, wasteful, and demoralizing. Instead, allowing the prolific writers, the creative artists, the inquisitive scientists, and the few and the proud mathematicians to pursue their talents and differentiate themselves will be a boon to education nationwide, especially with students in their teenage years, where identity formation is so important psychologically.

And what could bring light and warmth to those dark teenage years better than a new realization of ones future potential. In the teenage years where prevailing self-doubt and confusion so often serve to demotivate and undermine academic efforts , giving students the ability to truly see themselves having a successful career and adult life could serve to motivate classroom effort at a time where it is needed most. It is often said that the key to happiness is simply the feeling of progress. And for America’s unmotivated and faltering schoolchildren, a feeling of individual progress will lead to collective progress nationwide.

Tuesday, July 23, 2013

No Confidence

I always get mad when policy arguments move into intangibles such as "confidence, expectations, or structural problems". These terms are used by people who are confused and don't know what they are talking about, or people who's ideology/worldview has failed to describe reality and need a rhetorical escape hatch. Since modern economics has failed to live up to a lot of outdated models, many  arrogant economists, instead of admitting they were wrong, simply start making things up.

It is now obvious that economics is more than just the "dismal science" - it is really a pseudo-science. In no other fields of study do you hear so called experts using intangibles to justify the non-performance of their models. Real scientists are concerned with finding the truth, even if that means scrapping old models, no matter how much time was devoted into developing them. Many high profile economists, on the other hand, seem to be concerned only with maintaining their public reputation to a high enough degree to keep their corporate cash rolling in. There is no need to seek the truth when you get paid to be wrong.

Sunday, July 21, 2013

Now is not the time to be stingy

Concerns about economic efficiency are important, but they are misplaced when the economy is running so far below full capacity as it is now. Right now our top priority should be reducing unemployment. If you really care about waste, nothing could be more wasteful than having tens of millions of our fellow citizens being un or under employed. This represents literally billions of lost man hours every year-hours that could be put to use rebuilding our transportation and energy infrastructure for the 21st century.

Where we should use our concerns about efficiency is when the economy is back up running near full capacity and things start to heat up. This is where you can start saying oh, things are getting wasteful, or overheating or delusional to spend money in a certain way. God knows that concerns over efficiency would have been extremely useful in the past decade when the economy was running hot and the housing bubble was inflating like crazy. But as we have learned over the past decade (actually re-learned from past boom and bust cycles), is that no one wants to be a downer during the good times. When everyone is fat and happy, no one wants to interject and say, hey, maybe we should slow things down a bit and prune out the excess. 


We need to remember that earning interest on savings or investment is an economic privilege, not a right. Being able to use your productive capacity as a human being by being gainfully employed is a right. Societies that forget this will doom themselves to stagnation and decline. And the ironic thing is that they are not mutually exclusive. When the economy is growing and unemployment is low, chances are real yields will actually be higher than during slow economic times that we have now. This is because real goods and services will be making everybody in the economy wealthier, unlike now where stock prices/yields are dependent mostly on the ability of large corporations to extract larger and larger rents from productive workers. 

Wednesday, July 17, 2013

On Sausages and Congress

On sausages and congress:

People famously say that lawmaking is like sausage-making; you wouldn't want to see either in action. I've come to realize that there is even more to this analogy than first meets the eye. What sausages do is take pieces of meat and animal products that would otherwise be inedible and disgusting, and wrap them all together to make something delicious. Congress has a similar function. It takes all sorts of ideas and priorities from the amazingly vast array of constituencies across these united states, some bad and some good, and turns them into something that we can all live with and sometimes enjoy. This process is ugly, slow, frustrating, and seemingly corrupt, but it yields an acceptable whole product made from otherwise unacceptable parts. 

Similarly, I find frustrations about pork a little misplaced. I understand the desire to see politicians acting as cleanly as possible, but I believe that pork is actually necessary to the functioning of Congress. Again, when you have such a wide variety of conflicting priorities emanating from a country as diverse as the United States, you need something to grease the wheels. These pieces of varying size and shape can only come together when the right incentives can be used to get members to vote on an otherwise unacceptable piece of legislation. I’m not sure to what extent this is true, but it cannot be denied that some of today’s legislative gridlock is the result of limitations on pork and earmarks. That, combined with unprecedented right wing partisanship has made it harder and harder for members to convince each other to support measures that may not align with their partisan interests. The great thing about last year's hit movie Lincoln was that it showed how one of the most important pieces of legislation in human history (the 13th Amendment) was only passed after a series of deliberate bribes were handed out to various members.

That being said, I don’t think that even the best written laws can always counteract the moral failings of the most powerful people in business and government, but it is imperative that we try. When there is no justice, no rule of law, no punishment for antisocial behavior, those behaviors will spread and society will decay. The lesson of the past decades is that men in power can make vast sums of money trampling over uncodified social norms and get away with it (remember that Mitt Romney guy?) Because we no longer live in small, intimate societies where social norms can be enforced with personal contact, as many of these norms as possible should be codified at the federal level and enforced consistently.  All actors in our modern society, public or private, and especially the most powerful, must come to realize they are ultimately subordinate to the will of the people, written and enforced by a democratically elected government. This is the essence of our American democracy, and it will fail without it.

Thursday, July 11, 2013

Age of Empires IV, Modern Money edition

Modern monetary policy can be very hard to understand, and I sometimes think this was deliberate. Anyway, everyone know that analogies are usually a good way of explaining complex things in and understandable way, so here goes:

For those of you who may have been real time strategy geeks like I was as a child, you may remember playing some version of the Age of Empires game or something similar. In the game, you use village people to collect resources that you then spend on farms, buildings, and military stuff. The goal of the game is to invade and conquer your opponents on the map, so naturally it has a very military heavy focus. My dad, an economist, originally bought me the game because he thought it would teach me some economic principles about resource distribution, or something. To his dismay, the game turned out to really be mostly about killing your enemies, but I just recently realized that there is in fact an incredibly important economic lesson in the game.

Like most computer games, Age of Empires had various cheat codes that can be found online, that when typed into the game can cause deviations from the tradition script. Some of these cheats are ridiculous, such as instant-win or the creation of corvettes mounted with machine guns, that can be giddily driven through enemy territory to slaughter everything in sight. However, one of the cheats is actually very useful for demonstrating the benefits of a fiat currency. This cheat allows you to simply add 1000 units of gold to your national account by keystroke. While this may seem like cheating, most players will tell you that what this really does is unleash the full potential of the game, and makes it more fun to play. This cheat allows the player to no longer have to sit around and wait for villagers to dig gold out of the ground before being able to spend it on the things needed to win the game.

This cheat effectively ends the "gold standard" of the game, and turns the gold resource into a fiat currency. It allows the player to spend more time on the military strategy component of the game, and less time sitting around waiting for gold to accumulate. It saves the player from wasting his time, just as a fiat currency has the potential to save the time of the unemployed by putting them in productive jobs. Governments that don't have their spending abilities constrained by some ridiculous fixed convertibility are free to spend money into the economy to achieve maximum resource utilization. As any HR rep will tell you, "people are our greatest resource", so the high under/unemployment levels we have been suffering for the last 5 years represent a huge waste of resources. Instead of waiting around for the private sector to gain the "confidence" necessary to hire, fiat currency can get real resources moving as quickly as possible, stimulate demand, and help businesses and individuals pay down their debt sooner. In both cases, fiat currency allows people that would otherwise be sitting in a chair the ability to get up and do something with their lives.

This analogy goes even further, because the creation of modern money occurs in a similar way: it is just keystroke entries into computers. The gnomes at the Federal Reserve no longer have to spend time closely guarding their gold reserves; today they just sit in front of computer screens and make keystrokes into bank accounts. Thats it! Just like Age of Empires. Thanks dad.

Sunday, July 7, 2013

The importance of currency sovereignty

Although it should seem obvious, the ability of democratic governments to issue their own currency is perhaps the most important thing any government does. Economic models that apply to fixed exchange rate currencies simply do not apply to floating currencies, a point that many economists seem to have tragically missed. For some reason, even smart economists like Paul Krugman have been "surprised" that currency sovereigns operate under completely different economic realities than pegged or non-sovereigns do. The reality is that the loanable funds and money multiplier models simply do not apply to currency sovereigns, nor should they.

The ability to issue its own fiat currency is critical to the ability of any government to make public policy for its citizens, and thus is a crucial element to any nation that claims to be a democratic sovereign. Surrendering currency sovereignty, as Argentina did in the 1990's, and the Eurozone nations did in 1999, is an enormous leap away from democratic sovereignty. Any government that does so significantly weakens its ability to move real resources around its country to maximize utility for its citizens (Argentina's currency board basically turned the country into an internationally-financed Ponzi scheme). The importance of this seems to have been greatly under appreciated during the 1990's and 2000's, when countries in Europe were falling all over themselves to join the Euro and abandon their currency sovereignty. And although the British economy has faced its own challenges from misguided policies of the Cameron government, they can at least congratulate themselves on having had the restraint to stay the hell away from the Euro.

Now the Eurozone has been stuck in nearly 6 years of disastrous depression, with sky high unemployment levels and continually contracting economies. The only option sufficient to restore growth, namely default and devaluation from the periphery countries (Portugal, Italy, Spain, Greece, or the PIGS) has been considered Verboten by the policy elite that have been so disastrously ruling Europe. The so called "Troika" of the European Central Bank, the European Commission, and the IMF, have been unbelievably bad economic policymakers, for the precise reasons that they don't understand the benefits of currency sovereignty, have considered default a non-option, and refuse to ever admit their errors. (As a GW student, I regularly walk by the IMF building and witness the international house  of (t)errors of European bankers standing outside and smoking cigarettes in their $2500 Italian suits.)

The callously indifferent responses of these policymakers to the ever growing demonstrations of discontent in the EU have been equally disturbing. This response suggests that in the future, a country that gives up its currency might as well also dissolve its legislature and end elections. Countries that are constrained by foreign central banks or arbitrary debt/gdp ratios simply cannot meet the economic needs of their citizens, especially during times of economic difficulty. Relying on foreign investment or bond market "confidence" to boost an economy has proven to be an incredibly difficult, if not impossible proposition. No government that calls itself politically sovereign can really be so if their economic output is determined by the whims of foreign investors.

Saturday, July 6, 2013

Calm Down about the Debt, Part 4: Kicking "The Can Kicks Back"

I recently stumbled upon a political action group called "The Can Kicks Back" on Facebook. It is a youth-oriented political action group that advocates for entitlement reform and deficit reduction, and does so with "hip" looking website and articles clearly written for a college age audience. It appears that most of its members are of or near college age as well, and a quick glance over the website makes it seem innocent enough. Upon closer inspection however, I quickly realized that it was just another variation on the Pete Peterson-funded theme of disseminating false information about government spending in order to gut our old age benefit programs of Social Security and Medicare. For those of you who don't know, Peterson is an ancient billionaire who has been using his money to advocate for gutting of SS and Medicare for decades now, with little success. (btw Peterson's money dump into this fruitless cause is an excellent demonstration of the low utility of rich people's dollars and the need for higher marginal tax rates!)

Anyhow, while I am always excited to see people my age interested and engaged with federal policymaking, I simply cannot trust any Peterson funded institution, of which "Can Kicks Back" is one of the most recent. It saddens me to see what seem like well-intentioned people wasting their talents on the cause of this billionaire hack. A basic understanding of modern public finance reveals that just about all the claims made on the "Can Kicks Back" site are incorrect. There is nothing to prevent the US from meeting any and all of its liabilities in the future. In no way are "unfunded liabilities" or the federal debt a "burden" to future generations. These funding issues are entirely within our control and are not worth 1/100th of the time we dedicate to debating them . Spending on entitlement programs doesn't really preclude us from investing/spending on anything else.(see my previous blogs for more detailed explanations) Instead, it is climate change, which is several degrees of magnitude more important, than we should all be worrying about. Mitigating and adapting to climate change will be incredibly difficult, since the laws of Nature are most certainly NOT in our control. All economic and financial systems are. For future reference, here is my list of things to worry about:

1) In the short term: Unemployment
2) In the medium term: Health care costs (the primary driver of our deficits)
3)In the long term: Global climate change

So while the deficit reduction fetishists seem to have been silenced for the time being, I'm sure they will return soon. Their over-the-top calls for deficit reduction come not from any real world understanding of macroeconomics; rather they are just further efforts by the PetePeterson medusa to impose on the rest of us his normative preference for smaller, impotent federal government. Thanks to the shrinking deficit, along with valiant efforts from Dean Baker, Paul Krugman, Brad DeLong, and the growing group of MMT economists, the latest Peterson snake head has been lopped off. However this is no time to rest on our laurels: He will be back soon enough.

(my hilari-bad photo editing skills on display)

Tuesday, July 2, 2013

What's Wrong with Washington, Part 1 of ∞

Making fun of the DC press could be a full-time job for comedians (and for my favorite economist Dean Baker it almost is a full time job.) Those outside the Beltway have to realize that most of the people in the media are total morons. They always know what to say, but not what they are saying. They are very keen at picking up the latest buzzwords and zeitgeist, but not at independent analysis and deep thought. And for the most part that is what their job is. Most think tanks and media outlets in Washington are not independent operations. They are mostly funded by billionaires with an agenda, are not tanks, and don’t think. The media’s biggest mistake is that they treat all parties in a debate as if they are arguing in good faith i.e. in the public interest. This is rarely the case anymore. The true talent of Washington’s highest paid “experts” is using the language of government and public policy to promote private interests. They betray the American public on a daily basis, and they, and their audience, are rarely aware of it.

One of the primary roles of government, as mandated by our Constitution, is the pursuit of justice. The pursuit of justice is one of the most basic and most important roles of the federal government. This occurs in two major ways: (1) By ensuring that statutes keep up with changing social constructs and economic realities. As few implicit social constructs should exist as possible. In modern complex societies like ours, every implicit arrangement should be made explicit, thus having the force of law behind it to ensure that individuals do not fool or take advantage of each other. This is just basic fairness; government’s role as the just arbitrator. (2) The government should devote as many resources as possible to enforcing these statutes. 

The problems now it that there is an enormous amount of money to be made in thwarting the public interest and preventing the above two principles from being realized. Whether during the legislative or regulatory process, teams of corporate lobbyists descend on congress and the agencies to prevent the public interest from being served. These actions can save companies billions of dollars, so even paying lobbyists millions of dollars to stop rules is a fantastic bargain from the corporate point of view. It is no surprise then that conservatives have sought to jam and undermine both of the above described principles. They actively prevent government from achieving its maximal social utility, and do so on behalf of moneyed interests.  By corrupting and deadlocking Congress, they prevent new laws from being made, and ensure that existing ones are rendered hopelessly inadequate. By relentlessly cutting government spending where it matters and pursing rabidly anti-regulatory reforms, they prevent existing statutes from being adequately enforced. This has led to the negative view of government felt by many Americans, and the cynicism towards the whole process that consumes the few good souls that remain in our nations capital.

Sunday, June 23, 2013

Calm Down about the Debt, Part 3: The case for entitlement reform and eliminating FICA tax

The Federal Insurance Contribution Act (FICA) tax was created to fund our two large social insurance programs, Social Security and Medicare. Over time, as receipts from these taxes exceeded disbursements, they  were "saved" into two trust funds, the Social Security Trust Fund, and the Medicare Part A trust fund. Both funds consist of special, non-marketable US Treasury Securities, that are now (or soon will be) gradually amortized to meet the obligations of both of these programs, as disbursements exceed tax receipts going forward. However, both programs were constructed under flawed economic understandings of the realities of the way in which a sovereign currency issuer, such as the United States, spends money.There is no financial meaning to a sovereign currency issuing nation saving its own money. The US Federal Government is the monopoly issuer of US dollars, and thus has absolutely no need to "save" them for a later date. This is roughly akin to someone holding their breath and claiming to save the air for later.

Unfortunately, the debates on "entitlement reform" among the economic illiterates in Washington have been totally misplaced and useless. Because so few people (D's and R's alike) understand how the US government spends money, almost the entire discussion has been about increasing taxes or decreasing benefits. Neither of these changes are actually necessary, while the real problem, the absurdly high cost of healthcare provision in the United States, has been mostly ignored. Ok, now lets get onto the details.

It is legally true that both trust funds exist, and will in fact be drawn down to meet the liabilities of their respective programs. For example, what the Social Security trust fund basically says is "The Social Security Administration has the right to write $2.3 trillion in Treasury checks." However this accounting reality has no real economic meaning, since a sovereign currency issuing nation always has the ability to meet any and all of its liabilities anyway. No Treasury check will every bounce, regardless what "fund" it is drawn from. Additionally, a broader look at federal spending operations reveals that there is no distinction between how the Treasury writes checks for SS recipients/Medicare providers, or how it writes checks for anything else. The Treasury writes the checks, and the Federal Reserve clears them, pure and simple (more on these operations later). The fact that some people at the CBO and Social Security Administration choose to account for this spending by adding or subtracting numbers out of a certain funds does not mean that any special spending is going on. This is because all dollars are fungible; there is no difference between dollars spent on a tank for the military, or an air tank for a Medicare patient.

Unfortunately, high unemployment is the norm, and is directly caused by the government taxing too much/spending too little. Therefore, the current funding scheme basically serves to delay consumption. This may be useful during times of high inflation, but this is the exception, rather than the rule.  This is also a ridiculous government policy, since any society can always afford to consume everything it is capable of producing. Will the future American economy be able to send real goods and services back in time? Of course not!

Where the trust funds do have value is in politics. In fact, FDR and his economic advisers quickly realized the economic realities of their new Social Security program.Mariner Eccles, the Chairman of the Federal Reserve at the time, desperately pleaded to FDR to get rid of the payroll tax system of funding social security, since these new taxes were draining aggregate demand during Great Depression, a time when it was desperately need. Nevertheless, FDR correctly assessed that having Americans think they were "saving" or "pre-funding" their retirements was critical to the survival of the program.  By creating a sense among American taxpayers that they were "entitled" to the retirement benefits they had paid for in taxes, FDR knew attempts to unwind these programs would be politically suicidal. This structure was an asset to the program for most of its existence, although it has always been open secret among policymakers that such a structure is unnecessary. The reason that I feel the need to move beyond this way of thinking is because I fear that the perception of a need to fund these programs through dedicated income streams of the FICA tax and trust fund amortizations has now become more of a liability than an asset to their existence.

I regularly hear well meaning Americans worrying that their benefits will not be there for them, because at some point disbursements will exceed receipts, and the trust funds will be fully amortized (ie "Its going broke ahhhh!!!") There is a widespread misconception that SS and Medicare have a special economic status, and must be funded through dedicated revenue streams. The reality is that accounting for these programs in this way was a political decision, and we can just as easily decide to no longer do so, by paying for these programs out of revenue from taxes and bond sales, just like everything else. Much of this fear emanates from decades of right wing scare tactics, led by Pete Peterson and his myriad of propaganda outlets with innocent sounding names. While many of their tactics have been downright dishonest and manipulative, I also feel that Democrats that try to fight back are also standing on shaky ground when they neglect to explain the financial imperatives of a currency issuing government. So while the oft-touted fact that a modest increase in the cap on income subject to the OASDI portion of the FICA tax will make SS solvent until 2075 is true, I feel that this is not a necessary point to be making.

Another reason why the current funding scheme is undesirable is because FICA is a regressive tax. Because the amount of income subject to the OASDI portion of the tax is capped around $110,000 but has no floor, it fall disproportionately on those who work for a living and live on modest means. And at this point, it doesn't take a PhD in economics to realize that working class Americans have been getting the shaft since 1980 (hmmm, what happened then??) As I see it, the only real way that this generation of Americans will ever get the standards of living they rightly deserve is by decoupling SS funding from the FICA tax, and greatly increasing the payments made to retirees. It is my sincere hope that the millions of working Americans who never earned what they deserved may finally get just compensation in their golden years. My proposal then, is to eliminate the FICA tax system entirely, and fund SS and Medicare entirely through general revenues. As a precursor, it will be necessary to educate the American public about the realities of modern public finance.

So the next time someone asks you about the perils of the dwindling trust funds, ask them "where is the Department of Defense Trust Fund? How about the Farm Bill Trust Fund?" There are no such things, because money for these programs is simply appropriated and spent, without any savings or planning ahead involved. There is absolutely no reason that we could not fund SS and Medicare in the exact same ways, without the misleading accounting gimmicks that are the trust funds.

Friday, June 21, 2013

The case for permanent ZIRP

Cricisms of the Fed's current zero-interest rate policy (ZIRP) abound, especially among older investors with more traditional (ie gold standard) ways of thinking. I find this to be quite odd coming from many market participants, who in most circumstances would advocate for less government intervention in markets. I would advocate making this zero price for base money a permanent policy going forward.

Arguable the most important price in the world in the price of base money, ie the Federal Funds Rate. This rate sets the base price of borrowing for all banks, which then go out and sell loans with an interest rate somwhere above this rate, the higher the better. The Funds Rate is a policy tool set by the Federal Open Market Committe (FOMC) in its meetings, held every six weeks or so. Since the economic crisis of 2008, the Fed Funds rate, actually the target rate to be precise has been between zero and 25 basis points (0.00%-0.25%). This means that banks can aquire their needed reserves basically for free.

The reason I think zero should permantly be the base rate, is because this base money is risk free. Reserves are risk free assets that are instantaneously provided to banks in unlimited amounts by the Federal Reserve. The reserves are liabilities to the Fed, but only so far as the Fed promises to exchange X$ of reserves for....X$ of reserves, so it is not a liability in any real sense of the word. Additionally, the Fed arbitrarily setting a base rate is a subsidy to passive savers and safe asset holders. Modern money itself is not a store of value or investment vehicle, its a policy tool for directing economic activity and achieving public policy ends. There is no shortage of non-dollar, dollar denominated investment vehicles that investors can seek as a store of value.

The one positive effect the ZIRP and QE had was to increase bank net earnings. Even though the Fed removed earning assets from their balance sheets, the net effect of apparently permanently low interest rate policy has been to lower rates paid on bank liabilities MORE than the rates have fallen on bank assets. That is to be expected—banking is a highly oligopolized business (a handful of banks control “market” rates, as discussed below) so they are able to prevent retail loan rates from falling as much as deposit rates fall. Further, banks are jacking up all kinds of deposit and checking fees—which works so long as they all do it lockstep (if a major bank or if a lot of small banks refused to do it, they wouldn’t be able to make the high fees stick). The same thing happened back in the early 1990s as the Fed kept rates low to increase bank earnings so they could be recapitalized. It is implicitly a bank rescue policy.

Randy Wray blog post, August 1, 2012

This increase in net bank earnings is a aggregate demand leakage, because these earnings are not then “spent” by the bank. Normally, once persons spending equals another person’s income, but in this case the money just sits in the banks own account.  For example, if I buy a security for 96 cents on the dollar, the Fed buys it from me for 98. I get 2% interest instead of the 4%, had I held it to maturity. The Fed then allows the security to mature on its books, earning 100 cents while only spending 98, but this 2% is sent back to Tsy anyway!!!

While I personally have no interest (no pun intended) in using government policy to remunerate the asset holding classes by paying higher interest rates, at least there is a chance that this money will be spent. If anything there already is a severe institutional bias towards the asset holding classes in America (especially in the Federal Reserve structure), and these people are the least in need of favorable government policy. But when the Fed earns interest, it gives it back to the Treasury, which cannot just go out and spend ad hoc. Thats why Quantitative Easing (QE) is such a weak policy operation.

Most importantly though, the base rate of borrowing should be zero, so the private sector can price in risk on all its lending activites after this, as it deems appropriate. I cannot think of any good reason for the base price of money to be anything other than zero, or arbitrarily raised and lowered as it is now.

While recent crises have demonstrated that private sector risk pricing is far from perfect, it seems to me that the market should be allowed to price its own risk without the Federal Reserve arbitrarily changing the price of base money, which has enormous effects across the macro economy. When the Fed raises or lowers its rates, it sends shockwaves through the financial sector, as firms scramble to reprice their books. This fed policy only serves to support the term structure of interest rates at higher levels than would be the case. And, since longer term rates influence an enormous amount of private lending, especially mortgages, higher term rates only serve to adversely distort the price structure of real goods and services.

Ostensibly, the Fed raises the cost of base money to slow down inflation. However, its sucess in doing so over the years has been mixed at best, and a rapid, across the board increase in the price level that many institutional economists and investors fear has not been seen in decades.

Therefore, I believe that fiscal policy is a much more sensible way to control inflation as it pops up and down in various sectors, such as energy, equities, mortgages, and healthcare. Fiscal policy, especially taxation, is a much more precise tool than monetary policy. Tax rates can be raised, lowered and indexed, to target specific sectors that are growing too fast, without impacting the economy as a whole. Trying to slow inflation in certain sectors of the economy by raising the base rate of money as we do now, is akin to trying to eliminating an anthill with a B-52 bomber (or doing open-heart surgery with a chainsaw, etc) : it is very impresise, and you end up hitting a lot more things than you wanted to.

For example, I have heard some say that Greenspan should have raised rates in the 2000's when the housing bubble was inflating like crazy. While there definately should have been some action by the government to deflate the bubble, raising rates for the entire economy would have been too disruptive, especially as American consumers accumulated more and more debt. Instead, Congress should have scrambled to eliminate the mortgage interest deduction, and begun taxing financial transactions related to RMBS to slow down the secondary mortage market (and enact new regulations too, but that takes too much time). I believe a similar prescription is in order for the healthcare sector, which for decades has seen its prices rise way above CPI. Some sort of tax on healthcare provision would help to slow down price growth in this market, with the added bonus of putting our federal spending on a more sensible path.

Thursday, June 20, 2013

Some more macro- calm Down About the Debt, part 2

It has long been understood that those who control the money supply can control the behavior of individual humans and society at large, for whatever they want to. It is now a good thing that such control is held by a democratically elected body.

Government borrowing is not really a net transfer out of the economy; the only concern may be the burden of interest payments, which just another form of government spending and is really a political problem. Bond holders are likely to be those that are already wealthy, and thus more government borrowing will, at least when it comes to paying interest, benefit the wealthy. However if this borrowed money is spent correctly it can do just as much to strengthen the poor and middle class, and higher levels of inflation may  negate the real rates of return that the wealthy receive on their treasury holdings anyway. Additionally, about $2.3 trillion of this debt is held by the Social Security and Medicare Part A Trust funds. The interest paid on these bonds is accrued in the trust funds and then passed on (as a higher provision of goods/services) to the recipients of these programs, the vast majority of whom are middle class Americans.

Now the Medicare/Medicaid scheme leads to the classic problem of a public/private partnership. Government is obligated to spend money into the healthcare sector, but has little say in how this privately controlled sector operates. The incentives are skewed away from efficient provision and towards lobbying for more funding and less oversight. This is the primary driver of our deficits. Even then, the problem is not that we are spending too much money, rather the problem is that too much of this nation’s real resources (people’s time and energy) is being wasted providing healthcare in an inefficient way. It would very interesting to see how much money could be saved if a single payer system, like the British NSA was adopted. (Or if a system like the VA’s Tricare was created at the national level and funded as Medicare is.)

This also may be a political issue if a lot of money is being taxed out of the US economy or created, diluting the value of currency in circulation, to make interest payments to bondholders overseas. This has led to a great deal of concern among Americans, but the reality is that China only holds about 10% of all our debt, and uses this lending to subsidize the American consumer economy, which in turn keeps Chinese unemployment low, and helps the government avoid a political crisis that could arise from high unemployment. (some argue the largest thing that the Chinese government fears is high unemployment. More than anything this could threaten the politburo’s power. )

Additionally, one of the reasons that the Chinese are now buying American public debt is that they got badly burned buying private sector debt after the 2008 financial crisis. Chinese investors got suckered into buying a lot of RMBS (and other instruments that were contaminated by them) so are now putting their money in much safer Tsy securities. 

Also, the Chinese have one of the highest personal savings rates in the world. Part of this is because of their cultural affinity for savings from a buddhist/taoist culture, but it is also because of a lack of government safety net. There is no Chinese counterpart to Social Security or Medicare. Therefore, the onus on providing for the future is entirely on individuals and families. Of of the ways the Chinese save is by putting their dollar holdings in a savings account at the Federal Reserve, otherwise known as buying Treasury securities. If and when the Chinese decide to start spending these US dollars (ie stop "buying our debt"), they can do two things: (1) Use these dollars to buy American goods and services (or any goods and services denominated in dollars), which will result in increased demand for US goods and services and a reduction in domestic unemployment or (2) Sell dollars in exchange for foreign currencies, which in the absence of countervailing actions by the US Fed, will result in a lower valued dollar, which in turn will make US goods and services more competitive globally, and thus domestic unemployment lower. As you can see, both scenarios resulting from the supposedly disastrous "Chinese dumping our debt" scenario, are quite positive, and similar in outcome. A weakening in the dollar would also make our imports, ie OIL, more expensive, which would be a problem. However, it is my desperate hope that by the time this happens, the US will have drastically reduced its fossil fuel consumption anyway; if not, we will have much more serious problems to deal with than debt and interest rates.

Saturday, June 15, 2013

Spending priorities part 2

The reality of our modern mixed economy is that not all socially desirable investments yield short term profits, and thus will not be pursued by the private sector, especially publicly traded companies, who singularly focus on quarterly returns. This is where the public sector steps in and makes the big, risky, or long term investments that society needs, like infrastructure, energy production and distribution, and healthcare.

On the other side of the equation, subsidies (in the form of tax expenditures) to already occurring behaviors, such as the purchase of health insurance and home mortgages, are worse than useless. These do not fit the traditional form of government investing, that is in socially desirable things that the private sector chronically underinvests in. These behaviors would occur sufficiently on their own, thus the addition of a government subsidy is purely a windfall profit to those who partake in these behaviors. They distort natural markets by giving preference to certain kinds of compensation and spending behaviors. There is nothing inherently valuable or chronically underinvested about these behaviors that makes them worthy of public support. Both end up inflating these sectors and leading to enormous waste and oversupply (ie a global housing bubble and subsequent financial crisis).