Saturday, June 15, 2013

Some more macro aka Calm Down about the Debt

Think for a moment about where our national currency (dollars, for those of you who may not be economists) originates. Surely not from taxation and borrowing from China or anyone else. Our fiat currency must, first, be issued by the Federal government. That's the only way dollars get into the economy in the first instance. Dollars are extracted from the economy to manage aggregate demand and inflationary pressures, and not, contrary to what  99.9% of Americans wrongly believe, to actually pay for government expenditures.

Check with the guys at CBO, and the Fed's Operations Division, or with the Domestic Operations guys at the Treasury. They will tell you to ask yourself, why would the sole issuer of our currency need revenue per se when it can issue, electronically, all the dollars it needs to fund obligations denominated in dollars. Treasury and the Fed have a spreadsheet they add or subtract numbers from checking and savings accounts for the Treasury, states, firms, households and individuals. If you take $1,000 in cash to the IRS to pay your taxes, they shred it. They don't need that old, dirty money to spend again. 

So yes, the Federal Government is the monopoly supplier of dollars to the rest of the economy. Recipients then consume, save an/or invest/hoard those dollars. Then they can then create jobs. End of Story.

So what matters is not how much money government spends, because it has the power to create an unlimited supply of money. Therefore, concerns about government spending should be about quality, not quantity!!! There is nothing wrong with a democratically elected government being able to be sole issuer of currency and controlling the economy in this way. Civilizations have always used some form of currency, which for most of human history was controlled by private interests. Now we have the advantage of a government able to create money and spending it into the economy in the interest of the general welfare, as our Constitution demands.

What does matter is how that money is spent. Since the supply of money is unlimited, what is limited is human (and some degree physical) energy and intellectual power; those are the true assets that should not be wasted. Human and physical capital can be wasted, but money itself cannot be wasted by the federal government, since it has an unlimited supply. They should be used in the most efficient way possible, and government creating and spending money is just a way that public policymakers control how the human energy in a country is used. Simply, what government spending does is direct the way that time and energy in the country is used.

People still tend to confuse money with wealth, a mindset left over from the gold standard days. But nothing could be farther from the truth. Money is just paper, a certificate to make someone else provide a good or service to you. Thus the holding of money is really a political (power) issue. 

Simply, government spending is a means. It is amoral. What government does with that money is what is important. And whether a dollar is spend by the private sector or the public sector is irrelevant. What matters is how that dollar is spent. For example, very few people think that the government should be spending its money on making computers, or pizza, or any other consumer good for that matter. But no honest policymaker can deny that government spends its money far more efficiently than the private sector when it comes to providing some services, like education, security, or healthcare, to a large population. Part of this is the lack of a profit motive (and executive compensation/dividend payments), larger public oversight, economies of scale, and adoption of best practices that are then applied on a national level.




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