Skip to content

Firestone’s letter to Obama

Joe Firestone writing in New Economic Perspectives, outlines a  solution to US problems based on Modern Monetary Theory.  Here below is just a snippet  (it is very long) but it captures the main themes.

The solution is not so straightforward for Ireland, a non-sovereign government in the EMU, but there might be ways around that… keep following this blog.

….Bad ideas about spending constraints on Governments sovereign in their own currency

In addition, to the mistakes in your ideas on fiscal sustainability and fiscal responsibility, Mr. President, you also seem to have ideas about spending constraints on the United States Government, and other Governments sovereign in their own currency, that do not exist. On a number of occasions now, you have told the American people that the Government is “running out of money,” it needs to fulfill its obligations. Surely, Mr. President, you jest. Hasn’t your Secretary of the Treasury, or Mr, Bernanke told you yet, that the Government of the United States, can always cause non-Government accounts at the Federal Reserve Bank to be marked up by any amount needed to meet obligations? Governments sovereign in their own currency are like scorekeepers at games. They neither have nor don’t have money. Instead, they have the power to mark up or mark down non-Government accounts (or Government accounts), such as Social Security accounts or that matter). This power is not dependent on anything else. It is not dependent on the international markets. It is not dependent on foreign Governments. It is not dependent on commodity backing of their currency. It is a matter of fiat, which is why such currencies are called fiat currencies.

Mr. President, the United States of America can’t go broke. It has no solvency risk. It can always meet its obligations. It doesn’t really fund its expenditures with tax money, or borrowing, and it never needs to do so in order to “fund”, even though it does tax and also borrow money to regulate inflation and establish interest rates. This doesn’t mean that the Government can spend without limit. It can spend so much that it creates inflation or the risk of it. But this is not a solvency issue. It is not running out of money. So, please don’t tell us any more that we are running out of money or respond to policy proposals by asking “How are you gonna pay for it?” Because I know, and so should you, that we can always pay for it. The real issue here is what the impact will be if we do pay for it, whatever “it” happens to be.

Bad ideas about deficits and debt numbers and our children and grandchildren

In many of your statements, Mr. President, you have echoed the view of the deficit terrorists that unless we bring our deficit and debt numbers under control and reduce Government spending on job creation and the recovery, and other very necessary things, we will be bequeath to our children and grandchildren huge debts that they will personally have to repay. Mr. President, that view is ridiculous, and if you believe it, then I have a very big bridge to sell you.

In fiat money systems, like ours, when Government expenditures exceed revenues, a deficit doesn’t have to be reduced by increased tax revenues, or other transactional income, nor does it have to be financed by borrowing. Instead, since money isn’t limited by its relationship to a material commodity, the money necessary to make Government expenditures can just be created at will by the Government. It need not be the product of either increased taxes or debt financing, as it must be in commodity-backed systems.

Whatever Government debts we leave to our children also need not be repaid by them through either further borrowing, or increased taxation. These debts, just like our own, can be managed by our children and grandchildren by creating whatever money they need to pay their obligations when they fall due. Of course, if they want to reduce their well-being, they can raise taxes or borrow money to handle those deficits. But what they do to pay Government obligations, and the precise size of the burden they choose to assume is up to them. It has nothing to do with us, so long as they are wise enough to retain our fiat money system.

As Warren Mosler says: “our children get to consume whatever they can produce.” Unless they choose not to produce it, because they raise taxes and cripple economic productivity, in a vain and misguided attempt to pay down a fiat debt with money they might otherwise use for investment. In short, Mr. President, and contrary to what Peter G. Petersen may have told you, there is no debt burden for our children and grandchildren. That there is, is a myth, a fairy tale, “a deadly innocent fraud, as Mosler says. It is not reality, and we ought not to make it reality by believing it and acting accordingly.

Bad ideas about inflation
Mr. President, your reluctance to incur further deficits in the service of fixing the economy and solving other problems, suggests that you believe that inflation is something we have to be concerned about now; even with close to 20% of our labor force either under- or unemployed, and a substantial risk of a double-dip recession given the failure of the private sector to begin to pick up the spending slack, and the plans of many other nations to implement austerity programs.

Under conditions of a healthy economy and full employment, deficit spending can create “demand pull” inflation by creating too much aggregate demand. However, we have not seen a case of that kind of inflation in modern times in a nation like the United States, sovereign in its own currency with a fiat money system. The possibility of such inflation in a situation like the one we find ourselves in, is purely theoretical. And the theory that demand pull inflation is a serious risk is refuted by the history, or lack of it, of inflation in such systems. It is refuted by the history of the 1990s in this country. It is refuted by the history of Australia since the 1970s where the unemployment rate has been considerably lower than here and social safety net spending has been much higher. It is refuted by the absence of a single modern case of this kind of inflation.

If Government spending created full employment, the price of some commodities might go up, but, on the other hand, the housing market might recover some of what it has lost, and the lives of 30 million under- and unemployed Americans would be greatly improved. So, Mr. President, are you really intending to tell us that not increasing the prices of gold and silver is more important than creating full employment for those 30 million?

Don’t you understand that our real wealth produced at any point is equal to our domestic production, plus what we import, minus what we export? When you make cutting Government spending, more important than increased spending to enable full employment, you are acting against both increasing domestic production and increasing imports. So, you’re acting to reduce our creating more real wealth. Why? Because you believe in a theory about demand pull inflation that has been refuted again and again in modern times? Give us a break. Don’t make a false economic theory more important than our lives and the futures of our children.

Bad ideas about policy proposals for fiscal sustainability

Mr. President, your ideas about fiscal sustainability seem to be restricted to wearing green eye shades, cutting Federal spending, and in this way both reducing deficits and the public debt-to-GDP ratio. I’ve already written about why that’s not increasing fiscal sustainability, and why policy proposals advocating reducing Government spending are bad ones. I am not saying that reducing spending on programs that are not producing value or that are having negative impacts isn’t always a good idea. Cutting such spending gives Government more room to spend on things actually produce value. We need a lot more of that kind of cutting, and perhaps I’ll write another letter, about all the things that could be cut, whose elimination would improve our overall situation. But what we also need is much greater Federal spending on useful measures that will create jobs and add to savings in the non-Government sector.

The most important of these things is a Federal Jobs Guarantee (FJG) program for all Americans who want a job. Such an FJG should be at a wage of $8.00 per hour in counties with the lowest cost of living in America and should be cost-adjusted upwards in proportion to cost of living variations from the lowest cost of living counties. An FJG job would carry normal fringe benefits including vacation time, holidays, and most importantly full eligibility for employees in the Medicare program. Such an FJG program would eliminate unemployment, and at the same time increase the number of Americans with access to health care. Since the wage paid in the FJG would be the minimum wage, plus cost of living adjustments, the program would provide a built-in protection against wage-driven price increases. It would also provide an immediate boost in consumer demand. As the FJG program employed more and more people, and business responded to increased consumption, with increased activity and investment, it would end the recession, and also end most of the poverty we have in America, and it would do so quickly, over a period of months and not years, and would have cost the Government roughly $500 Billion, a fraction of the money you’ve spent on various top-down approaches to stimulating the economy.

In fact, Mr. President, had you established an FJG program, when you came into office in the Winter or Spring of 2009, it is likely that the Great Recession would be history right now, and that the private sector would have begun growing again. And with that growth we would also have seen a shrinking in the FJG program since, as the private sector began to hire again, it would have hired FJG employees, at higher wages than the minimum, to staff up. This points up one of the great features in the FJG program. It’s an automatic stabilizer, a creative way to expand the safety net. When times are bad, it expands, and with it so do Government deficits. But as it boosts demand, and begins to call forth renewed private sector activity and investment, it shrinks, and with it so do Government deficits, until full employment is reached.

Even though the FJG would by itself solve the recession problem, since it would take some time to work, it’s wise to do some things that would have immediate effects. Warren Mosler, the Independent Party candidate for the US Senate, in addition to suggesting the FJG, also favors a Federal Payroll Tax Holiday to immediately boost demand and a $500 per person grant to every State. With the new funds, the States could avoid cuts in employment and key services and could avoid the impending fall in aggregate demand as they implement planned sizable cuts in their payrolls.  (link to full article)

Posted in News.

Tagged with , , .