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How Progressives are Missing the Tool Available to them

by on July 8, 2013

Cross post from Gavin Fielder

Recent years has seen a resurgence in progressive thought. This resurgence is as much responsible for the election of Barack Obama in 2008 and again in 2012 despite a sluggish economy (an extremely historic event) as much as it is for the Occupy Wall Street movement that began in 2011. That does not mean that our economic situation, however, is getting any more progressive. Just this week, even, the Supreme Court elected to quash the rights of small business owners to protect themselves in a class action suit against large credit companies. At the same time, congress is aiming full tilt at decimating food stamps and further tying higher education to private debt systems. Economic inequality is still mind-boggling, and politicians are slashing programs and benefits left and right.

You can blame any number of factors that led us to this disconnect between the American electorate and its representatives, but in large part it comes down to one simple phrase:

“Fiscal responsibility”

Never mind that this phrase was coined by wealthy interests for the express purpose of dismantling government regulation. It’s worked remarkably well. The world over was caught in the throes of the austerity movement–austerity being the practice of governments attempting to balance their budgets by raising taxes and cutting spending. Never mind that no economist on the planet would recommend this as a way to fix the economy; it would be laughable, if it didn’t destroy the rights and opportunities of the lower and middle class – never mind that it would destroy the economy itself.

You can also blame politicians for not being economically saavy enough to listen to real science, and that would certainly be valid. The fact, remains, however, that there is an obscene amount of money making sure that the American people don’t realize the truth.

What most progressives don’t know, however, is that they have an enormously powerful tool with which to fight the austerity movement. It is comprised of a few simple truths regarding our money system that forms the basis of Modern Monetary Theory, or MMT.

  • Taxes don’t fund the government.

Surprised? Probably–the mainstream is wholeheartedly under the impression that they do.

“An analysis of reserve accounting reveals that all government spending is financed by the direct creation of (money); bond sales and taxation are merely alternative means by which to drain reserves/destroy (money). … In light of these findings, it is, perhaps, time to reconsider our definitions of monetary and fiscal policy as well as our treatment of taxation and bond sales as financing operations.” – Stephanie Kelton, Ph.D.

The money that finances the government is really created out of thin air. It’s not by taxes, and it’s not by debt. Just because mainstream culture is caught up on this idea of “taxpayer money” doesn’t make it any less invalid as a description of our financial system.

  • Money is technically unlimited

Most people treat money as a finite resource–as well they should, within their own household. As an economic resource in an economy, however, “money”, as a broad concept, has no scarcity at all. All money is is simply a medium of exchange and a store of value–a dollar bill itself is obviously worth far more than what it cost to manufacture that bill, but even more than that–the digital data that represent your “money” in your bank account is obviously worth far more than what it cost to ‘manufacture’ that data–which is nothing. Money is actually a broad concept that can take many different forms, and the US dollar itself has no limitations of scarcity.

What is scarce in an economy, is the real goods and resources that the economy uses and produces. Of course, many of these resources are sitting idle right now, as are many human resources (unemployment). The only limitation that the neglect of these resources suffers from is the limitation of capital, i.e., money–except money isn’t a real limitation in the first place… Hmm.

  • The Public debt (and deficit) don’t actually matter
At least not in the way the mainstream thinks it does. Yes, the US government is in debt. Lots of debt. It has been for over a century, and will probably always be in debt. This isn’t a problem, because, among other things, our government creates its own money. Let’s liken this to music sharing. Say Uncle Sam puts out a new hit single. It’s never available on CD, but is available for download. Now say Uncle Sam is in debt, and owes 300 million people that song. Can he afford that? Money isn’t something that is limited, and as Sam himself is the creator of money, he can pay people as much as feels like at any given time. There is absolutely no risk of the government running out of money for anything in any way; it’s structurally impossible.

If that’s true, you say, then why did we have budget crises that nearly threatened to shut down the government?

In a nutshell, we have an immense backlog of outdated laws. It’s our legal framework, and in many cases, the legislators themselves, that created the crises.

It’s well-known among actual economists (as opposed to Koch-funded patsies) that government spending stimulates the economy, raises demand, and gets capital (and jobs) flowing again. That’s a good economic reason behind the goal of mainstream progressivists to raise taxes–if they can fund the government more, they government can spend more, to bring about a recovery in the economy. This is the view of Robert Reich, another economist. Of course, even in our current legal framework, we can “finance” government spending with debt, and as we’ve already stated, there’s no real risk in doing so–so even deficit spending isn’t a real problem that we need to solve; in fact, if anything, we need more deficit spending, as world-renowned nobel economists Paul Krugman and Joe Stiglitz have stated repeatedly, to deaf ears in our legislature.The Tool that Progressives are Missing

is the realization of these few basic facts. A few protesters in Brazil have already realized it, and are calling for the government to drop its pretense of needing to finance the government through taking money from citizens. The United States, too, has no need to do this. If there was the political will to do it, our government could completely turn around our economy with ease without creating a tax burden or even a debt burden with the use of a simple phrase:“Monetary Sovereignty”

Monetary sovereignty is, in a nutshell, the legal right to print money. Right now, US monetary sovereignty is 99% owned by the Federal Reserve, but that isn’t necessarily the way it has to be. Right now, our laws dictate that we pretend to finance our government through taxes and debt, but that isn’t necessarily the way it has to be. With these realizations of our money system, the debate can be changed for the better. It’s time that mainstream progressives start thinking and talking about money.

The rest of this piece is for those who wish to delve a little further:

Entering the Economics Debate

Modern Monetary Theory is, oversimplistically, the study of sovereign money systems, that is, financial systems in which money is created by the government, and which describes the vast majority of modern governments and financial systems in existence today. If you’re inclined to engage economics, I highly suggest reading up on MMT.

The first argument you hear against the claims I’ve written above have to deal with inflation. Inflation is a phenomenon in which the price of goods and services rise dramatically. There is a significant body within economic debate that asserts that printing money into the economy inevitably devalues the currency, that is, cause inflation. This assumption is so embedded into mainstream economic thought that it, even more than the notion of “fiscal responsibility”, is responsible for national governments holding back on spending. The problem is, it’s horribly misunderstood by policy makers and even mainstream economists.

First of all, why would a business owner raise his prices just because people have more money? Unless he has no one competing with him, this would just drive him out of business. Inflation would have to come from one of two sources–rising costs for the business, or, rising demand that the business can’t possibly fill so the business owner has customers bid up his price in competition for his service. Which one are MMT opponents putting forward, and how?

To spoil the answer early, it’s the latter–they assume that as people get more and more money, the economy won’t be able to keep up with demand, and prices will rise as a result of aggregate demand overtaking aggregate supply. Which might be reasonable, if it weren’t for a few facts. First of all, our current aggregate supply is nowhere near its maximum yield–our country is still the wealthiest in the world and producers can easily expand production quite a bit before we hit our maximum potential GDP–the proof of this is unemployment itself–if we’re producing everything we possibly can, why on earth are millions left unemployed? For this exact reason, hyperinflation due to aggregate demand cannot possibly happen unless everyone who wants a job has one, i.e., practically speaking, no unemployment.

In addition to this, there are many tools available to us that can balance inflation and take money out of the economy if need be–taxes are one of these (and this, in fact, is the most important real function of taxes), but interest rates are another very powerful way to do this, and after that become adjusting bank reserve requirements.

Inflation only really becomes a concern when the economy is booming, but even then, is entirely manageable.

So does printing money cause inflation? In short, no. It can, but only when certain conditions are met–and right now, we are so far in the other direction that those conditions won’t be met for a while, which is more than ample time to pull back smartly–after the economy improves, not before.

The economics debate has much more to say than this, but it is with this introduction that I hope mainstream progressivists begin to engage at the very least in thinking about our money system and monetary policy.

  1. One note: Since we’re talking about MMT, the effectiveness of interest rate policy on inflation is debated. There’s significant evidence showing interest rates just change the flow of money from/to borrowers to/from savers.

  2. Kevin Edwards permalink

    Then what is the limiting factor that should prevent the government from paying for everything?

  3. There are no financial constraints, but there are resource constraints.

  4. Kevin Edwards permalink

    Thank you for your response, JP. I agree, but resource constraints are universal regardless of who pays. My underlying question is, why should private individuals pay for something rather than having the government pay for it?

    • Well you don’t want government to buy anything unless it is to help free up spending by the private sector. You don’t want the government to buy tv’s for people, but you could argue for them buying necessities like health care, or energy, or housing or clothing if there is those in the private sector that can’t afford it.

      You want to help the private sector by allowing consumers to consume, the government can do this by just lowering taxes. Warren Mosler has mentioned FICA tax holidays until the economy gets back to full employment.

      • Kevin Edwards permalink

        I can see why it would be bad if government spending reduced private sector spending, but doesn’t government spending generally free up private sector money for other spending or investment?

        Maybe the real limiting factor is when government spending reduces private sector production, just as some people may be discouraged from working as much if the government will pay for all their necessities. Does that sound right?

  5. Alfonse Bartlette permalink

    You have a pretty bad misunderstanding of what inflation is.

    ” Inflation is a phenomenon in which the price of goods and services rise dramatically. ”

    No economist I have ever studied has used a definition remotely similar to that one. But in general, your definition is describing an increase in the price of goods. Price Inflation

    good= was $100
    after one year…
    Would you agree that -$2 is larger than -$3? result 98/97
    Would you agree that +$3 is larger than +$2? result 103/102

    Using your definition, it is only a problem when there is a YoY increasing price, whereas the above figures are exactly the same. In both cases, you have 1 less $ in your pocket after the purchase.

    “There is a significant body within economic debate that asserts that printing money into the economy inevitably devalues the currency”

    It is based on supply and demand. More money = more $ prices vs less money (same stock of goods). This is obvious. Supplies of goods didn’t increase along with the instant increase in money supply.

    Those that are in your camp typically look at only the net inflation rate (as in cpi) and use that to “prove” that additional dollars didn’t cause price inflation. By the same logic, can’t we conclude that printing money causes deflation(Japan)? Bad logic

    “So does printing money cause inflation? In short, no. It can, but only when certain conditions are met–and right now, we are so far in the other direction that those conditions won’t be met for a while, which is more than ample time to pull back smartly–after the economy improves, not before.”

    Again, a grievous error.

    For a great description of how monetary inflation works;

    start at the interlude

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