Forum:Monetary Sovereignty

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Interesting stuff, but sets off my crank alarms since he seems so sure that all our economic problems could be wiped out if we did things his way. Or maybe I'm reading it wrong. It's based in Keynesian (maybe post-Keynesian?) economics, and essentially says that any country that has it's own currency can borrow, lend, and spend as much as they want, and should! Curious to hear other people's thoughts.

http://mythfighter.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/

He ends it with this:

Ten Steps to Prosperity:

1. Eliminate FICA
2. Federally funded Medicare — parts A, B & D plus long term nursing care — for everyone
3. Provide an Economic Bonus to every man, woman and child in America, and/or every state a per capita Economic Bonus.
4. Free education (including post-grad) for everyone.
5. Salary for attending school
6. Eliminate corporate taxes
7. Increase the standard income tax deduction annually
8. Increase federal spending on the myriad initiatives that benefit America’s 99%
9. Federal ownership of all banks
10. Tax the very rich (.1%) more, with higher, progressive tax rates on all forms of income

—–

10 Steps to Economic Misery:
1. Maintain or increase the FICA tax.
2. Spread the myth Social Security, Medicare and the U.S. government are insolvent.
3. Cut federal employment in the military, post office, other federal agencies.
4. Broaden the income tax base so more lower income people will pay.
5. Cut financial assistance to the states.
6. Spread the myth federal taxes pay for federal spending.
7. Allow banks to trade for their own accounts; save them when their investments go sour.
8. Never prosecute any banker for criminal activity.
9. Nominate arch conservatives to the Supreme Court.
10. Reduce the federal deficit and debt
Sacrelicio (talk) 04:55, 8 January 2016 (UTC)

Sounds more like a Modern Monetary Theorist than a typical Keynesian (though they are related). In general, the technical statements are good (though you have to be careful in parsing), but the normative policy statements make quite a few unstated assumptions about the goals to be achieved with policy and gloss over complicating factors that in the real world lead to rather different policies despite economists generally knowing this stuff already. I can go into details if you want. 192․168․1․42 (talk) 12:10, 8 January 2016 (UTC)

Details would be great. I've never been all that well versed in economics, and despite being liberal with regards to government spending, I always thought it was VERY important to be "fiscally responsible" and balance budgets and whatnot and that's a constant roar in today's political environment. Most people I know, even those I know who are relatively liberal, buy into this as well to some degree, and everyone I know who is at all conservative or libertarian seems to consider government spending to be the worst thing ever.Sacrelicio (talk) 15:55, 8 January 2016 (UTC)

That's always the problem, the details, as many things sound really great in sound byte format if you word it right. However, they can be interpreted or misinterpreted to mean virtually anything. The way it is worded it also seems like it set's many points as a series of dichotomies - either it is or isn't meeting a point - with no grey area as well. Like one point of eliminating any corporate tax one can point to taxes on profit, dividends, payroll, sales taxes (especially on durable equipment), capital gains (as companies invest additional profit), pass through profits for LLC/LLP's... which one can argue eliminates most taxes while desiring a massive increase in expenditures while reducing the deficit. How would that work mathematically? No idea as it doesn't give more than vague bullet points. -EmeraldCityWanderer (talk) 16:20, 8 January 2016 (UTC)

Fiscal responsibility is, as mentioned in the article, very different for entities that control the currency they pay their debts in than it is for the rest of us. When we buy something, we need to get the money from somewhere, whether savings or a loan; we can't just make money as needed. Therefore, in order to avoid things like insolvency and bankruptcy, expenses have to be approximately in line with income over time. However, an entity that can control the currency it uses to pay bills, such as the US federal government, has no such requirement. There is no amount of US Dollars that the federal government can't pay, since it can arbitrarily make more. Since US Dollars are perfectly fungible, it can be useful to consider Dollars as being created when the government spends them and destroyed when they are collected with taxes/fees/etc. The main factor that prevents governments from just creating money to pay for stuff is inflation, which is closely related to the money in an economy divided by the goods in the economy. The economy tends to grow over time, so there needs to be some deficit spending to keep pace and prevent deflation, and most modern nations actually shoot for small and steady inflation for its economic incentives. The problem is that most modern nations have expenses that are greater than what is needed for that, so in order to prevent inflation, some money has to be removed from the economy to counter some of what's being injected by government spending. Taxes are one way of doing that, and in discussions of federal taxes it can be helpful to keep in mind that their modern purpose is to lower inflation rather than pay for things directly. The advantage of taxes is that the money they collect is permanently removed from circulation. The disadvantage is that they reduce economic activity by removing the money that would have paid for it. Alternately, the government can sell bonds (take loans) to temporarily remove money that will return to the economy later with interest. So long as this debt grows more slowly than the economy on average, it can be serviced indefinitely without budgetary problems, and an advantage of maintaining a decent-sized debt is the option of using it to regulate private-sector interest rates to stabilize the financial system when things get out of balance. A disadvantage of maintaining a large debt is that, by way of interest payments, it is effectively a transfer of money from taxpayers to investors. This acts to concentrate wealth, which brings various economic and political problems.

There is no hard limit on what the US federal government can spend, but as a practical matter involving the balancing of multiple goals (economic growth and stability, predictable interest rates to encourage long-term investment, societal wellbeing, etc.), taxes and loans are important supplements to deficit spending. For historical and political reasons, there is plenty to optimize in the arrangement, however. One example mentioned in the article is Social Security and the FICA tax. The tax was instituted to "pay for" the spending. Looking at the big picture, it's not a very optimal setup. Social Security mainly goes to low-income people who tend to promptly spend it on stuff. As such, its "fiscal multiplier" effect is large, and increasing such spending (especially on the specific areas with the largest multipliers) would improve the economy. In contrast, the FICA payroll tax is regressive, drawing money away from those most likely to spend it. A more efficient way of removing money from the economy (as in the removal results in less loss of economic activity) would target money that is less likely to be spent, such as that of high-income earners and investors. Some of the most efficient taxes are estate/inheritance taxes, which are out of favor at the moment.

With that in mind, a lot of the differences in policy proposals in the article also come from different ideas about how to best arrange society. Massive deficit spending does have its advantages after all (the economy went crazy during WWII, for example), and these advantages are reckoned to be more important than avoiding the problems that arise from high inflation and instability. In fairness, optimizing the rest of the system would greatly reduce the problems of inflation resulting from paying for most things with deficit spending. The critical problem is that politics involves compromise, and half measures wouldn't work out very well, especially in the current political climate. To use a metaphor to compare the schools, many modern economists (who generally focus on getting the private economy to run well) propose government intervention to balance the engine of the private economy, giving it gas when it slows down, and backing off when it gets hot to reduce the risk of damage (bubbles). Modern Monetary Theorists propose running the economy on straight nitromethane with incoming fuel as the heat sink. Done right, it can do some pretty cool stuff, but it carries a significant risk of blowing up on you. 192․168․1․42 (talk) 04:06, 10 January 2016 (UTC)

So average people just don't understand how things are actually run, and instead think that food stamp funds are drawn directly from their pockets, Social Security is running out of money, China is going to take over because of our debt, the government is running out of money, etc. rather than realizing that the government tweaks our economy in different ways to keep it going. What's the "blowing up on you" part? People getting pissed off about inequality? Bubbles and busts and chaos?Sacrelicio (talk) 01:26, 11 January 2016 (UTC)

Most people aren't very familiar with technical stuff outside their personal experience, and personal finances give the wrong impression in this case. This includes politicians who might be expected to know better, but they also have incentives to misconstrue the situation for their own gain. For example, most federal debt is owed to US citizens (Have any savings bonds? You own some of the debt.), but China offers a spooky foreign power that can be used to direct the narrative along desired paths. And the government's modern role isn't to "keep the economy going" so much as the goal is stabilization. In the 1800s, when industrialization and modern financing were well under way but the government did little to intervene, violent booms and busts were the norm. Think of the Gilded Age alternating with the Great Depression every few years. This wasn't a very desirable state of affairs, so people worked out how to moderate the swings.

As for blowing up, this will take a bit of explanation. In a balanced economy, means are directed to ends, and resources are allocated according to prices that accurately reflect scarcity and demand. Getting the balance just right is hard given limited information and analytical ability, so mismatches are common as people react to changing conditions and try to anticipate the future. From time to time, a lot of people get it wrong all together, and overinvest in a segment of the economy that doesn't actually support that level of investment. Hence bubbles. When people catch on, the bubble pops, causing disruption in the markets related to the one that was overvalued, which can have ripple effects through the general economy.

Now consider the US economy during World War II. The Depression was on its way out, but things weren't back to normal. With the prospect of a global war, the government basically told the private sector, "Build as much war materiel as you can, and we'll buy it all at prices that will make you very rich." GDP growth soon reached the highest on record, unemployment reached the lowest on record, and government total spending and deficits reached their highest-ever percentages of GDP. By the end of the war, the US represented more than half of global GDP, and occupied probably the most dominant position of any nation ever. Stimulating that level of activity again sounds pretty cool, right? Well, there are problems. Inflation was high by historical standards even with efforts at price controls. When government-directed spending dominated the economy, private sector mechanisms weren't very effective at directing resources to meeting the economy's intrinsic demands, and while standards of living increased, it was not by nearly so much as the macro indicators would suggest. And when the war ended, there was a crash as industry realigned to work for private demand again. Things were much better than before in most respects, but this misalignment has implications.

As a medium-term policy to fight a world war, massive defcit spending worked out pretty well all around. The problems were significant but relatively easily dealt with, and a few years after the war, the US was by far the most prosperous it had ever been. When massive deficit spending is to be used as a long-term economic plan, those problems don't have a cutoff to keep them from growing. In such an economy, government stimulus is so large that tracking actual economic demand becomes hard, and bubbles of unprecedented size would probably be the norm. Along with that, inflation would likely be high and unstable, which would make investment and other economic planning harder. Of course, it's possible in principle to run a situation like that without bubbles and with stable inflation, but that would take a heretofore unprecedented competence at economic planning, as well as consistent goals to be achieved. In a "blowup" scenario, bubbles, uncertainty, and misallocation of resources gets so bad that large sections of the economy collapse, bringing down economic and political institutions, and possibly the government itself. Think something like the collapse of the Soviet Union in fast-motion. 192․168․1․42 (talk) 06:00, 11 January 2016 (UTC)