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.