Sunday, April 01, 2012

We can have our cake and eat it too

For a few years I've been following a movement that argues for the acceptance of Modern Monetary Theory (MMT) as the basis for fiscal policy at the Federal level. Every time I examine it I come away with two thoughts - the first being it's too good to be true, and second, why isn't this being accepted by the body politic of the day? It should easily appeal to the polar opposites on the moonbat side (leftists) and on the wingnut side (right-wingers) since it seems to grant that the major tenets of liberalism and conservatism are both right. Essentially in tough times high government spending is good, necessary even and low taxes (at the Federal level) is even better.

MMT was born when Nixon switched the U.S. from the gold standard to a fiat currency. That subject in and of itself is a fascinating thought exercise, but clearly for another day. The switch off the gold standard changed the nature of our government’s relationship to the economy. It is, as with all economics, a complicated set of accounting logic and relationships between the Federal Reserve, member banks and the Treasury Dept. When discussed it makes certain amount of sense (and maybe that's why it faces such and uphill battle) but it seems to be completely out of sync with the arguments coming out of the high taxing liberal types as well as the small government conservative types.

Warren Mosler, one of the principal proponents of MMT declares: Taxes function to regulate aggregate demand, and not to raise revenue per se.

In Mosler's book SEVEN DEADLY INNOCENT FRAUDS OF ECONOMIC POLICY the first two simply fly in the face of everything we hear every single day.

So in an economy where the number one problem is low demand it makes zero sense to raise taxes on anyone. Logic according to MMT says lower taxes drastically. On the other hand demand is demand whether it be government or private sector demand. Aggregate demand is combination of both and it's aggregate demand that is weak. It doesn't matter which side generates demand, in a slow economy where the private sector is not generating demand then government has to, hence high Federal government spending.

These things fly in the face of everything you hear out of politicians and pundits on both sides. The President is going to run on the fact that we have deficit problems because the "rich" don't pay high enough taxes. The Republicans, Mitt Romney for example, says the deficit is a result of too much government spending. MMT says deficits don't matter, period.

Under a fiat currency system taxes and deficits matter when the economy is running too hot. Right now high deficits aren't leading to hyper inflation, they didn't in Reagan's days either. However, higher taxes as the President is calling for will reduce demand, and instead of filling government coffers it will depress the economy and lead to even higher deficits.

All that said according to MMT the Federal government doesn't have to borrow or tax to pay the it's bills since it is the issuer of the currency. There is no need for us to continually wring our hands over the Chinese buying all our debt etc etc. The Chinese will get their return when the bonds come due from the same Treasury appratus as Social Security reciepents get their checks. On the tax side it is aurgued that taxes create demand for the currency and therefore are completely necessary. MMT says we have plenty of demand for the currency with state and local governments who actually do have to tax and borrow for revenue.

So when we see the lower and middle class demanding deficit reduction and the wealthy goading them on through the media while lobbying for lower taxes for themselves we come to realize that this is backwards. The lower and middle class are demanding cuts in the very things they need, right? Well, according to MMT, yes...

Rodger Mitchell in a 2010 blogpost laments that the lower and middle class  - the very folks that have been screwed by the shenanigans in Washington and on Wall Street - are demanding:
1. Cuts in Social Security
2. Cuts in Medicare
3. Cuts in  Medicaid
4. Cut the Supplemental Nutrition Assistance Program (SNAP) aka “food stamps”
5. Cut support for community health centers
6. Cut support for job re-training
7. Cut support for affordable housing programs
8. Cut funding for the Administration for Children and Families
9. Reduce the number, pay and retirement benefits of federal employees
10. Eliminate subsidies of student loans

All this in the name of deficit reduction. Goaded on by conservatives and Tea Partyers they demand cuts in the programs that level the playing field for them. It's not to say that reforms and efficiencies aren't needed for one or all of these "programs", but these people have been paying for these things with their taxes for decades. So now when they're needed the most they want them gone because the deficit is too high according to the prevailing attitudes of market economics. Free Markets are great things, but there is the simple truth that markets are basically amoral, and amoral entities generally don't care for anything but raw numbers, fact and figures, and the real needs of real people are not so cut and dried. There is a place for (good) government programs. What we don't need is more sweetheart deals for politically connected cronies and bailouts for the very wealthy.

Mitchell explains on the other hand that liberals constant demand for more taxes is just as damaging, in fact both he and Warren Mosler call for the elimination of FICA taxes altogether:

Then we have FICA, that tax that doesn’t pay for Medicare, doesn’t pay for Social Security, and in fact, doesn’t pay for anything. It is the most useless, destructive, ignorant, regressive tax ever invented – a masterpiece of screw-the-poor.

For salaried folks, it usually is the biggest tax they pay. For the rich, it barely is noticeable, since it cuts off at $107K, and who needs salary, when you have capital gains at the lowest tax rate? Though the pretense is that business pays half, FICA functionally is a 15% payroll tax on the great unwashed.

I have been told 10's of billions of dollars a month would pour into the economy if FICA went away. The economic impact of this money floating about productively in the private sector is incalculable, but it's safe to say it would be good for everyone. 

What are we to make of this? Those of us on the center/right are programed to believe that government spending is a necessary evil and should be kept to the bare minimum. Those on the left are just as convinced that the evil rich have been basking in ill-gotten gains and it is the government's role is to play Robin Hood. MMT tells us we are being lied to or at least willfully mislead into supporting the very things that keep us poor. MMT says we can have our cake and eat it too.

What's not to like about that?



TJW said...

Wow! I think I get what you're driving at here but, reading it all but gave me a head ache. I think the reason it is not being universally accepted is that I as a Wingnut, (a singularly useful hardware item) would instinctively oppose anything supported by a Moonbat, (a dangerously vicious creature that eliminates into the face of its victim before injecting its eggs into the victims neck for a lengthy and painful incubation) and vice-verse.