Myths, Scares, Lies, and Deadly Innocent Frauds, Updated: Part One
(Author’s Note: This post updates Part One of a series reviewing Warren Mosler’s book: The 7 Deadly Innocent Frauds of Economic Policy. The updating is prompted by a post by Hannah at DailyKos offering a “. . . a Review Sort of” of Warren’s book.
Hannah’s post begins by stating Warren’s “deadly innocent frauds” (DIFs), and then goes on to point out that they are not innocent and then to make a number of claims about Warren’s beliefs which clearly indicate that she neither read his book, nor researched his actual positions stated frequently on his web site, nor bothered to note Warren’s economic truths that his book counterposes to his DIFs. My point here is not to beat up on Hannah for a careless treatment of Warren Mosler’s views, but rather to point out that his actual views were given very short shrift in her piece which also gave no hint of how important they are to progressives and to economics. My original three post review of his book tried to convey the significance of his work, and so I thought it would be appropriate to update these posts now, and remind people of the full scope and importance of what Warren has to say in this easily accessible book.)
One characteristic of modern political and economic discourse is frequent asserting of beliefs about economics and money that have been variously described by some observers as ‘myths’, ‘scares‘, ‘lies’, ‘innocent frauds’, and ‘deadly innocent frauds’. ‘Innocent frauds’ was the courteous labeling of such beliefs by John Kenneth Galbraith in his last book, The Economics of Innocent Fraud. Warren Mosler, an economist, presidential candidate, and sometime co-author of James Galbraith, has added the modifier “deadly” to Galbraith the elder’s name for this belief. Mosler’s label is particularly relevant today because, given the various problems and crises currently faced by the United States, and the way it has faced them since the Fall of 2008, acceptance of these beliefs or “deadly innocent frauds,” could well doom the United States and its people to a bleak future of economic, political, social, and cultural instability.
The once proud land of opportunity could well be reduced to a gray land of despair and submergence of most of its people in a wholly unnecessary age of lost hope and increasing despair for American parents as well as their children. We see this age taking shape through the economic policies of the Obama Administration and their impact, and through the reaction of the Occupy Wall Street (OWS) movement to economic events. We can now see clearly, in a way that we perhaps could not in early 2009, that America and its dreams could well be sacrificed to a harsh fiscal and economic discipline based wholly on deadly innocent frauds, scares, myths, and outright lies. I’ll now, following Warren Mosler’s treatment, examine some of the most influential of these, and also rely in part on the earlier work of Cavanaugh, Boettger, and Eisner.
Our Sovereign Fiat Currency System and Our Inability to Involuntarily Run out of Money
First, all the DIFs are frauds in light of the changeover of the United States to a fiat money system during the Nixon Administration. As Warren describes it:
Historically, there have been three categories of money: commodity, credit, and fiat. Commodity money consists of some durable material of intrinsic value, typically gold or silver coin, which has some value other than as a medium of exchange. Gold and silver have industrial uses as well as an aesthetic value as jewelry. Credit money refers to the liability of some individual or firm, usually a checkable bank deposit. Fiat money is a tax credit not backed by any tangible asset. In 1971 the Nixon administration abandoned the gold standard and adopted a fiat monetary system, substantially altering what looked like the same currency. Under a fiat monetary system, money is an accepted medium of exchange only because the government requires it for tax payments. Government fiat money necessarily means that federal spending need not be based on revenue. The federal government has no more money at its disposal when the federal budget is in surplus, than when the budget is in deficit. Total federal expense is whatever the federal government chooses it to be. There is no inherent financial limit. The amount of federal spending, taxing and borrowing influence inflation, interest rates, capital formation, and other real economic phenomena, but the amount of money available to the federal government is independent of tax revenues and independent of federal debt. Consequently, the concept of a federal trust fund under a fiat monetary system is an anachronism. The government is no more able to spend money when there is a trust fund than when no such fund exists. The only financial constraints, under a fiat monetary system, are self imposed.
Mosler identifies 7 DIFs, all of which are related to the basic idea of fiat money or “soft currency.” The first of these is the idea that in order to spend money, the Government must first raise it through taxation, or borrow it. This is based on the idea that money is either a material thing or backed by a material thing having intrinsic value, which the Government possesses in limited quantities and may run short of.
However, fiat money is not like this. Put simply, the Government (encompassing the combination of the Congress, the Executive, and the Board of Governors of the Federal Reserve system) declares it into existence, in whatever quantity it likes. It can print it! It can credit some entity’s account with as much of it as it likes! And it can withdraw it from circulation by taxing, charging fees, or confiscating it according to law. From the Government’s point of view, the money it causes to exist is legal tender and all entities under its authority must accept it as legal tender in return for all goods and services for sale in the US, and as repayment for all debts incurred by the Government. The status of money as legal tender is backed by the Government’s authority under the Constitution and ultimately by its legal monopoly of the instruments of physical coercion within the borders of the State.
Since the Government has unlimited authority to create its own non-convertible currency that has a floating exchange rate in international markets, it is obviously false to say that it is, or must be constrained in its spending, by its ability either to tax or to borrow. It can impose such constraints on itself if it wants to, of course. And, as it happens the United States foolishly does that, as do other nations sovereign in their own currencies, because they are still laboring under old conceptions of the nature of money, appropriate for a commodity rather than a fiat monetary system. Nevertheless, the belief that the Government is so constrained is the first of Mosler’s 7 deadly innocent frauds, because the truth is that:
“Government Spending is NOT operationally limited or in any way constrained by taxing or borrowing.”
Now, if one can but accept this truth, it has many implications. One implication is that the Government never can have any solvency problem with respect to repaying debts it has incurred in its own currency.
It doesn’t matter how large those debts are.
It doesn’t matter how large its obligations are.
It doesn’t matter, from the viewpoint of solvency, how frequently it has to fulfill obligations, or how much money it has to create to pay its obligations.
It never has to run out of money as long as it is willing to create it, and not to “obey” any constraints it has imposed on itself. The simple fact is:
it always has the capability to create the money it wants or needs to spend..
Another implication is that:
it never need be short of money to do or spend for things it either wants to do, or wants to facilitate, or cause or encourage to be done.
It is never true that “we don’t have enough money to do x, or y, or z,” when “we” is the Government or the Nation. Rather, it is only true either that we don’t 1) fully understand our power to create money or 2) want to do the things that people are asking us to do for reasons we don’t want to talk about, so we use the excuse that money is limited instead.
Importance of the First Fraud
This first deadly innocent fraud is of great importance in our present political context. For example, why did President Obama limit the stimulus bill to around $800 Billion in size? And why did he take Medicare for All off the table, at the beginning of the health care reform process? I’m sure there were many reasons for both, but in both cases the idea that greater spending would create much larger federal deficits, and that in the face of these deficits he would either have to raise taxes or borrow more money, may have been a very important consideration.
Or, if he did understand that Federal spending is not limited by taxes or borrowing, he perhaps felt that he might not be able to escape the cultural influence of the first deadly innocent fraud, and explain to the American people that the increased deficit was nothing they had to worry about. Whatever the reason, Obama let Congress know that the “health care reform” bill had to be limited to less than $1 trillion in Federal Government expenditures over 10 years, a level that would have been dwarfed by Medicare for All, but also dwarfed by the amount of money the private sector would have saved if the Conyers-Kucinich Medicare for All bill, HR 676 had passed. He also let Congress know that the bill would have to pay for itself over 10 years according to CBO projections.
Why did Obama decide to limit the size of the stimulus package to roughly $800 billion, when some of the best macro-economists were telling him it needed to be at least twice that size? The answer, again, is either that he believed himself that government spending was ultimately limited by what the Government could raise by taxing or borrowing, or he thought that he couldn’t explain to others that this is not true, and therefore also that he wouldn’t have been able to defend himself politically against charges of irresponsible deficit spending coming from the Republicans and, perhaps, the blue dog Democrats.
More generally, why has President Obama, except in the case of the War and the financial system bailouts, approached other legislation from the viewpoint of deficit neutrality? Why has he applied that lens to reinventing the energy foundation of the American Economy, to legislation aimed at climate change and environmental protection, to infrastructure spending, to education, to new legislation aimed at creating jobs and lowering unemployment, and to temporary extensions of payroll tax cuts? It is either because he, himself believes in the first deadly innocent fraud, or it is because he thinks that the belief in it is so deeply ingrained in others, that he can’t educate people to the truth about our soft currency money system, and can’t defend himself or the Democrats against the old-time budget balancing religion, that past generations of Democrats thought they had overcome a long time ago.
Whatever the reason for Obama’s adoption of the deficit neutrality point of view, we know now (see his speech at Brookings early on and his actions since) that he was fixing to apply it during the remainder of his Administration, with the exception of the wars, and bank bailouts. The Administration has been making noises about “entitlement reform” for a long time now, as well as continuing to express its fealty to the ideas of deficit neutrality in program spending, or “paying for” what it wants to do, and also long-term deficit reduction.
The MSM has responded with a constant drumbeat of articles and analyses raising the issue of the size of the deficits, the national debts, and the possibility that purchasers of US Securities will raise interest rates creating a burden the Government cannot handle. For more than two years now these predictions of higher interest rates in the US have proven false again and again, though this hasn’t stopped columnists from such outlets as the Washington Post, CNN, the Wall Street Journal and numerous others from echoing the economic.fiscal world view and arguments advanced by Peter Peterson, David Walker and the Fiscal Times advocating fiscal austerity to counter the inevitability of inflation or even hyperinflation.
The MSM also often says things like: “It’s unlikely that the nation will ever default, but neither is that any longer unthinkable,” a statement that, of course is based on belief in the deadly innocent fraud that the Government’s resources are limited to what it can raise by taxing and borrowing, since if the Press understood that the Government’s fiat money can be created in whatever quantity the Government needs (see here and here for example), it would clearly see that there never is any possibility of default, unless the Government has been captured by the belief in the deadly innocent fraud itself, and declares a default, when all it really has to do is to make the money needed and repay its debts in its own fiat currency.
And so the first deadly innocent fraud maintains its destructive grip on American society, economy, and politics. The old-time religion, represented by people like Mike Spence, Olympia Snowe, Paul Ryan, Ben Nelson, Max Baucus, Peter Peterson, David Walker, and yes, evidently, Barack Obama, expects us to reinvent out economy and its foundations and to adapt to the new challenges of the 21st century, while refusing steadfastly to use the tools we can apply under our fiat monetary system. In fact, it expects us to ignore that we have such a system, and to act instead according to the economic principles that governed us when we were still on the gold standard.
It expects us to seek a budgetary surplus relative to our fiat currency, and to forget about evaluating a particular Government expenditure by the proper standard of whether its balance of benefits to costs in the value or non-monetary sense is positive for us and American society. If we persist in obeying the dictates of this first deadly innocent fraud, American prosperity will never be re-captured. The American Dream will die, and Democracy in America will, increasingly, be replaced by plutocracy, a process that has now been going on for 33 years since President Jimmy Carter initiated it.
In the next installment in this series, I’ll discuss some other deadly innocent frauds analyzed in Warren Mosler’s book, and also their implications for current issues.