By Warren Mosler*
We can have BOTH low priced imports AND good jobs for all Americans
The problem is we are conducting Federal policy on the mistaken belief that the Federal government must get the dollars it spends through taxes, and what it doesn’t get from taxes it must borrow in the market place, and leave the debts for our children to pay back. It is this errant belief that has resulted in a policy of enormous, self imposed fiscal drag that has devastated our economy.
My three proposals for removing this drag on our economy are:
1. A full payroll tax (FICA) holiday for employees and employers. This increases the take home pay for people earning $50,000 a year by over $300 per month. It also cuts costs for businesses, which means lower prices as well as new investment.
2. A $500 per capita distribution to State governments with no strings attached. This means $1.75 billion of Federal revenue sharing to the State of Connecticut to help sustain essential public services and reduce debt.
3. An $8/hr national service job for anyone willing and able to work to facilitate the transition from unemployment to private sector employment as the pickup in sales from my first two proposals quickly translates into millions of new private sector jobs.
Because the right level of taxation to sustain full employment and price stability will vary over time, it’s the Federal government’s job to use taxation like a thermostat- lowering taxes when the economy is too cold, and considering tax increases only should the economy ‘over heat’ and get ‘too good’ (which is something I’ve never seen in my 40 years).
For policy makers to pursue this policy, they first need to understand what all insiders in the Fed (Federal Reserve Bank) have known for a very long time- the Federal government (not State and local government, corporations, and all of us) never actually has nor doesn’t have any US dollars. It taxes by simply changing numbers down in our bank accounts and doesn’t actually get anything, and it spends simply by changing numbers up in our bank accounts and doesn’t actually use anything up. As Federal Reserve Chairman Bernanke explained in to Scott Pelley on ’60 minutes’ in May 2009:
(PELLEY) Is that tax money that the Fed is spending?
(BERNANKE) It’s not tax money. The banks have– accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed.
Therefore, payroll tax cuts do NOT mean the Federal government will go broke and run out of money if it doesn’t cut Social Security and Medicare payments. As the Fed Chairman correctly explained, operationally, spending is not revenue constrained.
We know why the Federal government taxes- to regulate the economy- but what about Federal borrowing? As you might suspect, our well advertised dependence on foreigners to buy US Treasury securities to fund the Federal government is just another myth holding us back from realizing our economic potential.
Operationally, foreign governments have ‘checking accounts’ at the Fed called ‘reserve accounts,’ and US Treasury securities are nothing more than savings accounts at the same Fed. So when a nation like China sells things to us, we pay them with dollars that go into their checking account at the Fed. And when they buy US Treasury securities the Fed simply transfers their dollars from their Fed checking account to their Fed savings account. And paying back US Treasury securities is nothing more than transferring the balance in China’s savings account at the Fed to their checking account at the Fed. This is not a ‘burden’ for us nor will it be for our children and grand children. Nor is the US Treasury spending operationally constrained by whether China has their dollars in their checking account or their savings accounts. Any and all constraints on US government spending are necessarily self imposed. There can be no external constraints.
In conclusion, it is a failure to understand basic monetary operations and Fed reserve accounting that caused the Democratic Congress and Administration to cut Medicare in the latest health care law, and that same failure of understanding is now driving well intentioned Americans like Atty General Blumenthal to push China to revalue its currency. This weak dollar policy is a misguided effort to create jobs by causing import prices to go up for struggling US consumers to the point where we buy fewer Chinese products. The far better option is to cut taxes as I’ve proposed, to ensure we have enough take home pay to be able to buy all that we can produce domestically at full employment, plus whatever imports we want to buy from foreigners at the lowest possible prices, and return America to the economic prosperity we once enjoyed.
Come on Mr. Mosler:"along with very low inflation and a high standard of living due in part to the low cost imports."Those low cost imports were a mirage that masked that fact that peoples wages were stagnate. It was a way to placate the masses. Try again.
i betcha china floats their yuan quickly if this happens…
Does this mean that the Chinese government (and other creditors) don't have the potential to turn those figures into demands for actual goods, services, tangible ownership of USian property? If not, what's in it for them? If they do have such potential, what's so unreal about such debt?
Lastly, while I agree with idea of direct jobs program and job guarantee – $8 per hour is not enough. For a family of 4 that is still below the poverty line. How about paying a Universal Living Wage?
!!! Cut Taxes !!!The gov't spends money? No wait it really does not! What it does is debate for almost half a year on whether to spend it or not, then they devise a plan where in a few years it will give some money to some certain places with restrictions in some fashion. But when they give money to local municipalities or states for certain programs within their certain departments, is this really spending money. Money travels both ways up and down the pipe, regions get gov't money but still send money back through taxes. Why don't we eliminate some government offices, stop paying many taxes, and let them keep their money they were going to give us. If I owe you 100$ a month that I collect from local businesses and you need to give me 500$ for a stimulus, why don't you just let me not pay you for 5 months and call it good!"Dugger – Against Inequality / Leaky Buckets"!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Why don't we simply repeal the GATT treaty and cutoff this ridiculous situation where we have to compete with suppressive gov't systems that pay unlivable wages. Isn't this exactly what James Goldsmith warned us all about in 1995?
"So when a nation like China sells things to us, we pay them with dollars that go into their checking account at the Fed."This is how it works for an individual American consumer, such as me, buying something labeled Made in China? I don't pretend to know how how foreign trade works in this sense, but at the end of the chain is a Chinese company that manufactured the product, not the Chinese government. And unlike a sovereign government, a business needs real money, doesn't it?
I have a good deal of respect for Modern Monetary theory/chartalism. But one point:You say:This in fact is exactly what happened in 2000 when unemployment was under 4%This is according to U3. But the U3 measure of unemployment grossly underestimates the amount of unemployment in America.A better measure is U6: under Clinton this only ever came down to about 7%. And if you use the even broader measure of John Williams of Shadowstats.com, the US unemployment rate never came below 10% under Clinton. See http://www.shadowstats.com.
It will not be easy to solve the currency issues between US and China because each party looked at its own interest. China will keep its currency low as long as us dollar stay weak. There is no doubt that China is the biggest foreign holder of debt issued by the U.S. government. That serves the interests of both countries..China by keeping its currency low, its exports will be cheaper while at the same time this help U.S. government run a deficit and keep interest rate low. I f China were to dump significant amounts of treasuries ,interest rate would increase and the U.S. government would have to pay more to borrow. China would feel the pain too since it is heavily dependent on exports to the U.S. The solution I think is both U.S. and China must define a fixed exchange rate dollar /Yuan that benefit both parties