Sunday, April 20, 2014

Drawing some initial conclusions

Money is a form of credit created by the government, and it typically becomes the national unit of account for all money things. When that government itself is the creation of the people, we can safely say that our money is of the people and for the people. It’s ours to use for the public good – which is exactly why we created government in the first place!

Stable prices and full employment are the stated mandates of the US Federal Reserve Bank (called the “Dual Mandate”). I believe these to be noble goals but they cannot be realistically achieved via central bank monetary policy (i.e. raising and lowering interest rates and managing bank reserves) for reasons I won’t go into yet, although our experience alone is enough to confirm the validity of this statement. 

However, we can achieve these goals if we use our monetary system to its full extent, and that means we have to use fiscal policy (i.e. government spending and taxation). In particular, the implementation of a job guarantee would provide employment to everyone who can and wants to work, while functioning as a stabilizing buffer stock in the economy (the pool of labor in the program will rise and fall as the economy expands and contracts). More on this in later posts.

So why don’t we? Because we are held back by the mistaken belief that we can’t afford to, or that we can’t spend money that way, or that if we do there will be bad consequences. For the record, there are plenty of bad consequences evident all around us today for NOT doing so!

I have attempted to explain that government money works very differently than how households and businesses are managed. The differences are highly significant and we ignore them at our peril. Failure to use the system properly does more harm than good.

What have we learned?
  • Taxation and bond sales do not finance government spending, and governments have no need to balance revenues versus their spending.
  • Taxation plays a very different role in the economy than the mistaken notion that it is used for funding government; we need to use taxation appropriately.
  • Government “debt” is really just money the rest of us have saved (or we can also say it is money that the government has spent into the economy but not yet taxed back out, so we get to save it). As such, this so-called "debt" is not to be feared and there is never a need for government to have to earn more (i.e. increases taxes) in order to pay it off.
  • The hyperinflation monster we have been taught to fear lives in a different monetary system than ours. It lurks in the world of societal destruction combined with gold standards, pegged currencies, external currencies, or foreign denominated national debts.
  • In short, we can afford to do what is in our best interest.
So how should we best use the people’s money for public purpose? We can certainly have legitimate debate over the “what” and the “how” (indeed, this is exactly what our politicians should be doing), but for now let’s just imagine some possibilities now that the blinders are lifted off:
  • We can afford to provide housing, food, and care for our elderly.
  • We can afford to provide education to our youth so they have the skills and knowledge to be productive citizens and future innovators.
  • We can afford to provide essential health services to everyone.
  • We can afford to grow our economy without harming our environment.
  • We can afford to repair our national infrastructure, and to invest in new infrastructure (a national high speed electric rail system linking all major cities?)
  • We can afford to provide employment to everyone who is ready, willing and able to work.
  • We can afford to invest in research and development of groundbreaking science and technology, and to help commercialize innovative technologies.
  • We can afford to cut income taxes and increase the real incomes of families.
  • We can afford to help struggling municipalities and states and not let their citizens suffer the loss of essential services because of mismanagement of some previous politicians.
Lest you misunderstand the message, let me emphasize that 1) just because we can afford something it does not mean that everything is an appropriate use of public money, and 2) there is a big distinction between the public’s money being used to pay for something and government employees doing or managing that activity (the two do not have to go together). For example, there are ways to provide health care for every citizen without a government run medical industry if that is what the people prefer. 
J Fagg Foster, Denver University Economics Professor, wrote in 1966.
Whatever is technically feasible is financially possible. To the perpetual question ‘Where is the money coming from?’ the answer is now clear. It comes from the only two institutions we permit to create money funds: the treasury of the sovereign government and commercial banks. And the rate at which we permit either to create funds is pretty much a matter of public policy.” (emphasis added)
Of course we have to consider the effect of what we do on the economy (i.e. it would almost certainly cause inflation if we decided to give every citizen one million dollars in cash tomorrow), but the key point is that affordability is never the issue for the government (i.e. "us acting collectively for the common good"). We have unlimited ability to credit bank accounts if we direct the government to do so.

After too many years of economic malaise, isn't it time to begin to see and act rightly? We have an incredible system of money and government that was formed for our benefit. Let’s use it. Start to imagine a prosperous and just future for all. It is within our reach.