Saturday, August 23, 2014

Are you a victim of innocent fraud?

"The term "innocent fraud" was introduced by Professor John Kenneth Galbraith in his book, The Economics of Innocent Fraud, which he wrote at the age of ninety-four in 2004, just two years before he died. Professor Galbraith coined the term to describe a variety of incorrect assumptions embraced by mainstream economists, the media and, most of all, politicians. 
The presumption of innocence, yet another example of Galbraith's elegant and biting wit, implies that those perpetrating the fraud are not only wrong but also not clever enough to understand what they are actually doing. And any claim of prior understanding becomes an admission of deliberate fraud - an unthinkable self-incrimination."

Words from the Prologue of Warren Mosler's game-changing book, The Seven Deadly Innocent Frauds of Economic Policy. Get the PDF here, or buy the book. It will alter your worldview - in a good way!

If you think you have a decent understanding of what makes for a good economy and you haven't read this book, the chances are very high that you are a victim of an innocent fraud. Whether you think of yourself as a Conservative, Liberal, Tea Party, or Libertarian  - the economic framework that underpins your political views are deeply flawed.

Yes, that's a bold claim. Don't believe me? Here's my challenge - read this book and I guarantee that you won't be able to think the same way again. And don't worry - it's a small book and written in plain language - you don't have to be an economist to understand it!

Here's a quick test to see if you're a victim:

  • You think government's spending is constrained by its ability to tax and borrow. 
  • You're concerned about the rising national debt, and what it will mean for the next generation.
  • You think the government's involvement in the economy is almost always bad and getting government out of the way will help restore prosperity.
  • You think Social Security is running out of funds and should best be privatized before all hope of having any future payouts are gone.
  • You worry about trade deficits and the amount of money we owe to China.
  • You're afraid we're going to have higher interest rates and higher taxes in the future because of all the irresponsible government spending. 

If you answered "yes" to any of these, I'm happy to tell you that you're being honest, and that's the first step to recovery. The next step is to let your curiosity get the better of you, and start re-learning what you think you know.

Get this book. Read it. Or at least start by reading all the Money Myths on this blog which cover many of the same principles... just not as well as Mosler.

Will you take up the challenge and follow Alice down the rabbit hole or are you afraid to learn you've been a victim of fraud? 

Sunday, August 17, 2014

The myth of Free Markets

Up there with Sasquatch, the Loch Ness Monster, and unicorns is the magical and mythical Free Market. 

It doesn’t actually exist in the real world. But why do so many believe in its existence and the apparent powers it has to solve all our problems?

Well, let’s start with Free Market’s co-conspirators: Supply & Demand. Everyone seems to know them. They have an almost Biblical authority over the minds of economists, politicians, and the public. They are the ready answer to every economic question. “How did this happen? Well of course – it’s Supply & Demand.”

The idea behind Supply and Demand is that there is a self-adjusting mechanism in all markets whereby what people will pay for (demand) and what businesses will sell (supply) will always find a happy equilibrium point as prices move up and down. We're all familiar with the X diagram - quantity supplied and quantity demanded move with price, and the point where the lines meet is "equilibrium". It's a law. It's gospel. Right?

Now there is no disputing the fact that there is such a thing as a Supply and Demand curve - i.e. that at various prices, people will buy more or less stuff; likewise, businesses will produce and sell more or less products at various price points. However, the Free Market believers take it a step further. Their claim is that the price is actually determined by the supply and demand, and that it will always reach equilibrium and efficiently utilize all the available resources in the market

What they usually omit from the story is that this only works in a state of market perfection that happens to be conspicuously absent in real life. What does it take for the magical S-D X curve to work and reach our happy equilibrium point where all resources are used efficiently and all people are employed?

  • Perfectly flexible wages
  • Perfectly flexible prices
  • Perfectly flexible interest rates
  • Perfect knowledge of value and risk
  • Perfectly rational behavior by market participants

So here's the catch. In the real world, prices are very rarely set by Supply & Demand and there are a host of dynamics that constantly interfere with the self-adjusting S-D mechanism, sometimes deliberately. 

  • Income levels greatly affect our ability to buy even when prices might be falling
  • Tastes or preferences influence our willingness to buy at any price (this is often the result of the power of marketing to disrupt the "free market" function)
  • If there is limited availability of a substitute or complimentary product, changes in price may have no impact on demand
  • The level of confidence in the future or expectations about pricing or availability or changes in fashion can influence what we buy today and at what price
  • If the market has limited buyers or sellers we may see little movement in prices and quantities
  • Labor skills don't transfer easily from job to job or industry to industry, and loss of work can erode skills and "employability" quickly, meaning even at lower wages, employers may not hire
  • The cost of inputs has a huge impact on what prices businesses can or will charge, along with profit needs and debt levels
  • Laws, regulations, policy goals, social responsibility targets can all influence what is bought, sold, and at what price

Simply put, the "Free Market" never actually materializes in the way proponents claim. The real world is full of a more complex interplay of needs and wants - of private and public and corporate interests - that prevent the simplistic "self-adjusting" mechanism from magically rationalizing all factors. (Of course, we know it really couldn't solve all problems anyway since some human and societal needs cannot be reduced to a price in a market - e.g. clean air and water are usually regional or national challenges.)

Why it matters: this myth leads to bad policy

The religious followers of Free Markets use their mythical, magical S-D X chart to convince us all that if there is unemployment, the government should not intervene, but instead take a hands-off approach, letting the "Free Markets" and the "self-adjusting mechanism" do its work. However, they are quick to add that the government should do things that would help promote the smooth working of the mechanism, such as get rid of regulations.

When we recognize that the mechanism itself doesn't work that simply, and that deregulation, while it might lead to more profits (and possibly lower quality worker conditions and greater risk to the environment), it may not necessarily lead to more employment and increased real wages, we have to reevaluate the problem. 

We saw this dynamic play out during the Great Depression as the self-adjusting mechanism failed to result in a new equilibrium and full employment. And it is also precisely the situation we have been in since 2008, as businesses take advantage of record profits to buy back shares and increase bonuses and stock prices, all while workers' real wages have been declining and unemployment levels remain high. 

So do we live with systemic unemployment believing it is the only choice in our "Free Market" system? Or do we put down our over-simplified economics charts and recognize that if we want to address something as basic as full employment, reading fairy tales won't help. 

Free Market's dirty secret

Businesses actually don't want Free Markets. They want us to believe in the Free Market myth so as to influence policies to favor anti-market and anti-competitive behavior. This may come as a surprise to some of you, but it's not disputed by those involved in industry today. I'm not making a value judgement here - it's just the outflow of how people and companies fight for their interests. 

Many businesses don't want zero regulation - they want to influence the regulatory process to provide a more guaranteed and protected market and profits (just look at the US health care system!) Why is lobbying the most valuable investment of many corporations? It pays!

For those thinking that businesses want free markets, recognize that "Corporations" are actually a legal structure that was established to enable a concentration of market power to limit the influence of competitive market dynamics. Some of the first corporations were monopolies directly supported by their host-nation's navy during colonial times, and the same imperialistic dynamic has continued to play out in more subtle ways today with multinational corporations. Some people don't like the idea of unions and workers negotiating collectively, yet a corporation is really just the same thing - it allows owners to aggregate interests, financial strength and influence while shielding them from personal liability for much of their actions. This is no "Free Market", so let's stop kidding ourselves! 

Think also about how employment contracts and other incentives & threats limit the free exchange of labor; how copyright laws protect high profit margins and stifle innovation. The science of marketing and branding uses sophisticated psychological methods to cause irrational behavior. These are all some of the very deliberate ways businesses seek continuously to make the Supply & Demand curve break down, increasing profits and often squeezing workers.

Back to the real world

We need to stop throwing around mythical terms that have no meaning in the real world. Too many people think that "Free Markets" are threatened whenever someone suggests a role for government or government money in the economy. Mythical creatures are in no danger of extinction! 

Now please note: I am not at all suggesting we should do away with a market-based economy. I am in no way arguing for communism or a government take-over of business. In fact, my bias is to favor market-based solutions whenever possible. I'm simply saying that there is no such thing as a "Free" market that efficiently rationalizes all inputs to maximize resource allocation and create full employment, so we should stop pretending that it exists. There is no pure self-adjusting mechanism that will enable capitalist economies to be fully efficient. They never have been and never will because of all the complex dynamics described above. Markets are not free: they are a set of complex interactions; they are often not efficient; they are not conducive to all economic and societal problems; they can often be manipulated or controlled to various degrees; and they are heavily influenced in a constant tug-of-war between competing interests - some of which gain disproportionate power over the others. That's the real world of capitalism and market-based economies. 

So now that we recognize that "let the market decide" will never adequately address certain dynamics such as unemployment, environmental protection, long-term research, etc., we can see the healthy role for government money to enable a market-based economy to truly flourish and all of society to benefit.

The goal of good economics and the government's use of money (managing interest rates, overseeing and regulating banking, deciding what and how much to tax, prioritizing where to invest and spend, etc.) should be a healthy private sector, market economy, full employment, and the development of the nation's long-term capital needs. It should counteract the growth of oligarchy and ensure that markets and the political process are not becoming unduly influenced by a few wealthy or corporate interests, and that there is equity in opportunity wherever possible. And in the real world, Free Markets have nothing to do with any of this.

Friday, August 15, 2014

Would you believe me if the Treasury said it?

Source: Forbes book review Six Myths that Hold America Back
Listen, I get it. When one first hears this government money stuff all our objections drown out the words before we finish the first paragraph. It goes against everything we've heard and believed for a long time, right? 

I didn't believe it either. 
  • The government has to behave like everyone else! 
  • The debt is out of control! 
  • The US dollar is going to collapse with all this Fed money printing! 
  • It's just a matter of time until we have hyperinflation.
  • Interest rates are going to skyrocket when China stops buying our debt! 
  • Greece - we're next! 
  • Let's reign in the government pending and "get our house in order"...

Yep, it all sounds so rational and on the moral high ground. Except that it's all wrong. 

Fortunately for many of us, the explanations that were coming from all sources (media, mainstream economists, and even Austrians/gold folks) regarding how economies worked and what caused the Great Recession left too many unanswered questions. I was very fortunate to have someone I deeply respected tell me "Listen, this modern monetary theory stuff is right on track". So despite all my objections, I kept with it until I understood what they were saying. It wasn't long before the light bulbs went on and all the puzzle pieces finally fit together. 

The funny thing is once you see how it works, it is all so simple and obvious that you wonder how such a great deception could have overtaken western civilization.

I'm hoping some of you will get a similar push from this blog to dig deeper and get your own answers. And then pass it along to your friends. We are in great need of a shift in the political discourse regarding fiscal policy in order to have a path out of the mess we've created.

You might ask why a guy that's involved in renewable energy cares so much about something as boring as economics and monetary policy. Why isn't my blog about climate change, saving the planet or hugging trees? Well, the short answer is that until we get the money stuff figured out, we're not going to get very far on any of our other economic, social, and physical needs. I'm still shocked every day about just how pervasive are the myths that hold back our nation, and virtually every other nation. You should be shocked too. 

If we believe the lie that we can't afford anything we simply won't do anything. And that's both foolish and tragic. Great nations with rich resources, amazing people, and big dreams are sitting idle, unemployed, and frustrated -- all because we have bought the lie that money was our problem; our primary limiting factor.

The good news is that word is spreading and the myths are being exposed for the destructive nonsense that they are. Here's an example: 

A Treasury Secretary speaks up

Frank Newman is a former Deputy Secretary of the Treasury. He's been at the highest levels of the system and knows how it works inside-out. He managed Treasury's side of the interplay between the Fed and the Treasury and speaks authoritatively about the operations of modern monetary systems. He's also been at the top of some of the largest banks in the US and China. He knows how it works, and he's telling us we've got it all wrong!

Mr. Newman has written a couple of small books, explaining to Americans that they have been terribly misled, and appealing to us all to grasp our folly as it is holding our nation back from progress and prosperity.

I've included some excerpts below from his books Six Myths that Hold Back America and Freedom from National Debt. You'll recognize the same themes we've been covering on this blog. 
The expression "National Debt" is neither meaningful nor appropriate for the United States.
Misunderstanding of the modern nature of money and Treasuries needlessly confines our thinking about economic approaches to reducing unemployment and growing GDP. The reasons often alleged for fear of "national debt" are not valid for the U.S. and other nations with similar structures of financial systems.
Newman challenges many basic concepts of current economic thinking (you'll recognize some of these if you've been reading along), including:
  • Saving cannot generate productive business investment; it's the other way around: Investment generates economic Saving
  • Deficits do not reduce national Saving or Investment. 
  • Issuance of Treasury securities (deficit financing) cannot "use up" equivalent amounts of funds intended for private-sector use.
Many people who have been lectured a thousand times about the "evils" of "national debt" believe that the U.S. government will have to generate enough money revenue, through future taxes, to "pay off" all the Treasury securities that have been issued to finance deficits. But none of these beliefs are true.
Many Americans are under the misimpression that they are paying taxes, this year, that are being used to "pay off the national debt." In fact, the amount of our tax dollars used to "pay off national debt" this year is zero, last year was zero, and next year will be zero. And no tax dollars will be required of our children to "pay off national debt."
We have talked ourselves into sustaining an unfounded fear. The real damage to America relating to "national debt" is a result of America's fear of it: we have been too reluctant to take steps that would be good for the nation, as we have been held back by needless fear of increasing the "national debt." (emphasis added)

Don't be fooled

Consensus among all the political, religious, and scientific experts at one point was that the world was flat. It also wasn't all that long ago that the medical community unanimously condoned the practice of bleeding patients that were sick. Sometimes society as a whole just gets fooled and it takes a new generation to restore knowledge and common sense. We are in such a time.

The west is finally waking up to the incredible folly of economic thought that's dominated the narrative for the past 30+ years. This economic "mainstream" ideology never saw the Great Financial Crisis coming and still has no clue how to spot the next one. It doesn't understand the role of banks in creating money so it doesn't recognize the instability they cause when they do so irresponsibly. It perpetuates myths in economics textbooks that have not been updated since before the world left the gold standard - a completely different monetary system and fiscal paradigm. It provides no real solutions to unemployment, growth, economic stability, or income inequality. It provides no path forward for achieving financial prosperity while addressing environmental and social challenges. 

Modern monetary theory does. It is a framework for understanding how the modern systems of money really work. From that perspective, we can see clearly the obvious (and extremely positive!) path forward to using national currencies for the real needs and prosperity of the country and its citizens. That's why we have a national currency! 

If you're still wrestling but are ready to get your own objections answered, I would actually suggest you start reading Warren Mosler's books, The Seven Deadly Innocent Frauds of Economic Policy, and Soft Currency Economics. They are short and easy to read even for those without an economic background. Frank Newman's books are a good addition but are best read with a little background.


Sunday, August 10, 2014

The myth of "unfunded liabilities"

There has been a growing voice of doom, gloom and despair rising in the blogosphere and political circles related to the national debt. In addition to the actual record of national "debt" (about $17.6 trillion at the time of writing), the hysteria rises to a fever pitch when the so-called "unfunded liabilities" (obligations of the government mostly for future retirement payments and medical costs) are tacked on. 

Almost $120 Trillion! It's an astronomical number, so it simply has to be bad, right? Clearly our government is insolvent and we are just one more economic crisis away from financial Armageddon. Or so the soothsayers predict (while they peddle gold and silver to the frightened sheeple).

Unfortunately, this view has become widespread among various political groups, such as the "fiscal conservatives" and particularly the Libertarians -- largely due the Ron Paul's outspoken criticism of the Federal Reserve and relentless promotion of gold-backed money. 

[Note: I have much respect for Ron Paul and sympathize with the "Austrian Economics" concerns over banking excesses, irresponsible lending practices, "malinvestment", credit-induced asset bubbles, the impact of wealth inequality and low interest rates on the poor and elderly, and even the overreach of government in certain ways. However, I disagree with their views on money and how to fix banking since they are premised on a flawed understanding of modern monetary systems.]

It has also become quite popular among the "religious right" and evangelical camps who have found in the dire economic predictions support for their views on the Biblical "End Times", which (especially in the bible belt US culture) is often understood to be precipitated by a dire spiral into world-wide chaos and rise of evil government(s). Understanding this sub-cultural influence (which also pervades American politics) is important in order to realize the difficult task of educating both the broader population and the political leadership on good monetary and fiscal policy. There is almost a desire on the part of some to see financial collapse as it justifies their world view, political aims, and religious beliefs.

Now it is not my intent here to discuss Biblical paradigms, but suffice to say that there are many attempting to crack this nut and illustrate a much more hope-filled Scriptural viewpoint to counter the American apocalyptic narrative. And I am also not suggesting that we will not have another economic crisis. We are in a cycle of booms and busts that has been going on now for decades, and there are real changes we can and should make to our financial and banking system to reign back in the business of speculation and fraud. But gold money and 100% reserve banking are not the right answer. 

Understanding and using modern money properly is what's desperately needed.

1) There is no insolvency for a currency-issuing nation unless it has significant debt denominated in another currency (e.g. Argentina, which has subjected itself to Wall Street and their favorite courts in New York), or promises to convert that currency to something it cannot produce (hence the problem with the gold standard). 

2) There is no inevitable collapse of the US Dollar unless folly rules in DC and our political leadership makes the monumental error of deliberately defaulting on our debt obligations. We can ALWAYS pay our USD debts (both foreign and domestic) - we are the monopoly issuer of our currency. Same with Japan, Canada, UK, New Zealand, China and so many other nations (but NOT Eurolandia!) 

3) There is no reason that the crises caused by the financial sector should necessarily devastate the nation as a whole or the real economy and it's base of employment. We have chosen to respond in a way that has helped the banks while providing little no support for households and businesses - it doesn't have to be this way, but that's a topic for another day.

So what about these unfunded liabilities? Isn't this just too much money? Won't we have to raise taxes really high to pay for it all? Won't they burden the next generation and leave us with decades of austerity? Is America at the end of its economic strength and we're entering the demise of our global power? 

Happily, the answers are all emphatically, "No!"

  • Firstly, unfunded liabilities are simply an accounting entry that tries to forecast what our future monetary obligations are in certain categories - usually social security and healthcare. Well why stop there? What about our unfunded liabilities for the military? Shall we forecast that spending out 20 years? What about congress and other government salaries, pensions and other costs? Are those "unfunded liabilities"? Why aren't they on the list? These numbers are accounting reports and simply have no meaning in terms of the ability to "afford" or "pay for" these needs.
  • Secondly, as the currency-issuer, we can ALWAYS direct our government to make any payments in our national currency. We can never run out! Yes, this means we have to be responsible and we need to realize the effect of such actions in the economy, but that NEVER means we can't afford to pay. If something is for sale in US dollars, the US government can always afford it. 100% of government spending is done by crediting bank accounts with new money. It's that simple. 
  • We've made spending look scary and complicated with things like government bond sales, trust funds, and special taxes named after the things we're spending on. These create a perception that our taxes fund social security or medicare or highway infrastructure, and that if the costs for these things rise our taxes will have to go up too! It simply isn't the case - we should know this simply by observing the Bush years where we cut taxes AND increased deficit spending (wars etc.) - and voila - it was all "paid for" without hyperinflation!
  • Recall Al Gore's "lock box" idea during his presidential campaign. Consider the folly of taking a trillion dollars that could be being productive today and literally locking it up. How does that help those in the future? All this does is increase the likelihood of unemployment today due to a poor economy (assuming that money could otherwise have been used to buy goods and services), and it does nothing to help the future government's ability to credit bank accounts with the right amount when the time comes.
  • There can never be an inter-generational fund transfer. Money changes hands between the living. Money today is used for people today. Money in the future will go to people in the future. No tax today can be saved up by the government and spent 20 years from now. Think of a Starbucks rewards card. Starbucks never has to collect cards back from customers in order to issue new ones out - they issue new cards (or add "Bucks" to the cards) anytime they want to if the demand is there. It is silly for Starbucks to "save" it's own rewards cards for future customers 20 years from now - once redeemed the "Bucks" vanish and they simply issue new ones whenever they need to. Their only constraint is in the real world - i.e. have they issued more than they can redeem for real coffee - they have no limit to how many rewards "Bucks" they create on their computers and put on cards. 

So we've established that the availability of dollars in the future is never the problem. Payments can always be made if the government exists and still taxes people in order to create ongoing demand for the money it creates. Remember that taxes serve a completely different purpose than "funding" government spending.  

Our "real" unfunded liability - the capital development of our nation

So what are our future liabilities? It's not money. Our real "un-produced" liability is the real goods and services necessary to meet the real needs of our nation/people. What do our future elderly and sick really need? They need doctors and nurses and caregivers to be educated and trained and paid so that there are enough of them to meet the real needs. They need good medicines and advances in medical technologies, and improved nutrition and wellness practices. They need hospitals and clinics and the ability to access them when they need help.

What does America need to prepare for the future and be prosperous now and then? It never needs to save up tax money to pay for things down the road. What we need is to develop the "capital" of our nation - both infrastructure and human capital. Investment today in research, funding promising technology advances that don't make economic sense yet for the private sector to invest in; develop state-of-the-art public infrastructure (roads, transportation systems, hospitals, schools, training facilities, research laboratories, etc.); provide universal high speed Internet access; support the continual improvement of our agriculture, food production, and the quality/nutritional value of our nation's food supply; invest in cleaner and sustainable energy sources that lower energy costs for business and consumers... all these things are what will ensure that future generations will have their needs met, not lock boxes full of "saved taxes".

Ironically and shamefully, our insistence that investment in these things is not affordable today is the very path whereby we will ensure that money won't be enough in the future. 

  • If we haven't trained enough doctors, no amount of saved money will meet the medical needs of the future. We will need doctors and equipment. 
  • If our public infrastructure is declining and our elderly can't reach a nearby clinic or hospital with adequate facilities and trained staff, a promise to pay the bill has little meaning. 
  • If our education, scientific research, technology development is all falling behind major world nations, we won't be able to buy our children's jobs back later.

In summary, there is no such thing as an unfunded liability for a currency-issuing nation. But the myth is keeping us from investing in the very things our nation needs to have a robust economy today and a prosperous future that provides for the needs of our people. The answer to everything is not "more government", but in areas of public infrastructure and capital development, the use of government money is critical and affordable

Sunday, August 3, 2014

Fly away Deficit Hawks & Deficit Doves: we've found the instruction manual

Deficit Hawks (usually on the political right) and Deficit Doves (usually on the left) both follow principles based on an out-dated and flawed understanding of state money. The good news is that we've rediscovered the monetary system instruction manual.

A quick reminder before we begin: a government deficit occurs when a government deposits more new money into bank accounts than they tax back out of existence. Such spending creates new money deposits for the private sector. Taxes removes some of that money. The "national debt" is the total accumulation over time of all money spent into existence by the government that has not been taxed out of existence. It represents the total net money savings of the private sector. 

Of course, this isn't how the Hawks & Doves talk, so let's summarize their views.

Deficit Hawks:

These folks think that budget deficits and the national debt are always bad and have a negative influence on the economy. Their perspective comes from the following beliefs:

  1. Deficits are inflationary: they hold the (neoclassical) view that economies tend toward full employment through price adjustments/free markets, and since deficits increase aggregate demand (i.e. more spending power in the economy), they will cause prices to rise. (See here for inflation post).
  2. Deficits make interest rates go up: they think that the government competes with the private sector for the limited pool of savings dollars. This competition for limited "savings" bids up interest rates.
  3. Deficits reduce private investment: following the previous point, they therefore think that when savings get "used up" to fund government debt, it leaves less for the private sector and reduces their ability to invest. (See post on these points here).
  4. The national debt leaves a burden for future generations: they somehow think that the next generation will have to pay off the "debt" left by our irresponsible choices, or at least leaving our children impoverished with the burden of huge interest payments. (See here.)
  5. Government deficits & debts are irresponsible - even immoral: we have all heard the statements "if we ran our business or household like the government, we'd be bankrupt". The Hawks equate a currency-issuing nation with a household and believe they should manage their budgets the same way. 

Deficit Doves:

Now how about the Doves? They still wring their hands about the "problem" of debt and deficits in the long term, but they try to argue that they still aren't quite as bad as the Hawks think, and if we take a different time frame to deal with the problem, we can allow deficits today to help our economy in the short term. 

Here are their assumptions - and they do raise some good points along the way if our concern is just the size of the debt (which, of course, it isn't):

  1. Let's inflation-adjust when we measure deficits & debt: this is one way to say that deficits really aren't as big as they seem if you measure today versus 50 years ago in total dollars - you have to look at debt-to-GDP ratios, and then it seems we can still afford more debt since the ratios aren't too much bigger.
  2. The Federal Government doesn't keep a capital account and it owns assets: businesses show capital investments on their balance sheet and account for their use over time. For the government, it just shows up as money spent that year. Doves argue this makes the "debt" overstated.
  3. What about intra- and inter- government debt? Some debt is "owed to itself" between government agencies so does that really count?
  4. A lot of debt comes from unemployment: tax collections drop and welfare payments increase when there is a recession. Doves say it's not fair to count that as normal or irresponsible government deficit spending.
  5. Why balance a budget over a year; why not a business cycle? There's nothing about a calendar year that makes sense for how government spending fluctuates. Doves look to ebb and flow over the ups and downs of the private sector, but still seek balance in the long run. 
  6. Only the living pay and get paid, so we really don't burden future generations: since future generations will hold the debt too, they will be paying themselves, and they also benefit from any assets created by today's spending.
  7. If there's any link between deficits and interest rates, it is reversed: Doves believe high interest rates cause deficits due to the higher interest payments.
With me so far? Have you identified your views along the way? Hopefully not, because both Hawks and Doves hold to a flawed view of government monetary operations.

Functional Finance (a.k.a. the Deficit Owls)

Stephanie Kelton has popularized the "Deficit Owl" terminology as a counter to the prevailing nonsensical alternatives (even with a fun YouTube book for children), but the ideas are not new. Most look back to the writings of Abba Lerner who explained the logical policy implications of how monetary systems actually function. 

So here are the basic principles that underlie the Deficit Owl "Instruction Manual":

  1. The purpose of taxation in a modern monetary system is to create demand for (or give value to) the state currency.  This is so that the state can then spend that money into existence and provision resources for the purposes directed by the people. So taxes don't fund the government. 
  2. The government has a monopoly on its money: the government has no need for the people's money; rather the people need the government's money, which only it can create. But, the government needs the people to need it's money - and that's why we have taxes! It's so that we accept the government's money in payment for goods and services. 
  3. Selling government bonds has nothing to do with raising money for the government: this gets a bit technical, but the reason for bond sales it to keep the banking system from having too many reserves which would collapse the interest rate. It has nothing to do with raising funds for the government in order for it to spend. (See here.)
  4. There is no real relationship between government spending and taxes: they are completely different operations serving different purposes, and each should be managed based solely on the effects that each operation has, not based on an artificial relationship between them (i.e. the "deficit").
  5. The Hawks "sound money, sound finance" view treats modern money as though it were a gold standard: this simply isn't how anything works, and it hasn't been this way for a long time. 
  6. The Doves are still wrong since even though they debate the size and cycle, they still give in to the Hawks that we ultimately need to balance budgets and manage the total size of our debt. We don't. We do need to manage the effect of our spending and taxing on the economy, so this is not a license to be irresponsible.  
  7. The national debt is simply an accounting function: it is a balance sheet record of how many reserves have been removed from the banking system (and the flip side, it is a record of the total financial assets held (financial savings), mostly by private parties). It is nothing to fear. It is not a "debt" in the way a business or household thinks of debt (or a government without its own currency for that matter - Spain, Greece, etc. all gave up these options to the great detriment of their people). 
  8. There is no future debt burden since the government, as a monopolist, can always pay its "debt" with the money it alone creates. It really just stops paying interest since "paying off the debt" just exchanges an interest-bearing "Treasury" with a reserve deposit at the Fed. (And of course it can always afford the interest payments since it creates those too!) But in fact there is unlikely a reason it will ever need to pay it off since the holders of that debt would lose the safest investment and their interest payments. 

The Instruction Manual

Sometime around the 1970's (likely due to the mistaken view that the oil crisis-led inflation was caused by too much government spending), we threw away the functional finance manual and have relied, miserably, on monetary policy alone. 

So how should we put this into practice? It's really quite simple and intuitive once you start with the correct premise. A currency-issuing nation has the ability to provision resources for its needs, but also the obligation to use that same system to keep the nation at full employment and to ensure there are no impediments to productive investment. In addition to the monetary policy of setting interest rates, this also means using fiscal policy via the effective adjustment of both taxation and spending - and casting off our debt/deficit fears.

So if the economy is in a downturn and there is insufficient spending to maintain growth, investment, and employment, then the correct "function" is some combination of lowering taxes and increasing spending. On the other hand, if demand is robust, investment is becoming speculative, and inflation is rising, then the appropriate "function" is a combination of increasing taxes (reducing spending power) and reducing government spending. Interest rate adjustments can still be somewhat useful for influencing investment but fiscal policy is the key.

Note that there is NO consideration here for the size of debt or deficits. It is simply irrelevant. What is relevant is the EFFECT of each operation on the economy. Too much spending and low taxes might one day cause inflation. That is an effect and should result in a change of function. Too little spending and too much taxation creates unemployment - that is the current effect of our lack of functional finance and reliance of the Hawks or Doves to lead us.

So join with the Owls. Teach your friends and children how money works. Let's free ourselves of the harmful and mythical practices that keep millions of our fellow citizens unemployed and that hold us back as a nation from investing in the necessary and beneficial capital, technology and services that we need to be prosperous, healthy, and free.