Thursday, January 07, 2010

Take My Taxes, Please

(just kidding)

Warren Mosler explains a simple truth that boggles the mind if you truly think about it. Tax paying and tax collecting in this current monetary system is not at all what you think it is.

In a nutshell this is what Mosler says about tax collecting...

Try to pay your taxes in cash... Head down to the IRS with a wad of cash. You'll find the IRS doesn't really want your cash, they won't quite know what to do with it. Access to your bank account is preferred. The simple truth is the government doesn't actually use your taxes to pay for anything.

Say you owe a $1000 in taxes. When you send your $1000 check to the IRS what happens? The government goes into your account that has, let's say, $2000 in it, and they change the 2 into a 1. Now you have $1000. That's it. No real money ever changed hands - in any form -some numbers changed on some spreadsheets in a couple of databases.

Now your waiting for your Social Security check. You are expecting $2000. So the government goes into your account and changes the 1 into a 3. Now your balance is $3000. Again no actual money was ever touched.

Fed Chairman Bernake recently explained this quite clearly to Congress. When asked where the money comes from to pay the banks Bernake said the Fed simply changes some numbers on the bank's ledger and presto the banks have the money. No armored car shows up with bags of money to replenish the vault. Just some numbers shuffling around on some spreadsheets.

This is how it works.

Mosler asks? So why does the government tax us if they don't really use our money to pay for anything. It's quite simple, he says, yet the current President and his economic advisers don't appear to understand the way our monetary system works. The reason the government taxes us is to take money away from us so that when government spends they don't cause inflation.

Mosler offers this simplified explanation: consider the total economy as if it's a department store where everyone works to make all the products to fill the store. All the money we earn as workers and owners and all the profits are just enough to buy all the goods in the store. How is the government going to buy anything if all of us have enough money to buy everything on the shelves? You end up with too much money chasing too few goods and the result has historically been inflation.

The government takes away some of our spending power by taxing us so there are enough goods left over for the government to buy. The purpose for taxes is to create a balance in the economy. Essentially to keep us from competing with the government for goods and services.

Obviously this economy is out of balance. The government is actually just a score keeper who's job it is to keep the economy going. Taxes are a tool the score keeper employs to keep the economy moving along smoothly. It sounds rather simple and it is, but the game is played out by the action of billions of transactions and complicated maneuvering within a set of rules and regulations.

Now my 2 cents...

The economy gets out of balance for any number of reasons but it's mostly the government itself fiddling with rules and regulations that favor special money interests like the big banks, investment houses, big industries and foreign interests which essentially throw things out of whack. Both political parties are supremely guilty of mismanaging the economy in order to shower special favors in a quid quo pro game of feathering nests. When the Federal government and the Federal Reserve then step in to bail out firms that played the risks and lost big it throws everything out of balance. Add the uncertainty the current administration is fostering, and the inaction of the former administration to prevent the credit system collapse then you have a decent picture of what has happened. For now we need to spend and we need to obtain credit - take out loans - so that new money can enter the economy and start to create the jobs we need.

So Mosler is convinced that the hand wringing over deficit spending is misguided. In order to re-balance the economy either taxes need to be cut or government needs to spend. Right now we are heading for deflation before we would ever get into any significant inflation. There are too few dollars chasing too many goods. This is actually worse than inflation.

Warren Mosler has good economic credentials and seems to know what he is talking about - he is currently an official candidate for President in 2012. He have previously run for Congress. I know nothing about him other than what I can read doing a cursory Internet search. Mosler earned his B.A. in Economics at the University of Connecticut and went on to become Chairman of Consulier Engineering Inc, President and Founder of Mosler, Founder and Principal of Illinois Income Investors & AVM L.P. as well as President and owner of Valance Co. and is a Board Member Enterprise National Bank.

He is also a featured speaker at many Tea Party rallies, and shocks more than a few with his notion that government deficits are not the bogey man everyone seems to think. Me, I think deficit spending is fine if the spending actually goes for pro growth/pro employment causes.



Tom Nugent said...

Warren and the economists he works with are at the leading edge of understanding how the economy works. His "soft currency" economics paper explains how the system is no longer tied to the gold standard even though most modern economists thinks as though it is. His 7 Innocent Frauds paper clarifies most aspects of how the economy really functions.

rge270 said...

What Mosler is saying isn't shocking at all once you notice that we changed completely from a Gold-Standard based currency to ... a public-spending based currency. We did that in 2 steps, domestically under FDR, and internationally under Nixon in 1971. One seemingly unnoticed consequence of those changes was that the nature and meaning of taxes, federal-level-public-spending, and national "deficit" spending changed forever ... even if very few have noticed yet.
The only thing that's shocking is how long it's taking everyone to notice that we're no longer on a Gold Std.

StaticNoise said...

Thanks for the education. I started getting into this topic in 2008 when TARP was being debated. In my ignorance I thought the fact that people weren't taking out loans and paying off their debt was a good thing. I discovered that commercial bank loans are nearly the only way "new" money is injected into the economy. The eye opener was how government fiddling with tax laws and the credit/interest environment was the real culprit in this financial mess.