Friday, February 21, 2014

Hey Democrats, Please Stop Talking about the Meaningless "Trust Fund"

With the good news that the Obama administration is dropping its proposal to cut Social Security through chained CPI, I figured it would be a good time to do a refresher on how Social Security actually works. Although I usually target right-wingers in this blog, I sometimes come across Democrats making some misleading statements too. The worst, and most common error is discussing the "Social Security and Medicare Trust Funds." As innocent as this mistake may be, I cringe every time I hear it. 

Sorry folks, but these Trust Funds aren't real. They exist only in a legal/accounting sense, but not in any real economic way. Unfortunately, many Americans hold views that range from thinking SS&M are not part of the government, to thinking that SS&M are funded from payroll taxes and the Trust Funds. Neither are true.

Want proof? Just take a look at the Daily Treasury Statement (link) which is a income statement for the Federal Government. 

On the "deposits" side, you'll see a line item for "Cash FTD's."

For a further breakdown, you can scroll down to Table IV- Federal Tax Deposits:

The first line in this box says " withheld income and employment taxes. The "employment taxes" part is that damn FICA tax that sucks away 7% of every dollar of our hard earned income (up to $112,000 that is.) These revenues supposedly go into the "trust fund" where they are either used to pay for benefits or saved for later. As you can see, this does not really happen.

Then, on the "withdrawals" side, you can see line items for Social Security and Medicare. Not surprisingly, they are the largest withdrawals:

See? Both programs deposit into, and withdraw from, the same Treasury General Account as all other government programs. Its clear just from this statement that the "funds" don't fund anything at all. When Grandma gets her Social Security check every month, the check says "Department of the Treasury", not "Social Security Trust Fund."

The Treasury describes Trust Funds as such- "These are accounts maintained to record the receipt and outlay of monies held in trust by the Government for use in carrying out specific purposes or programs in accordance with the terms of a trust agreement or statute." Notice how they used the word "record", and not "deposit" or "withdraw."

Its like if Congress passed a law allowing me to be called "Justin Santopietro." Thanks, but I was already doing that. The numbers that show up in the Trust Fund are just accounting records for transactions that have already happened. There is no "there" there.

This is because, as few people understand, the federal government creates ex nihilio all the dollars that it chooses to spend into the economy in any given year. Federal taxation functions as a control on inflation and aggregate demand, and is entirely unrelated to spending. In fact, since taxation does not give the federal government anything it cannot already create, there is no real sense in which dollars collected by the federal government can be spent again. There are no tax dollars flying in and out of giant tubes in the Treasury Department. Federal taxation is merely a digital transaction that deletes dollars balances in private bank accounts, and federal spending is merely a digital transaction that adds dollar balances to private bank accounts. 

When we send tax money to the government, nowadays usually as a wire, the dollars that existed only as numbers in a checking account are functionally destroyed. They are no longer part of the monetary base, because the Treasury’s General Account at the Fed, which is shown in the above statement, is isolated from the monetary base (unlike the accounts of all state and local governments and the entire private sector). US dollars can only exist in bank accounts outside the Treasury, so when the Treasury spends, the monetary base increases, and when it taxes, the monetary base decreases. Only the US Treasury (and Fed, for distinct reasons) can affect the monetary base in this way.  As the sole issuer of US dollars, the US federal government does not and cannot “use” or even “save” dollars that only it can create.

I make these points because the supposed Trust Funds have now become the weak point for Social Security and Medicare. The Peterson hacks love to scream about how the funds are going broke, and how we need to slash benefits NOW!! The reality is that Social Security and Medicare will always be solvent, just like every other federal program. There is no financial reason why the federal government cannot just credit our bank accounts in any amount that it wants. 

Setting up an additional trust fund for something that is already perfectly solvent is like wearing two condoms at once. Not only does the second condom not protect you any more than the first one, the extra friction can actually make things worse than just wearing one - just like the Trust Fund makes Social Security and Medicare seem like they can be insolvent. If there were no trust funds set up for these programs, no one could claim they were somehow independently going broke. 

It almost seems that in a genius move of cruelty, Alan Greenspan intentionally set up Social Security as a "Trust Fund", in order to make it seem insolvent down the road. The great irony here, is that Greenspan himself once said, in an accidental moment of honesty, that "there’s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody. The question is, how do you set up a system which assures that the real assets are created which those benefits are employed to purchase.” See, Greenspan always knew that the Trust Funds were a scam. 

For a more detailed discussion on these accounting maneuvers, please read this.

Sunday, February 16, 2014

"The Can Kicks Back" demonstrates the difference between currency issuers and users

Just when I thought the cheesy "The Can Kicks Back" group couldn't get any worse, they came in handy, in a very ironic way. Though I never thought they were particularly threatening, I have made fun of these goobers in previous posts. Several recent reports have revealed that this group, which argues the entirely false myth that the US government can go bankrupt, is itself near bankruptcy. This beautiful irony presents us MMTers with a potent "teachable moment". I'll keep it short and sweet this time. Please enjoy these free tidbits, courtesy of your fellow currency user:

1) Currency issuers, such as the governments of the US, Canada, Japan, and the UK, can never go bankrupt unless they deliberately choose to. Their overriding financial concern is inflation.

2) Currency users, like you, me, McDonalds, the people who make the Shake-Weight, the State of Colorado, Portugal, and the goons at "The Can Kicks Back" can very easily go bankrupt if they are not careful, since they do not control the currency- they merely use it. If their spending exceeds their income for too long, they can get into serious economic and financial trouble.

3) People who don't understand or appreciate the above differences cannot understand modern economics.

Nobel please!

Wednesday, February 12, 2014

Is Moore's Law the Ultimate Inflation Killer?

Lately I have thinking about how technological progress makes inflation less and less likely over time. For those that aren't familiar, Moore's Law is s the observation that the number of transistors on computer circuits doubles approximately every two years. The law is named after Intel co-founder Gordon Moore who described the trend way back in 1965. His prediction has proven to be accurate over the years, and tech growth has roughly followed this law for almost half a century now, and our quality of life has drastically increased as a result.

This exponential growth of computing power has led to unbelievable increases in productivity and transmission of information. This means that production can respond to increased demand at ever increasing levels, making inflation less and less likely over time, at least in sectors which are computing heavy. We can now produce more and more stuff, with less and less inputs, especially human labor. The easiest example is lawyers/researchers- where it used to take hours to pour through documents to find information, it now takes only seconds thanks to CTRL-F.

Certain basic commodities may be not be affected by these improvements, especially energy- its proven much harder to manipulate energy than transistors. But for all else, the more that computers can do, the less that humans must do, and computers can produce 24/7 without asking for a raise or cost of living adjustment. General supply becomes more elastic over time, and the United States is more efficient than ever. The problem is that aggregate demand is based on the intelligence of our federal policy makers and legislators, which is desperately lacking. 

Why is is so hard for modern humans to realize that our recurring problem is a lack of demand, which can easily be solved by our agile, fiat currency issuing federal government? Whenever we MMTers bring up the need for more government spending/lending, we get faced with the tired "hyperinflation" schtick, as if war-ravaged 1920's Germany bears any resemblance to the modern United States (pro-tip: It doesn't!)

So as it turns out, its really not that easy to create inflation in modern competitive economies. The Fed has blown all its wads, and still can't hit its target. As I see it, concerns about inflation are about as relevant as concerns about a Soviet invasion....both haven't existed since the 1980's. The baby boomers really need to update their macro, or get the hell out of the way.

Our lack of cultural evolution leaves us stuck in the mindset that was appropriate for most of human history- that resources were very limited and production could not easily adjust to increases in spending power. But in the 21st century, we are facing the opposite problem- too little spending power to spur demand for everything we are capable of producing. 

As with everything else it boils down to politics- the 1% stupidly think that giving "those people" too much spending power might drive up prices. Yeah, as if any public school teacher is going to show up to an auction in Greenwich and outbid a hedge fund manager for a Picasso or Renoir....

Friday, February 7, 2014

What is Fiscal Responsibility?

Most conventional macro though these days is incorrect because it comes out of the old fixed exchange rate days, when the US was on a gold standard. This outdated thinking, which includes monetarist Keynesians like Paul Krugman, unfortunately treats money like a commodity that should be regulated, as if it can run out. These types of descriptions are fine for a fixed exchange rate system, but they simply don't apply to countries with sovereign, free floating fx. Its like playing a football game with the rules of soccer….both may be referred to as futbol/football but you have to understand the difference to avoid disaster. For example, I frequently hear talking heads on Bloomberg and CNBC talking about the US and Euro economies in the same sentence. This simply cannot be done accurately, and anyone that attempts it is committing economic malpractice. The differences between a currency sovereign such as the US, and non-sovereigns such as the Eurozone countries are impossible to overstate, but usually missed by business/econ pundits

Few terms in Washington are abused more than the notion of “fiscal responsibility.” Since almost no one understand the implications of currency sovereignty, almost no one uses this term correctly. Fiscal responsibility, from the standpoint of a currency issuer, means spending enough to create an economy where everyone who wants to work, can work to their full potential. The current approach to fiscal responsibility is the stunningly stupid opposite- People just pick a number out of thin air, and determine any spending above this level to be “irresponsible.” This is an incredibly infantile way of approaching public policy, and it is almost always the poor and least powerful than suffer the most as a result. 

For those struggling with this as a novel context to picture, managing a fiat currency supply is analogous to managing the amount of oxygen/CO2 which an individual breathes in and out. How much fiat currency do we need? Answer: as much as our activities dictate. No more and no less. Same as during WWII. Breathing, initiative or fiat currency is not something you need to regulate in anyway EXCEPT avoiding the extremes of hyperventilation and hypoxia. Our current congress has been holding the country's breath until the Middle Class turns blue, and is now at risk of outright death. And this is totally bipartisan stupidity....Democrats are just a guilty as Republicans, especially when they perpetuate the pernicious lie that Social Security and Medicare need to be "paid for" by maintaining or raising the cruel and regressive FICA tax.

Government spending, when you take a look at the actual mechanics, which few people ever feel the need to do, is just a big digital balance sheet. You cannot project human values on to digital balance sheets! Thats like saying, “that powerpoint is such a slut” or “that word document is greedy”. These things make no sense at all. You cannot determine just by looking at a balance sheet if it is “fiscally responsible” must look out into the Real World to see what is going on. If there are unemployed resources, then the currency monopolist ie the US government, is not spending enough/taxing too much. Pure and simple. Nothing is more irresponsible than the currency issuer restricting currency issuance based on numerical concerns and causing unnecessary human suffering.