Sunday, March 9, 2014

The 7 Deadly Frauds

Ah the economy.  Its stinks, but is slowly improving so the story goes.  But that is not what I am talking about today.  No, today I am going to discuss the deficit in the United States.  Just to be clear, I do think the budget needs to be balanced, and I do feel that we should pay off the majority of debt, just so that it is not constantly held over our heads.  But, I want to point out a report that was brought to my attention recently.  This report is from 4 years ago, and discusses the debt in a way I was not familiar with.  I also want to point out that the GOP which is now railing against the debt also has some interesting perspectives on it.

So every conservatives mainstay, their "uber-God", the man who is beyond any and all reproach is Ronald Reagan.  Yeah, I know everyone knows that, but the thing is be basically doubled up the national debt, I mean you take every single president before him, and he totaled up their level of debt, by himself.  Yet only Reagan himself seemed to regret it, and only in later years.  Bush I, for all his faults did attempt to reign it in, but failed.  He added about one third of what Reagan did (50 Billion dollars).  Dick Cheney famously quipped that Reagan proved that the deficit didn't matter, while W was on his way to increasing the debt by over a trillion dollars.  While Carter, Clinton and Obama

have combined to lower the national debt by over 1.3 trillion dollars. 

I know the butt hurt will be strong with this post, but if you look at the current GOP, their spending habits, they really want a debt so they can "starve the beast".  The problem is while they are starving the beast, they are killing the country, just to get there way.  And this brings me to the report I was recently told about, The Seven Deadly Innocent Frauds of Economic Policy.  Basically, from what I understand of this report, they aren't really frauds, they are misconceptions that we hold about the way our economy works.  The fraud comes in, because we have been told by those who do know the very fine details of the economy it is how it works.  I will leave a question mark next to them, as I honestly do not know, or I don't believe it myself.

Seven Deadly Innocent Frauds of Economic Policy
  1. The government must raise funds through taxation or borrowing in order to spend.  In other words, government spending is limited by its ability to tax or borrow.  
  2. With government deficits, we are leaving our debt burden to our children.
  3. Government budget deficits take away savings.
  4. Social Security is broken.
  5. The trade deficit is an unsustainable imbalance that takes away jobs and output.
  6. We need savings to provide the funds for investment.
  7. It’s a bad thing that higher deficits today mean higher taxes tomorrow.
As of writing this entry, I think I can only side with the first two.  I think four is patently wrong.  And I don't know why the third one is even listed.  But we shall see.

"The Government must raise funds through taxation or borrowing in order to spend.  Basically Government spending is tied to its ability to tax or barrow."  One thing I recently heard was that when it comes to money coming to or coming from the Fed is that it is just numbers in a computer.  A bank or Uncle Sam needs more money, someone over at the Reserve goes to their computer, adds a few dollars to the account all is well.  Man, I wish I had that line of credit, how about you?  "Yeah, I need some extra cash, what can you do for me?"  A few moments later... "Okay sir, you know have a billion dollars, anything else I can do for you today?"  Why is this not a problem according to this report, because, the debt is paid back in a nations currency.  But for me, I am thinking, alright, so money is but a few key strokes away, debt is also paid back with your own currency, but what happens if your currency is devalued.  It is not worth as much as it had previously been, what happens then?  Apparently nothing, or it is not stated in this report.  But, the author does warn that this is not an unlimited cycle, you can't keep upping the numbers in your account to spend, less you will create inflation.  At this point you are asking about taxes, and the role they serve.  Well, in this deal, taxes serve as a means of regulation.  It regulates spending power.  IE: if you want the poor to spend more, you lower their taxes, if you want the rich to spend less, you raise theirs.  But I do not agree with that.  As we see from the wealthy hording their money with low tax rates, I think that they need to be taxed on the money they horde.  Something akin to what we formerly did, the more you invest, the lower your taxes, the less you invest the higher your taxes.  If this is true, and I am still out to lunch on this, it would mean that national debt, no matter the country, worldwide does not exist. 

"With government deficits, we are leaving our debt burden to our children."  See this is the thing I have heard over the past five years.  And to some extent I do feel it is true.  I am currently paying for the debts Reagan and those before him created.  Or am I?  Basically, while there is a debt, and at some point the money is being paid on it, I can still purchase goods, the goods produced today are not disappearing in a literal sense.  We are still producing, still using, these goods and services are only going outside of the country, due to greed.  Not out of some obligation to pay a debt.  Remember what I asked about what happens if the dollar is devalued, and I said apparently nothing, or it isn't stated?  Well it is.  We know the Fed is a giant bank, if we owe a country debt, they have an account there.  Well two accounts it seems, when we buy something from them, we add numbers to their account, if it goes on "credit", the numbers go into a savings account, and basically everything is then traded back and forth between the checking account and savings account at the Fed.  When the dollar is devalued, it simply means they get less in return.  It isn't like they can demand payment in gold, or something, we use a fiat system. 

"Federal Government budget deficits take away savings."  Now, if we assume that this report is correct, and money that is a "debt" is merely moved to a savings account, it would mean this is true.  But it goes deeper than this, and leads to another issue.  So in 1999, there were a few articles in the same addition of the Wall Street Journal, the first praising Clinton about the surplus, another talking about how Americans were not saving as much money.  Now the interesting thing is, the surplus was almost the exact opposite in savings.  Surplus up, savings down.  I was unable to verify those articles, so again I will make this with a question mark. 

Now to add to this, Professor Wynne Godley (retired Cambridge) taught the following:
- Federal deficits are not the “awful things” that the mainstream believes them to be. Yes, deficits do matter. Excess spending can cause inflation. But the government isn’t going to go broke.
- Federal deficits won’t burden our children.
- Federal deficits don’t just shift funds from one person to another.
- Federal deficits add to our savings.
If true, this indicates that if we have low unemployment, savings coming our the backside, and output is high (meaning things are getting done) debt isn't the problem so long as it isn't growing to quickly and inflation isn't setting in.  As for the level, it is all in how much one wants to carry, the amount according to this author, that promotes maximum output, employment and government size. 

"Social Security is broken."  The author says government checks don't bounce.  And I tend to agree with him.  If it says US on it, there is a 99% chance you will never have a problem with it, outside of a few check cashing services, or not having "proper ID".  Basically, if this guy is right, then Social Security isn't an issue per say, because the money the government spends is really just numbers in a computer.   Really the problem is social equality or inequality.  How much are our elders entitled to once they retire?  Not only in the future but right now.  But it also brings another question up, can this question be completely negated by proper education, and the proper application of technology now and in the future?  In my mind, this concept is actually worth trying, more than privatization.  Keep output up, but finding a way to keep viable employment up through education, and new technology.  Remember someone has to maintain, use, and build the new technology.

"The trade deficit is an unsustainable imbalance that takes away jobs and output."  Now on this one he completely left me sitting staring blankly at the screen.  This flies in the face of conventional wisdom.  Basically importing is good, exporting is bad.  Except that we need exports, as they provide more jobs for us than importing things.  Look to some extent I agree that we need to import things, specifically jobs.  But even so, I can see the point, their goods are coming here, companies here are selling them.  As that author says, no foreign capital is involved, and that might well be the case.  The problem is, should these companies and countries decide not to sell to us, then importing almost everything will cause some major issues.

"We need savings to provide the funds for investment."  When the author of this study says the opposite.  Out of everything listed so far, this one actually makes sense.  I actually agree that investment leads to savings, not the other way around.  Honestly when we invest in something, say roads, the people who build and then maintain the roads, spend money on things, because they have it, this in turn leads to someone somewhere being able to save money on the side.  Basically saving for the sake of having something to fall back on, bad idea.  Saving with intent to use savings for a specific items is a good thing in the eyes of the author of the report.  To some extent he is right, when people start holding more and more money, spending only what they have to, it does drag the economy down.  I once had a teacher who asked us, what do you do during a recession?  I responded that I would hang onto my money, basically shut down any unneeded purchases.  He in turn told me that I was somewhat correct in my course of action.  He further went on and said that when on segment sees a downturn the wise thing to do, is to cut back on spending, but he also pointed out a fatal flaw in the logic.  As I start spending less, it becomes an issue, but when everyone in class starts spending less, it leads to cuts everywhere.  Eventually nobody is spending money, because everyone is fearful that they might see a downturn in their segment and everything collapses.  Back to the point at hand, investment leads to savings, we tend to save for the new things we want, otherwise we run into debt to get them, but in order for that investment to be paid back it requires people have enough capital backlogged to purchase it.  So the investment is made, people start saving up, and eventually the investment is returned.

"It’s a bad thing that higher deficits today mean higher taxes tomorrow."  I do not agree here.  The problem is, the poorer you are, the more your income you spend as it is.  The problem is this.  I as someone who is poor, I need every penny I can, just to survive.  When someone is wealthy, they spend on essentials as I do, they also spend on perks as well.  The problem arises when we get to the point that we shut down.  We have taken our cut, spent all that we intend to, and we horde the rest.  Its different when you are saving for retirement, or saving for a new vehicle, maybe picking up a home or an apartment.  But what is occurring at the higher levels of wealth, and with many companies they are hording all the money they make, not reinvesting it in any way, and not allowing it to trickle down.  That stagnates the economy worse than any debt the nation can carry.  So Mr. Mosler's calls for lower taxes yet for everyone is uncalled for.  If anything taxes need to be raised on corporations and the wealthiest in such a way that the more they pony out for their businesses, the less they pay. 

Overall this was an interesting read, I really must remember who forwarded this to me, so I can thank him.  I can see some of the points Mr. Mosler makes in this report.  To some extent I think something can be learned from it, but it all boils down to a few major factors.  I do not agree with his assertion that taxes do nothing except regulate spending, and that lower taxes create more spending.  As it stands, in some segments lower taxes do promote more opportunity to spend, but in other portions, the ones who could easily afford to spend, lower taxes promote hording.  I do agree that Social Security is not broken, but I differ on what to do tweek it, improve it.  I feel the retirement age should be lowered, not raised, to free up more jobs that are currently held by older persons.  I feel the cap on the intake of Social Security should be raised from its current level of $150,000 to $250,000, to include all levels of income.  Finally, it should never be used as a slush fund for everything that lacks required funding.  To some extent I feel that a national debt is a good thing, but it should be lowered, if for no other reason than to keep some segments of the population focused on real issues.  Furthermore, Mosler has a point when he states that the national debt has no real impact on the following generations.  What they produce, will be what they use, the key is to find ourselves back on the top of the heap when it comes to technology and education.  If you are interested in reading the entire report, here is the link The Seven Deadly Frauds of Economic Policy.  His politics aside (maximum 30 MPH speed limit), he seems to be fairly well rounded, and has some fairly rational explanations for his beliefs.