The Seven Deadly Innocent Frauds of Economic Policy

Economics Economics Questions
1

Hi guys,

I recently came across this guy Warren Mosler, who is currently writing a book about the “The Seven Deadly Innocent Frauds of Economic Policy”

Has anyone seen this? Here is a link the the “7 deadly frauds”: http://moslereconomics.com/2009/12/10/7-deadly-innocent-frauds/

Here are the frauds below. What do you think?

Deadly Innocent Fraud #1:

The federal government must raise funds through taxing or borrowing in order to spend. In other words, government spending is limited by the government’s ability to tax or borrow.

Fact:

The actual act of federal government spending is NOT operationally limited or in any way constrained by taxing or borrowing.

Deadly Innocent Fraud #2:

With government deficits we are leaving our debt burden to our children.

Fact:

Collectively, in real terms, there is no such burden possible. Debt or no debt, our children get to consume whatever they can produce.

Deadly Innocent Fraud #3:

Federal Government budget deficits take away savings.

Fact:

Federal Government budget deficits ADD to savings.

Deadly Innocent Fraud #4:

Social Security is broken.

Fact:

Federal Government Checks Don’t Bounce.

Deadly Innocent Fraud #5:

The trade deficit is an unsustainable imbalance that takes away jobs and output.

Facts:

Imports are real benefits and exports are real costs. Trade deficits directly improve our standard of living. Jobs are lost because taxes are too high for a given level of government spending, not because of imports.

Deadly Innocent Fraud #6:

We need savings to provide the funds for investment.

Fact:

Investment adds to savings

Deadly Innocent Fraud #7:

Your reward for getting this far is a look at what has become the most common criticism of federal government deficits:

Higher deficits today mean higher taxes tomorrow.

Fact:

I agree, the innocent fraud is that it’s a bad thing,
when in fact it’s a good thing!!!

The guy basically says that without government spending, there would be no dollars with which to buy goods. This might be true of a fiat monetary system, but to me, this mainly seems like accounting trickery that still redistributes wealth to whomever the government favors, regardless of how the nominal numbers pan out.

It also seems to me that with a free banking system, the balance between savings and investment and the interest rate would be balanced by natural market forces, not by whichever sectors a government prefers, so fiat money is not required for full use of resources.

What do you guys think? You can read through the book draft here: http://moslereconomics.com/2009/12/10/7-deadly-innocent-frauds/

2

Wow, that is a big pile o’ garbage.

“Government checks don’t bounce” ?

3

Well, he is right as far as sovereign currencies are concerned. The government can always put whatever amount it wants on the cheque and honor that cheque… the question is how does it affect resource distribution and inflation (i.e. printing a $1 trillion cheque and giving it to Joe will not bounce, but it will sure affect everyone else)

So, really guys? This guy is running for president… there has to be an Austrian rebuttal somewhere :stuck_out_tongue: I haven’t found any so far; instead, I’ve seen guys that think that HIS economics is a rebuttal to the Austrian view.

Are there any experts out there familiar with his work and that care to chime in?

4

Hmm, actually this seems to talk about this, although it did not appear in Mises search results when I searched for “Warren Mosler”; strange, because his name is in the post. It seems that the search of the main site skips over the blog and doesn’t bother searching it.

Anyways, http://blog.mises.org/12576/oh-wow-it-turns-out-that-we-can-print-our-way-to-heavenly-bliss/

5

I don’t believe any Austrian academic would waste his time rebutting this. Mosler’s points have all been addressed years ago.

6

With this in the news again, it would be good for a detailed rebuttal of each point, but of course if the austrians have bigger fish to fry I have no objections to that :slight_smile:

I’ve been reading through the thread, and the debate there goes into what I felt were the weak links in the chain; i.e. assuming that nominal effects would carry over into real effects. Then there are the moral sides of the issue (should one entity be able to manipulate purchasing power of a whole nation)? I think not…

7

#1. “The actual act of federal government spending is NOT operationally limited or in any way constrained by taxing or borrowing.”

Yes, this is true. They have a printing press. However the Weimar Republic and Zimbabwe tried this, and we know the results.

#2. “Collectively, in real terms, there is no such burden [of debt from Govt deficits] possible. Debt or no debt, our children get to consume whatever they can produce.”

Not sure what he means here. Why will they be able to consume it all? Won’t they have to repay the debt?

I guess he means they will take the honest moral way and just won’t pay it. Which means no one will ever lend money to the USA again. Considering we needed trillions of dollars to function so far, this sounds like a problem to me.

Or else he means the govt will do an equally honorable thing, print money to repay. Enter Zimbabwe. Not to mention that people will be reluctant to lend money ever again if they get paid back in inflated worthless money. See previous paragraph.

#3. “Federal Government budget deficits ADD to savings.”

Maybe it adds Zimbabwe dollars into your account. And of course changes all the money you already have saved into Zimbabwe dollars. Because deficit spending means inflation if paid for by printing. And if paid for taxing, it will indeed dimish your savings. There is no other way to pay for it. Oh, they mifght just default. Still, even that is a problem. Because if the govt borrows money and never repays, that has the same effect as if they printed the money. Zimbabwe.

#4. “Federal Government Checks Don’t Bounce.” [And therefor social security is not broken].

They don’t bounce, but they will be in Zimbabwe money. Because there is no other way to fund social security.

#5. “Imports are real benefits and exports are real costs. Trade deficits directly improve our standard of living. Jobs are lost because taxes are too high for a given level of government spending, not because of imports.”

First and second sentences are true. And so far so good, we are enjoying all those Chinese goodies for now. The catch is that trade deficits mean the Chinese have a trillion dollars of our paper money, to spend as they please here in the US. So far they have been lending most of it to the US govt. But one day they will wake up and want their money back. We will give it to them in inflated useless dollars, which will really upset them. They won’t sell us anything anymore unless we give them real stuff in exchange. Unfortunately, we don’t have anything to give them. So they won’t sell us anything, we don’t make anything, and our shelves will be empty.

Third sentence is right that jobs are not lost because of imports. Because we get richer from trade, as does the country we trade with. That’s what trade is about. If we are richer, we spend more, creating more jobs.

That jobs are lost because of high taxes is true. Also because of govt regulation and interference and meddling. I’m not sure what he means by “too high for a given level of govt spending.” He should have said “too high to enable a businessman to earn a profit and make it worthwhile to hire workers.”

#6. “Investment adds to savings.” [And therefor we don’t need savings to provide the funds for investment].

Yes, investment adds to savings. But it does not follow that therfor we do not need savings to provide funds for investment.

That’s like refuting the claim that we need seeds to grow plants by saying plants add to the amount of seeds in the world.

#7. “I agree, the innocent fraud is that it’s a bad thing, when in fact it’s a good thing!!!” [to be taxed more than we are already].

Does this really need refutation? Does anybody personally desire to be taxed more? Is something I hate and get no benefit from “a good thing”? Duh.

Totally false. What about the money we have in out pockets that the govt takes away from us in taxes in order to spend it? If we just had it in out pockets instead of paying it in taxes, we would find a way to spend it, rest assured.

Of course, there is the Keynesian question of “But what about the over stocked shelves of a factory that made too much of something nobody wanted? It is now operating at less than full capacity. People don’t want to buy what these jokers made already, how can we expect the factory to stay in business? Unless. of course, the govt taxes people or prints money and buys the unwanted useless things from the factory and pays the factory to make more.”

LOL. The answer is “That factory has to go out of business, and it’s plants and workers given over to making something people DO want. No point in keeping the factory on life support to make stuff people obviously don’t want.”

8

The sad thing about it is this is essentially the core of Keynesian policy recommendation today. Some here said there are bigger fish to fry. Others said that these arguments have been addressed before. If so I’d like to know when and by whom.

I’ve skimmed over the 63 pages of this paper, although I don’t have the technical proficiency to fully understand the author’s justifications here’s what I’ve been able to glean thus far.

First is that government conducts its exchanges solely through manipulating the balance of bank accounts and therefore it isn’t constrained by revenues and there’s theoretically no limit to how much it can spend. In other words, when the government spends a sum, all it does is write up some numbers in your balance books. The author thinks that there are no consequences at all to government debt, and that it is in fact good for the economy. In other words, the same rules that apply to the household do not apply to the government because somehow it has infinite funds to spend. However the author does contend that if the government spends too much, then it would lead to inflation.

Second is that taxes are inconsequential. Their only purpose serves to regulate aggregate demand. Moreover the central, perhaps most controversial argument is that all money, all wealth held in private hands in the country was created, caused by government spending as detailed above. This of course might seem preposterous to Austrian readers from the outright, but given the fiat nature of money showing up as digital values printed on our balance accounts, I believe there’s a gist of truth in the author’s argument.

Third is government deficit adds directly to the economy’s savings pool.

Fourth is that government surpluses are bad because they take away savings from the economy. The natural interest rate is 0 and this is the desired funds rate the FED should keep at all times.

Fifth is an exhultation to policy makers for creating make-work programs and higher social spending budgets (throughout the piece he always talks about our national objective being full employment/consumption). At the end of the piece the author seems to contend that taxes are being kept too high because of underconsumption and underemployment caused by lack of sufficient government spending.

The argument between Austrians and Keynesians I think comes down to the argument between a bottoms up vs. a top down look at the economy. Keynesians believe that all it takes to achieve full employment and prosperity is finding the right amount of money to spend to shore up holes in aggregate demand and investment, and consumer behavior in the economy and all the effects thereof could be simply controlled by setting taxes and interest rates.

The author tells the following anecdote to explain his view of the origin of monetary value in the modern economy.

In the early 1800’s the British wanted to get some of their African colonial subjects to till crops and work on irrigation canals. The Africans did not accept British currency, so they had no reason but to defer to their demands. So the British imposed a hut tax paid in British bullion. Then the natives all of a sudden started working and trading for the British because now their money had “value” to them. So basically monetary value is arbitrarily set and enforced by government decree.

9
  1. In a fiat monetary system government is the monopoly issuer of currency. Government accepts taxes in this currency and has to spend the currency before It taxes. Otherwise you cannot pay taxes to the government. As you can see taxes don’t fund government spending. Such money is government liability IOU. It doesn’t even make any sense for such government to borrow It’s own IOUs. It can just issue them. Issuing treasury security and taxes are not govrnment funding operations. Government can buy any goods and services that are available in the economy, there is no financial constraints for such a government. It doesn’t mean that government spending is not constrained at all. It is limited by real resources What are taxes and treasuries for? Government taxes to control aggragate demand in economy. If It just spent and never taxed It would cause demand-pull inflation. That happens when demand exceeds supply. Not when there are mountains of unemployed and economy operating under full capacity. Zimbabwe and Weimar are both cases of supply constraints. http://bilbo.economicoutlook.net/blog/?p=3773

http://en.wikipedia.org/wiki/Occupation_of_the_Ruhr

"#2. “Collectively, in real terms, there is no such burden [of debt from Govt deficits] possible. Debt or no debt, our children get to consume whatever they can produce.”

Not sure what he means here. Why will they be able to consume it all? Won’t they have to repay the debt?"

What he means is this: We cannot drive the car today that our children will produce in the future. It is not possible. You can consume whatever you can produce. There is no logical reason not to produce today because mainstream thinks It is financially unsustainable. Government does not borrow real resources from the future. Treasury debt is not true debt at all. #Won’t they have to repay the debt# No they won’t. All they have to do is add numbers to the system to pay intrest on It. Money monopolist is not a regular household. Money Itself is government debt, does the government have to repay It?

  1. Government has historicaly net deficit spent and never has to repay It. Every nation in the world who has fiat money with floating exchange ratye has done It. Otherwise they would not have money in the system at all.

  2. Like I said, government is not financially constrained. The question is: Are real resources available to provide SS recipients the goods and services that they need? If the resources are available then the services can be provided to them. There is not going to be more resources available to them if we use austery measures today and keep economy operating under full capacity.If we don’t invest in education, roads and so forth chances are the future services provider to SS recipients will be less productive.

  3. US government doesn’t need chinese to buy treasury debt. If China is willing to send It’s goods to the US and wants to keep numbers on Fed saving account(that’s what treasury debt really is) so be It. China in this case doesn’t want anything real, this is their problem. Imports are benefits, you are correct. Now this Chinese disire to get US issued financial assets doesn’t mean that US has to keep It’s economy operating under full capacity. US can use It’s reasorces for something else that creates value. Imports are benefits, remember! There is no reason for currency wars like mainstream thinks. If the USD exchange rate goes down then so be It.

  4. This is a common fallacy. Saving for an individual usually means that she is not spending her full income. Let’s say Linda is consuming less two hamburgers each week and saves now that money. This means that someone else in economy dissaves the exact amount that Linda is saving. On the aggregate level savings are not increased by this. Government deficit spending adds net savings to the economy.

  5. ##Totally false. What about the money we have in out pockets that the govt takes away from us in taxes in order to spend it?##

How did that money get in your pocket in the first place.

10

“Collectively, in real terms, there is no such burden [of debt from Govt deficits] possible. Debt or no debt, our children get to consume whatever they can produce.”

This only makes sense to me if “collectively” means people of the Earth. Yeah, sure, while the trade balance with extraterrestrials is still 0.

11

More dreamng in technicolor it seems? Went to his site and stopped at the top of the page where it’s subheading reads, "MOSLER’S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it."

Guess that about sums up his perversion..1+1 can equal 3, just not forever.

12

I don’t understand his point about children and debt. Sure my kids will be able to consume what they produce, but they will also have to use a significant portion of their earnings to service the debt run up by the government now. Is he saying they’ll repudiate the debt?

13

He is wrong. Your kids will not be able to consume what they produce, their creditors will consume what your kids produce. That’s the whole point with debt. He’s right that the future as a whole will not be poorer because we make debt, humanity as a whole will be able to consume what they produce. But those with debt will be in the service of those they owe money to. Which is not China, as commonly asserted, but banking elites at home.

14

I especially like this one. When did the measure of ‘brokenness’ become whether or not the checks bounce?

15

Mr Mosler defended himself at length

on this thread: https://forum.freecapitalists.org/t/an-austrian-critique-of-mmt/17182/4

and here: https://forum.freecapitalists.org/t/an-austrian-critique-of-mmt/17182/38

and here: https://forum.freecapitalists.org/t/modern-monetary-theory-and-chartalism/15858

16

I didn’t know that Smiling Dave. All this has been discussed already I guess.

17

“The guy basically says that without government spending, there would be no dollars with which to buy goods. This might be true of a fiat monetary system”

This is very true about fiat monetary system. Next time you fight against deficts you should use the same

rhetoric you are using here. We cannot build transpotation systems because It interferes with free market

forces, we cannot educate our children, invest in science, service our elderly because It interferes with free market forces

This is exactly what you should be saying and not that It is unsustainable, not that the government will go broke, have a debt crises etc.

18

Kristjan,

You forgot to mention green energy and winning the future.

Welcome to the forum.

I assume from your posts that you are a supporter of Mr Mosler’s economic theories, and also that you have not read the basics of Austrian Economics [=AE around here].

May I suggest you start with the free, easy to read, fun book, “Economics in One Lesson”?

You might also like Bastiat’s “That Which is Seen and That Which is Unseen”.

What I’m saying is that the simple ideas laid out in those books show why it is impossible for us to win the future by having the govt invest in any of the things you mentioned. And the reason is not because it interferes with free market forces.

If you are able to summarize what their main idea is, and think you are able to rebut it, I would be interested.

19

###Social Security is broken.

Fact:

Federal Government Checks Don’t Bounce.

I especially like this one. When did the measure of ‘brokenness’ become whether or not the checks bounce?##

Since 1971 in case you didn’t know. Government debts are settled in currency It issues in case you didn’t

know that either.

Smiling Dave, very good. Since you know a little bit more about fiat monetary system now I suggest next

time you lobby against budget deficits just tell them how It is. "we cannot utilise idle resources because

we cannot win the future". It might sound reasonable. Being in the same boat with religious Peter Schiff

cult who is talking about debt crises and government not being able to service It’s debt is not very reasonable.

You understand It now, don’t you?

Wish you luck!

20

1)The actual act of federal government spending is NOT operationally limited or in any way constrained by taxing or borrowing. Then why did the EU order Greece to cut spending and raise taxes? Under this assumption they should have left them alone since there’s no need for taxation and borrowing.

2)Collectively, in real terms, there is no such burden possible. Debt or no debt, our children get to consume whatever they can produce. So patently ridiculous I won’t even bother commenting.

3)Federal Government budget deficits ADD to savings. Then the EU should order all the member States to increase deficits because it would increase savings and hence capital available to the economy at large.

4)Federal Government Checks Don’t Bounce. Uh? So it’s good as long as the money keeps coming, regardless of where it came from?

5)Imports are real benefits and exports are real costs. Trade deficits directly improve our standard of living. Jobs are lost because taxes are too high for a given level of government spending, not because of imports. First you say government spending doesn’t matter and then that it translates in lost jobs.

6)Investment adds to savings. But where did investment capital came from in the first place? Thin air? So indebtment and inflation actually add to savings?

7)I agree, the innocent fraud is that it’s a bad thing, when in fact it’s a good thing!!! What, higher taxes? After saying they result in lost jobs?

I am no economist and I have issues grasping many advanced concepts but I have nothing on this chap.