Saturday, June 25, 2011

Perception vs Reality : Paul Ryan vs MMT

Continuing on from my last post where we looked at Warren Mosler's MMT (Modern Monetary Theory) and pondered its legitimacy. I find that I struggle reconciling what MMT says with the current debate over the debt, the deficit and Paul Ryan's budget. Paul Ryan is a hero and some circles, frightening in others. To some he is just plain wrong.

Ryan, (R-WI) the Chairman of the House Budget Committee, produced what some would say was a radical budget for 2012. The bill passed in the House and it failed in the Senate. Some praised Ryan for being a grownup by facing the debt problem with a solution instead of more rhetoric. It called for drastic cuts in Federal spending, restructuring some entitlement programs - Medicare in particular - and streamlining tax policy. Ryan along with many conservatives and centrists believes government spending is out of control and is absolutely dangerous to America's future. Yet according to MMT deficits don't matter at the Federal level, that the U.S. government cannot run out of money. Well, which is it? Is debt and deficits the death of us or are they no big thing?

The average person sees the U.S. government "spending money it doesn't have" and tries to relate it to their own lives. Obviously if we average Joes and Janes kept spending and spending well beyond our ability to even pay the interest let alone the loans themselves then we would soon be bankrupt and in the poorhouse. Can the U. S. government become bankrupt? MMT says no, Paul Ryan says it already is. Most of us see Paul Ryan's point of view because it's something we can related to. This is the perception we all live under right now.

What if MMT is right and theoretically the Feds can't really run out of money. In fact the Federal government doesn't have to actually borrow cash, sell bonds or even collect taxes to get the money they need to run the country? Well, consider for a moment that the value of our currency is confidence based. If every one is losing confidence because the Federal Reserve pumps billions of dollars into the system which devalues the dollar and in turn causes inflation (in the cost of energy and food in particular). Is this some kind of false reality?

How many times do you have to hear the old phrase that perception IS reality? Whether MMT is technically right doesn't matter if the wheels that turn the world economy are based on the perception that the U.S. government is broke. When American citizens and foreign governments lose confidence in the U.S. dollar all the theory in the world isn't going to change that.

Why are there no brave politicians espousing the "truth" of MMT? An oxymoron, there are no brave politicians. Or are there? Is Paul Ryan brave for proposing a massive restructuring of venerable government programs because even though in reality the government will always pay for Social Security and Medicare the perception is that they will bankrupt the country.

Perception vs Reality.

Tuesday, June 14, 2011

Is Warren Mosler right?

I've been following the proclamations of Warren Mosler for some time now. I always come away thinking that what he says is just too good to be true. What he says in a nutshell is that deficits don't matter. With everyone in Washington, Wall Street and Main Street decrying Federal budget deficits as the concrete around the ankles of this economy it seems impossible that everyone is dead wrong and Warren Mosler and merry band of MMTers are right. Mosler has a nice explanatory article on the Huffington Post that appeals to progressives not to follow the conservatives down the deficit doom and gloom road. It's short, and worth reading.

MMT stands for Modern Monetary Theory. MMT was born when President Nixon removed the U.S. currency from the Gold Standard creating a free floating fiat currency tied to absolutely nothing. It works by plying simple accounting methods. So, as Mosler points out:

...when the government spends or lends, it does so by adding numbers to private bank accounts. When it taxes, it marks those same accounts down. When it borrows, it simply shifts funds from a demand deposit (called a reserve account) at the Fed to a savings account (called a securities account) at the Fed. The money government spends doesn’t come from anywhere, and it doesn’t cost anything to produce. The government therefore cannot run out of money, nor does it need to borrow from the likes of China to finance anything.

It seems the value of our money is the value we give it. Our confidence in the almighty dollar is what gives it power, oh yeah, and demand too... Currently demand for goods and services is down, way down. Aggregate demand which combines government demand and private sector demand is what drives the value of the dollar. All this deficit talk and wringing of the hands is what is driving down aggregate demand and that is not good for anyone.

Mosler's main point is since there is no shortage of goods, labor or materials to drive the economy to full employment and full funding of our entitlement obligations, the only restraints are self-imposed by a deficit reduction mentality. Conservatives, he says, are wrong headed (as opposed to evil) about deficits and debt, and liberals are equally wrong headed about taxes.

Convincing conservatives that deficits (at the Federal level) don't matter and convincing liberals that high taxes only serve to put the brakes on demand (and real economic growth) is an awfully large mountain to climb. If he is right then we are wasting so much time and so much human potential with self imposed and painful austerity.

The most interesting idea is his call to suspend FICA taxes:

...many MMT progressives today favor the immediate suspension of all FICA taxes, which are highly regressive, punishing taxes on people working for a living that no progressive should tolerate. Eliminating FICA fixes the economy the progressive way, from the bottom up versus the highly regressive top down trickle-down economics practiced by the current administration that would have made even President Reagan blush. Yes, the last two years have seen positive real growth, but with employment remaining near post depression lows, and wages under continuous downward pressure, executive compensation just hit new highs and stocks more than doubled, as this administration presided over the largest transfer of wealth from the least to the most wealthy in the history of the world.

I can see the wisdom in this if one believes that deficits don't matter and that taxes stunt private sector demand. Frankly, there is no "lock box" for Social Security, there never has been, so we wouldn't be robbing from grandma. This will be a tough sell, but it has an appeal that can't be dismissed easily. FICA taxes are the most punitive taxes we have. A FICA holiday would add billions to the economy every week. If you believe, as MMTers do, that taxes don’t really serve to collect revenue, but are more like a gas pedal that controls the speed of the economy. When the economy is going too fast, raising taxes is like taking your foot off the gas slowing it down. Right now a very large tax cut is called for and a FICA holiday would be the simplest to enact and the most fair.

I really do want to believe that MMT is right and the Mosler is an oracle, but like I said it seems too good to be true - and when things seem to be too good to be true they usually are.


Monday, June 06, 2011

The Real Welfare Queens

We've all been there, standing in line at the grocery store behind someone using their EBT card or food stamps or whatever you call it. We wonder if her mother before her relied on the government to feed the family and if her daughter, busily playing with the button that moves the conveyor belt, will follow in her footsteps. We look at the kind of food on the conveyor and think, these people eat better than I do and not a dime is coming out of their pocket. We lay seven meager items on the belt and get charged $51.67. It just seems unfair.

On the heals of reading Michael Lewis' "The Big Short" (see review from and earlier post) I have been reading more about the financial crisis of 2008 and becoming more and more sick about it. The waste, fraud and abuse we suspect of welfare Mom's is spittle in the wind compared to fraud practiced on Wall Street and Washington DC. Our anger, our disgust is completely misplaced. The fact is the relationship between Washington DC and Wall Street is criminal. It does not matter who the President is, the revolving door that spins between executive positions in the Treasury and the White House into all the big Wall Street firms is one massive conflict of interest. The corruption is almost unfathomable. That's really all you can call it, corruption.

Whether or not TARP or any of the other government rescue "loans" saved the financial system from total collapse is irrelevant, what's transpired since the fall of 2008 is the biggest financial crime in all of history.

The roots of the problems go back to 80's and especially the 90's, but now that it has come to a head you'd think something would be done about it to prevent such a disaster from happening again. If you thought that you'd be wrong.

Wall Street traditionally made it's money on commissions being brokers, traders and advisers. In the new century the Internet changed the way many investors did their business and Wall Street needed new sources of revenue. Amazingly in the late 90's deregulation fell into their lap paving the way for complex, potentially dangerous financial instruments called derivatives. Many pushed strenuously for their regulation, but some members of Congress and White House appointees (Democrats and Republicans alike) were so entirely opposed that in 2000 a bill was passed specifically prohibiting any such regulation.

These derivatives made it possible for banks and mortgage lenders to minimize their risk if (when) there was a default. This is what fueled the boom in subprime mortgages. Fannie Mae and Freddie Mac, quasi-governmental lending agencies, were front and center of this scheme. Financial institutions on from Wall Street to Berlin combined these risky loans and made them seem as reliable as government securities. All of this is detailed in "The Big Short". Employing the notorious credit default swaps, Wall Street firms blatantly, knowingly, sold fraudulent securities to gullible clients while betting at the same time that they were going to fail.

This ponzi scheme like all ponzi schemes crashed. This time no one went to jail, no one was shamed, no, this time there was a government bail out as a reward. Sickeningly the executives at Fannie and Freddie as well nearly all the big Wall Street firms walked away with millions - millions in government money. The numbers are so staggering and the fraud so complex that most Americans can't or won't even let themselves be upset by it. Worse, many people just smile slyly and say "boys will be boys" as if we should expect no less. But it's the overweight welfare Mom shopping with abandon that should be cut off!

Barack Obama thinks we should pay more taxes, that the government needs more revenue... While it's clear that most of the lefty criticisms of "the rich" are true they fail to see that it's their "guy" who is and has perpetuated this fraud for decades to keep the money flowing into the party and the campaigns. Barack Obama was the #1 recipient of campaign contributions out of Fannie, Freddie and Goldman Sachs. Boys will be boys. Meanwhile he'll try to convince us that a husband wife team that owns a little business generating $250,000 a year are the filthy rich.

The Republicans may be saying no to higher taxes, but they are no pillars of virtue in this whole affair. The incestuous relationship among the Wall Street elites and the executive branch (of any Preisdent) should be severed. The notion that the finances of the nation are just too complicated for someone without a Goldman Sachs background is preposterous. Isn't clear by now that the qualifications for high government posts are how well you can game the system for the benefit of Wall Street. Most of the filthy rich up and down Wall Street were Republicans at one time. No, the Republicans are no better at all.

Americans need to start getting educated about this and learn to direct their anger at the real welfare queens in NY and DC and not the welfare Moms at their local grocery store.