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By William K. Black

(Cross-posted with Benzinga.com)

James Bovard of Cato wrote an article entitled “The Food-Stamp Crime Wave” on June 23, 2011 for the Wall Street Journal.

http://online.wsj.com/article/SB10001424052702304657804576401412033504294.html?mod=WSJ_hps_sections_opinion

Bovard shows no awareness of criminology, but what he described was the creation of a criminogenic environment. A criminogenic environment has such perverse incentives that it produces widespread crime in a particular field of activity. Non-criminologists frequently have difficulty believing that fraud can become common. They often believe that fraud can only arise among “a few rotten apples.” This view is naïve and crimionological research falsified the claim over a half century ago. Bovard is correct, therefore, that fraud can become common in an industry. This is particularly true if fraud produces a “Gresham’s dynamic.” George Akerlof explained this point over 40 years ago in his famous article on a market for “lemons” (1970).

“[D]ishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.”

Bovard purports to be a libertarian, yet he ascribes the creation of the criminogenic environment in food stamps to the three “de’s” – deregulation, desupervision, and de facto decriminalization. He is also upset that the federal government, in the context of food stamps, has failed to sufficiently distort consumer decision making. I address his substantive position on food stamps in another column.

This column explains his argument as to how the three de’s created a criminogenic environment in food stamps and shows how his reasoning would compel him to demand the end of the far more powerful and destructive criminogenic environments that drove the Great Recession (and the second phase of the S&L debacle and the Enron-era accounting control frauds).

The first element Bovard cites as producing a criminogenic environment is deregulation.

“Thirty-five states have abolished asset tests for most food-stamp recipients. These and similar “paperwork reduction” reforms advocated by the United States Department of Agriculture (USDA) are turning the food-stamp program into a magnet for abuses and absurdities.”

The second element he cites is de facto decriminalization due to the Obama administration’s near indifference to fraud.

“The Obama administration is far more enthusiastic about boosting food-stamp enrollment than about preventing fraud.”

Bovard argues that desupervision led to de facto decriminalization.

“The USDA’s Food and Nutrition Service now has only 40 inspectors to oversee almost 200,000 merchants that accept food stamps nationwide. The Government Accountability Office reported last summer that retailers who traffic illegally in food stamps by redeeming stamps for cash or alcohol or other prohibited items “are less likely to face criminal penalties or prosecution” than in earlier years.”

Bovard is implicitly raising the danger of a Gresham’s dynamic among retailers. Large, fraudulent retailers can obtain vastly more from food stamp fraud than can recipients. An honest retailer cannot compete against a large, fraudulent retailer. This turns market forces perverse and can drive honest retailers out of business. Fraud begets fraud.

Bovard appears to recognize that vigilant regulation is essential to successful fraud prevention and prosecution. When the regulators do not make anti-fraud efforts a priority the prosecutors are so overwhelmed that the criminal justice system breaks down. He cites the example of Wisconsin.

“The Wisconsin Policy Research Institute concluded: “Prosecutors have simply stopped prosecuting the vast majority of [food-stamp] fraud cases in virtually all counties, including the one with the most recipients, Milwaukee.””

In criminology, we refer to this as a “system capacity” problem. Bovard argues that the desupervision has effectively destroyed the capacity of the system to respond to the “crime wave” produced by the criminogenic environment. Bovard concludes that the criminogenic environment was inevitable because cheaters can profit with greatly reduced risk of prosecution.

Environments become intensely criminogenic when the federal government engages in the three “de’s” and preempts state anti-fraud efforts. This was an infamous feature of the Bush administration’s response to the fraudulent mortgage lenders, and Bovard argues that the Obama administration is intensifying a criminogenic environment in food stamps by following similarly fraud-friendly policies.

“The Obama administration is responding by cracking down on state governments’ antifraud measures. The administration is seeking to compel California, New York and Texas to cease requiring food-stamp applicants to provide finger images.”

So, how much does the food stamp fraud cost? Bovard does not provide the published estimates, but notes that 44 million Americans are recipients of food stamps at a total cost of $77 billion, or under $2000 per recipient. Individual frauds, therefore, obtain relatively small proceeds. Fraudulent retailers are the ones who are enriched by food stamp fraud. Bovard, however, concentrates entirely on fraudulent recipients and several corrupt public officials.

The GAO estimated, prior to the adoption of electronic benefit transfers (EBT) that food stamp trafficking represented 3.7% of annual benefits. Food stamps are now paid through EBT. This has greatly reduced the incidence of fraud by recipients, in some studies by an estimated 75-81 percent. Whitmore, Diane. “What are Food Stamps Worth?” (July 2002: p. 6 & n. 5).

https://www.msu.edu/~dickertc/301f06/whatarefoodstampsworth.pdf

Bovard missed the real food stamp crime wave (in terms of a much higher incidence of fraud) that peaked over a decade ago.

What we need now is to get Bovard and the Wall Street Journal to apply this same reasoning and passion about the dangers of the three “de’s” producing intense criminogenic environments to the three “de’s” that produced our recurrent, intensifying financial crises. My prior columns have explained at length how the three “de’s” produced the criminogenic environment that drove the “epidemic” of accounting, securities, mortgage, and appraisal fraud that hyper-inflated the bubble and led to the Great Recession. Bovard’s column was the most e-mailed WSJ article for two days. Food stamp fraud is important and Bovard’s rhetoric stirred the WSJ readership to rage. The accounting control frauds that drove the S&L, Enron era and ongoing crises are massively greater and more destructive and they involve our most elite CEOs becoming spectacularly wealthy at the expense of the public. The incidence of banking and mortgage fraud is far greater than food stamp fraud. The direct dollar losses due to these frauds are massively greater than food stamp fraud. The moral culpability and the financial gain of the CEOs who led the accounting control frauds are incomparably greater than that of a typical fraudulent food stamp recipient. The typical fraud consists of a recipient who is actually eligible for food stamps because she is impoverished selling some of those stamps to obtain income to purchase non-food items. Those non-food items can range from paying the rent and health care costs to illegal drugs. The systemic damage caused by the fraudulent CEOs – the Great Recession – has no counterpart in the food stamp context.

Bovard’s column allows us to test two rival theories. Hypothesis one: Bovard and the WSJ readers were enraged that the three “de’s” produced a criminogenic environment and led to a “crime wave” of fraud because they are enraged by fraud and the theoclassical dogmas that lead us to repeatedly adopt the three “de’s” despite the recurrent disasters they cause. Hypothesis two: Bovard and the WSJ readers were enraged by fraud by poor people and refuse to apply the same logic and moral outrage to the vastly greater and more damaging crimes led and generated by elite financial CEOs. Instead, they will blame “the government” and make excuses for the elite frauds. My bet is on the second hypothesis, but I hope to be proven wrong.

By L. Randall Wray

(Cross-posted with Benzinga.com)

It was obvious to those who understand Modern Money Theory that the set-up of the European Monetary Union was fatally flawed. We knew that the first serious financial and economic crisis would threaten its very existence. In a sense, it was from the beginning much like the US in 1929, on the eve of the Great Depression—with excessive lender fraud, household and business debt, and a boom that had run on too long. Anything could have set off the crisis that followed—just as discovery that Greece had been cooking its books sealed Euroland’s fate. And like the US post-1929, Euroland has struggled to understand and to deal with the crisis. Meanwhile, it is slipping into another great depression.

Many economists and policy-makers—even fairly mainstream ones—have come to recognize that the barrier to resolution is the inability to mount an effective fiscal policy response. And that is because there is no Euro-wide fiscal authority. Hence, the half-measures undertaken by the ECB and other authorities to put band-aids on the debt problem.

To be sure there is a conflict among authorities over the solution—given absence of a fiscal authority. Many want to impose austerity—equivalent to medieval blood-letting. These argue that the real problem is the lack of self-discipline in the periphery countries. Note that this view is shared by the elites in those countries! Many of them would be happy to throw their countries into deep depressions that wipe out all resistance to wage-cutting and slashing of all social programs that benefit working people. That is always the preferred solution of unenlightened elites. Through this method, wage costs in the periphery nations can be cut, making production more competitive.

This of course is also the position of the most powerful member of the EU. Prudent Germany had held wages in check over the past decade while ramping up productivity. As a result, it became the low cost producer in Europe and can even go toe-to-toe and win against Asia. Mind you, not in the production of cheap labor intensive output, but where it really counts in the high value added export sector.

And this view is also common among working classes in the central countries—that share the view of periphery populations as lazy and over-rewarded. While untrue, what is most shocking about this attitude is that if the blood-letting and crushing of wages in the periphery actually does work, the factories will be moved out of Germany seeking lower cost workers. In other words, success in the periphery would shift the burden back to Germany’s workers, who would have to accept lower wages to compete. That will be fueled by job losses if Germany cannot find sales outside the EU that will be lost as the periphery nations fall farther into depression. The result will be a nice little rush to the bottom, benefiting Europe’s elite. How nice.

To be sure, I do not think there is a snowball’s chance in hell that the EU will squeeze sufficient blood out of the Greeks (and Spanish and Italians and Irish and Portuguese) for this to work. What actually makes far more sense is to raise German wages—to achieve competitiveness within the EU by leveling up. But that snowball does not have a chance, either, because Germany is looking far outside the borders of Europe—and mostly in an eastern direction. As a result, it will remain focused on cutting its own labor costs—so the periphery nations will never catch Germany on the way down.

That leaves two alternative approaches. First, continued debt restructuring, ECB purchases through the back door (allowing central banks to buy the debt), guarantees, and lending. The hope is that the financial institutions holding all the periphery government debt can either move it off their balance sheets, or use the American method of “extend and pretend” to avoid recognizing the institutions are insolvent. The problem is that almost all the economic data in recent weeks are bad—almost globally—and that makes it likely there will be some financial hiccup somewhere that will spread as quickly through financial markets as it did in the Global Financial Crisis of 2007.

Many European banks will be recognized to be hopelessly insolvent—with PIIG government debt only adding to the problem. Further, the ECB legitimately worries about the “precedent” and “incentive effects”. This is not really a matter of rules governing what the ECB can do—it has leeway much as the Fed has to intervene in a crisis to essentially buy or lend against virtually any type of asset. It has to do with what the ECB sees to be its independence. Markets would view a US-style bail-out of the European financial system (and by extension, guaranteeing individual government debts) as a loss of its independence. In truth, the ECB already gave that up, but clings to the hope it can somehow get its virginity back.

The third approach is to create the necessary fiscal authority. This would allow the ECB to stick to monetary policy, while giving a European Treasury the purse strings to deal with the crisis. I’ve been arguing since 1996 that is really the only way to make the EU project viable. The economics behind that is simple, adopted in developed countries everywhere. Indeed, the US is effectively an American Monetary Union (AMU) but one properly set up with both a central bank and a treasury. However for political reasons, that ain’t going to happen in the EMU. We are actually further away from that than we were in 1996 because the crisis has increased hostility among the members. No one wants to cede power to the center.

Well, none of those is going to work. What is left? Exiting the union.

By Michael Hudson

The fight for Europe’s future is being waged in Athens and other Greek cities to resist financial demands that are the 21st century’s version of an outright military attack. The threat of bank overlordship is not the kind of economy-killing policy that affords opportunities for heroism in armed battle, to be sure. Destructive financial policies are more like an exercise in the banality of evil – in this case, the pro-creditor assumptions of the European Central Bank (ECB), EU and IMF (egged on by the U.S. Treasury).

As Vladimir Putin pointed out some years ago, the neoliberal reforms put in Boris Yeltsin’s hands by the Harvard Boys in the 1990s caused Russia to suffer lower birth rates, shortening life spans and emigration – the greatest loss in population growth since World War II. Capital flight is another consequence of financial austerity. The ECB’s proposed “solution” to Greece’s debt problem is thus self-defeating. It only buys time for the ECB to take on yet more Greek government debt, leaving all EU taxpayers to get the bill. It is to avoid this shift of bank losses onto taxpayers that Angela Merkel in Germany has insisted that private bondholders must absorb some of the loss resulting from their bad investments.

The bankers are trying to get a windfall by using the debt hammer to achieve what warfare did in times past. They are demanding privatization of public assets (on credit, with tax deductibility for interest so as to leave more cash flow to pay the bankers). This transfer of land, public utilities and interest as financial booty and tribute to creditor economies is what makes financial austerity like war in its effect.

Socrates said that ignorance must be the root of all evil, because no one deliberately sets out to be bad. But the economic “medicine” of driving debtors into poverty and forcing the selloff of their public domain has become socially accepted wisdom taught in today’s business schools. One would think that after fifty years of austerity programs and privatization selloffs to pay bad debts, the world has learned enough about causes and consequences. The banking profession chooses deliberately to be ignorant. “Good accepted practice” is bolstered by Nobel Economics Prizes to provide a cloak of plausible deniability when markets “unexpectedly” are hollowed out and new investment slows as a result of financially bleeding economies, medieval-style while wealth is siphoned up to the top of the economic pyramid.

My friend David Kelley likes to cite Molly Ivins’ quip: “It’s hard to convince people that you are killing them for their own good.” The EU’s attempt to do this didn’t succeed in Iceland. And like the Icelanders, the Greek protesters have had their fill of neoliberal learned ignorance that austerity, unemployment and shrinking markets are the path to prosperity, not deeper poverty. So we must ask what motivates central banks to promote tunnel-visioned managers who follow the orders and logic of a system that imposes needless suffering and waste – all to pursue the banal obsession that banks must not lose money?

One must conclude that the EU’s new central planners (isn’t that what Hayek said was the Road to Serfdom?) are acting as class warriors by demanding that all losses are to be suffered by economies imposing debt deflation and permitting creditors to grab assets – as if this won’t make the problem worse. This ECB hard line is backed by U.S. Treasury Secretary Geithner, evidently so that U.S. institutions not lose their bets on derivative plays they have written up.

This is a repeat of Mr. Geithner’s intervention to prevent Irish debt alleviation. The result is that we enter absurdist territory when the ECB and Treasury insist on “voluntary renegotiation” on the ground that some bank may have taken an AIG-type gamble in offering default insurance or bets that would make it lose so much money that yet another bailout would be necessary. [1] It is as if financial gambling is economically necessary, not part of Las Vegas.

Why should this matter a drachma to the Greeks? It is an intra-European bank regulatory problem. Yet to sidestep it, the ECB is telling Greece to sell off its water and sewer rights, ports, islands and other infrastructure.

This veers on financial theater of the absurd. Of course some special interest always benefits from systemic absurdity, banal as it may be. Financial markets already have priced in the expectation that Greece will default in the end. It is only a question of when. Banks are using the time to take as much as they can and pass the losses onto the ECB, EU and IMF – “public” institutions that have more leverage than private creditors. So bankers become the sponsors of absurdity – and of the junk economics spouted so unthinkingly by the enforcers, cheerleaders for the banality of evil. It doesn’t really matter if their names are Trichet, Geithner or Papandreou. They are just kindred lumps on the vampire squid of creditor claims.

The Greek crowds demonstrating before Parliament in Syntagma Square are providing their counterpart to “Arab spring.” But what really can they do, short of violence – as long as the police and military side with the government that itself is siding with foreign creditors?

The most effective tactic is to demand a national referendum on whether to accept the ECB’s terms for austerity, tax increases, public spending cutbacks and selloffs. This is how Iceland’s President stopped his country’s Social Democratic leadership from committing the economy to ruinous (and legally unnecessary) payments to Gordon Brown’s Labour Party demands and those of the Dutch for the Icesave and even the Kaupthing bailouts.

The only legal basis for demanding payment of the EU’s bailout of French and German banks – and U.S. Treasury Secretary Tim Geithner’s demand that debts be sacrosanct, not the lives of citizens – is public acceptance and acquiescence in such policy. Otherwise the imposition of debt may be treated simply as an act of financial warfare.

National economies have the right to defend themselves against such aggression. The crowd’s leaders can insist that in the absence of a referendum, they intend to elect a political slate committed to outright debt annulment. Across the board, including the Greek banks as well as foreign banks, the IMF and EU central planners. International law prohibits nations from treating their own nationals differently from foreigners, so all debts in specified categories would have to be annulled to create a Clean Slate. (The German Monetary Reform of 1947 imposed by the Allied Powers was the most successful Clean Slate in modern times. Freeing the German economy from debt, it became the basis of that nation’s economic miracle.)

This is not the first such proposal for Greece. Toward the end of the 3rd century BC, Sparta’s kings Agis and Cleomenes urged a debt cancellation, as did Nabis after them. Plutarch tells the story, and also explains the tragic flaw of this policy. Absentee owners who had borrowed to buy real estate backed the debt cancellation, gaining an enormous windfall.

This would be much more the case today than in times past, now that the great bulk of debt is mortgage debt. Imagine what a debt cancellation would do for the Donald Trumps of the economy – having acquired property on credit with minimum equity investment of their own, suddenly owing nothing to the banks! The aim of financial-fiscal reform should be to free the economy from financial overhead that is technologically unnecessary. To avoid giving a free lunch to absentee owners, a debt cancellation would have to go hand in hand with an economic rent tax. The public sector would receive the land’s rental value as its fiscal base.

This happens to have been the basic aim of 19th-century free market economists: tax land and nature – and natural monopolies – rather than taxing labor and capital goods. The aim was to keep for the public what nature and public infrastructure spending create. A century ago it was believed that monopolies such as the privatizers now set their eyes should be operated by the public sector; or, if left in public hands, their prices would be regulated to keep them in line with actual costs of production. Where private owners already have taken possession of land, mines or monopolies, the rental revenue from such ownership privileges would be fully taxed. This would include the financial privilege that banks enjoy in credit creation.

The way to lower costs is to lower “bad” taxes that add to the price of production, headed by taxes on labor and capital, sales taxes and value-added taxes. By contrast, rent taxes collect the economy’s “free lunch,” and thus leave less available to be pledged to banks to capitalize into debt service on higher loans. Shifting the Greek tax burden off labor onto property would reduce the supply price of labor, and also reduce the price of housing that is being bid up by bank credit.

A land tax shift was the primary reform proposal from the 18th and 19th century, from the Physiocrats and Adam Smith down through John Stuart Mill and America’s Progressive Era reformers. The aim was to free markets from the landed aristocracy’s hereditary rents stemming from the medieval Viking conquest. This would free economies from feudalism, bringing prices in line with socially necessary costs of production.

Every government has the right to levy taxes, as long as they do it uniformly to domestic property owners as well as to foreign owners. Short of re-nationalizing the land and infrastructure, fully taxing its economic rent (access payments for sites whose value is created by nature or by public improvements) would take back for the Greek authorities what creditors are trying to grab.

This classical threat of 19th century reformers is the response that the Greeks can make to the European Central Bank. They can remind the rest of the world that it was, after all, the ideal of free markets as expressed from Adam Smith through John Stuart Mill in England, and underlay U.S. public spending, regulatory agencies and tax policy during its period of take-off.

How strange (and sad) that Greece’s own ruling Socialist Party, whose leader heads the Second International, has rejected this centuries-old reform program. It is not Communism. It is not even inherently revolutionary, or at least was not at the time it was formulated. It is socialism of the reformist type that two centuries of classical political economy culminated in.

But it is the kind of free markets against which the ECB is fighting – backed by Treasury Secretary Geithner’s shrill exhortations from the United States. Mr. Obama says nothing leaving it all to Wall Street bureaucrats to set national economic policy. Is this evil? Or is it just passive and indifferent? Does it make much of a difference as far as the end result is concerned?

To sum up, the aims of foreign financial aggression are the same as military conquest: land and the public domain. But nations have the right to tax their rental yield over and above a return to capital investment. Contrary to EU demands for “internal devaluation” (wage cuts) as a means of lowering the price of Greek labor to make it more competitive, reducing living standards is not the way to go. That reduces labor productivity while eroding the internal market, leading to a deteriorating spiral of economic shrinkage.

The need for a popular referendum

Every government has the right and indeed the political obligation to protect its prosperity and livelihood so as to keep its population at home rather than drive them abroad or drive them into a position of financial dependency on rentiers. At the heart of economic democracy is the principle that no sovereign nation is committed to relinquish its public domain or its taxing, and hence its economic prosperity and future livelihood, to foreigners or for that matter to a domestic financial class. This is why Iceland voted “No” in the debt referendum. Its economy is recovering.

Ireland voted “Yes” and now faces a new Great Emigration to rival that which followed the potato famine of the mid-19th century. If Greece does not draw a line here, it will be a victory for financial and fiscal aggression imposing debt peonage.

Finance has become the 21st century’s preferred mode of warfare. It’s aim is to appropriate the land and public infrastructure for its own power elites. Achieving this end financially, by imposing debt peonage on subject populations, avoids the sacrifice of life by the aggressor power – but only as long as subject debtor countries accept their burden voluntarily. If there is no referendum, the national economy cannot be held liable to pay the debts owed even to “senior” creditors: the IMF and ECB. Assets that are privatized at foreign bank insistence can be renationalized. And just as nations under military attack can sue, so Greece can sue for the devastation caused by austerity – the lost employment, lost output, lost population, capital flight.

The Greek economy will not end up with the proceeds of any ECB “bailout.” The banks will get the money. They would like to turn around and lend it out afresh to the buyers of the land, monopolies and other properties that Greece is being told to privatize. The user fees they collect (no doubt raising charges in the process, to cover the interest and pay themselves the usual salary jumps on privatized property) will be paid out as interest. Is this not like military tribute?

Margret Thatcher used to say “There is no alternative” (TINA). But of course there is. Greece can simply opt out of this giveaway of assets and economic privilege to creditors.

What do Mr. Papandreou’s Socialist International colleagues have to say about current events in Greece? I suppose it is clear that the old Socialist International is dead, given the fact that Mr. Papandreou is its head, after all. What passes for socialism today is the diametric opposite of the reforms promoted under its name a century ago, in the era prior to World War I. Europe’s Social Democratic and Labour parties have led the way in privatization, financializing their economies under conditions that have blocked the growth in living standards. The result promises to be an international political realignment.

Economic austerity cannot secure creditor claims in the end

On Thursday afternoon the DJIA, having been down 230 points, leapt up at the close to lose “only” 60 points, on rumors that Greece had agreed to the IMF’s austerity plan. But what is “Greece”? Is it the cabinet alone? Certainly not yet the entire Parliament. Will there be a Parliamentary vote in opposition to the public interest, accepting austerity and privatization?

Only a referendum can commit the Greek government to repay new debts imposed under austerity. Only a referendum can prevent property that is privatized from being re-nationalized. Such a transfer is not legitimate under commonly accepted ideas of political and economic democracy. And in any event, a rent-tax can recapture for the Greek economy what the financial aggressors are trying to seize.

History is rife with instructive examples. Local oligarchies in the region invited Rome to attack Sparta, and it overthrew the kings and their successor Nabis (who may himself have been royal). The sequel is that Rome headed an oligarchic empire, using violence at home to murder democratic reformers such as the Gracchi brothers after 133 BC, plunging the republic into a century of civil war. The creditor interests ended up fully in control, and their own banal self-seeking plunged the Western half of the Roman Empire into an economic and social Dark Age.

Let’s hope the outcome is better this time around. There will indeed be fighting, but more in the financial and fiscal sphere than the overtly military one. The fight ultimately can be won only by understanding the corrosive dynamics of the “magic of compound interest” and the social need to subordinate creditor interests to those of the overall “real” economy. But to achieve this, economic theory itself needs to be brought out of its current post-classical “neoliberal” banality.

[1] Louise Story, “Derivatives Cloud the Possible Fallout From a Greek Default,” The New York Times, June 23, 2011, quotes Christopher Whalen, editor of The Institutional Risk Analyst, as saying: “This is why the Europeans came up with this ridiculous deal, because they don’t know what’s out there. They are afraid of a default. The industry is still refusing to provide the disclosure needed to understand this. They’re holding us hostage. The Street doesn’t want you to see what they’ve written.”

By William K. Black

* Cross-posted with Benziga

By Stephanie Kelton

White House Press Secretary Jay Carney recently explained President Obama’s “singular concern, which is that the outcome of the deficit reduction talks produce a result that significantly reduces the deficit while doing no damage to the economic recovery and no damage to our progress in creating jobs.”

Great. And I want to go on a donut diet and shed ten pounds.

As far as Washington is concerned, there are only two ways to bring down the deficit: cut spending or increase taxes. Both reduce private sector incomes.  This means that the president is looking for a way to reduce private sector incomes without hampering sales or job creation.

Can it be done? Let’s see.

Suppose the government decides to cut spending by $100. This means that someone in the private sector is receiving $100 less than they were getting before the government tightened its belt.  Ordinarily, we would expect this to generate an even bigger drop in GDP, as the decline in income leads to multiple rounds of contraction due to the effect of the multiplier.

For those that need a refresher, the multiplier is given by (1/1-b), where b = the marginal propensity to consume (MPC) or:

It shows the relationship between disposable income (Yd) and household consumption spending (C). As disposable income increases, we expect household spending to rise, making the value of the MPC > 0. But we also expect people to save a bit more, so the MPC < 1.

This means that we also have a marginal propensity to save, which is given by:

The MPS shows how saving changes in response to a change in disposable income. Like the MPC, the MPS is expected to be greater than zero but less than one. And, since you can only do one of two things with your disposable income – spend or save – the MPC and the MPS must always sum to 1. This is all basic Econ 101.

So let’s suppose that the MPC = b = .90, which means that people tend to spend, on average, $0.90 out of each additional $1.00 of income they receive. The other $0.10 is added to their savings. Now suppose that the government reduces its spending by $100. What will happen to economic activity as measured by output (Y) ?

After multiple rounds of spending reductions (the multiplier at work), output falls by $1,000. Ouch!

But the president is looking for ways to reduce the deficit without damaging the recovery or destroying jobs. So maybe a tax increase is the way to go. Let’s check.

A tax increase means less disposable income , and this means less spending by consumers. As before, a reduction in spending by one party (in this case the private sector) will result in several rounds of additional cuts, because of the multiplier effect. We can use the following equation to measure the macroeconomic effect of a change in taxes.

The large bracketed term is the tax multiplier, and it is used to demonstrate the macroeconomic effects of an increase/decrease in taxes. Since the president is trying to reduce the deficit, we should consider the effect of a $100 increase in taxes. If the MPC = b = .90 as before, we get:

In this example, output falls by $900, better than the previous outcome, but still not what Obama is looking for. So the challenge remains: How can the government reduce the deficit without negatively impacting economic activity?

As Warren Mosler pointed out, it would require Congress to tax where there is a negative propensity to spend and cut where there is a negative propensity to save.

What does this mean? A negative propensity to spend means that people would spend more if the government raised taxes and reduced their incomes:

Under these circumstances, the economy would benefit from, say, a $100 tax increase, because households would spend more even though their incomes were falling:

Similarly, if the government cuts spending where there is a negative propensity to save, then output and employment will increase even as the government tightens its belt.

But a negative propensity to save means that the MPC >1 because the MPS < 0 and they must sum to 1:

Under these conditions, a $100 cut in government spending results in:

But what are the chances of this happening in the real world?  Probably zero. Spending cuts and tax increases reduce private sector incomes.  And the private sector isn’t going to celebrate the loss of income by going on a shopping spree.

The bottom line is this: As long as unemployment remains high, the deficit will remain high.  So instead of continuing to put the deficit first, it’s time get to work on a plan to increase employment.

Here’s the formula: Spending creates income.  Income creates sales.  Sales create jobs.

If you think you can cut the deficit without destroying jobs, dream on.

By Michael Hudson

Financial crashes were well understood for a hundred years after they became a normal financial phenomenon in the mid-19th century. Much like the buildup of plaque deposits in human veins and arteries, an accumulation of debt gained momentum exponentially until the economy crashed, wiping out bad debts – along with savings on the other side of the balance sheet. Physical property remained intact, although much was transferred from debtors to creditors. But clearing away the debt overhead from the economy’s circulatory system freed it to resume its upswing. That was the positive role of crashes: They minimized the cost of debt service, bringing prices and income back in line with actual “real” costs of production. Debt claims were replaced by equity ownership. Housing prices were lower – and more affordable, being brought back in line with their actual rental value. Goods and services no longer had to incorporate the debt charges that the financial upswing had built into the system.

Financial crashes came suddenly. They often were triggered by a crop failure causing farmers to default, or “the autumnal drain” drew down bank liquidity when funds were needed to move the crops. Crashes often also revealed large financial fraud and “excesses.”

This was not really a “cycle.” It was a scallop-shaped a ratchet pattern: an ascending curve, ending in a vertical plunge. But popular terminology called it a cycle because the pattern was similar again and again, every eleven years or so. When loans by banks and debt claims by other creditors could not be paid, they were wiped out in a convulsion of bankruptcy.

Gradually, as the financial system became more “elastic,” each business recovery started from a larger debt overhead relative to output. The United States emerged from World War II relatively debt free. Downturns occurred, crashes wiped out debts and savings, but each recovery since 1945 has taken place with a higher debt overhead. Bank loans and bonds have replaced stocks, as more stocks have been retired in leveraged buyouts (LBOs) and buyback plans (to keep stock prices high and thus give more munificent rewards to managers via the stock options they give themselves) than are being issued to raise new equity capital.

But after the stock market’s dot.com crash of 2000 and the Federal Reserve flooding the U.S. economy with credit after 9/11, 2001, there was so much “free spending money” that many economists believed that the era of scientific money management had arrived and the financial cycle had ended. Growth could occur smoothly – with no over-optimism as to debt, no inability to pay, no proliferation of over-valuation or fraud. This was the era in which Alan Greenspan was applauded as Maestro for ostensibly creating a risk-free environment by removing government regulators from the financial oversight agencies.

What has made the post-2008 crash most remarkable is not merely the delusion that the way to get rich is by debt leverage (unless you are a banker, that is). Most unique is the crash’s aftermath. This time around the bad debts have not been wiped off the books. There have indeed been the usual bankruptcies – but the bad lenders and speculators are being saved from loss by the government intervening to issue Treasury bonds to pay them off out of future tax revenues or new money creation. The Obama Administration’s Wall Street managers have kept the debt overhead in place – toxic mortgage debt, junk bonds, and most seriously, the novel web of collateralized debt obligations (CDO), credit default swaps (almost monopolized by A.I.G.) and kindred financial derivatives of a basically mathematical character that have developed in the 1990s and early 2000s.

These computerized casino cross-bets among the world’s leading financial institutions are the largest problem. Instead of this network of reciprocal claims being let go, they have been taken onto the government’s own balance sheet. This has occurred not only in the United States but even more disastrously in Ireland, shifting the obligation to pay – on what were basically gambles rather than loans – from the financial institutions that had lost on these bets (or simply held fraudulently inflated loans) onto the government (“taxpayers”). The government took over the mortgage lending guarantors Fannie Mae and Freddie Mac (privatizing the profits, “socializing” the losses) for $5.3 trillion – almost as much as the entire national debt. The Treasury lent $700 billion under the Troubled Asset Relief Plan (TARP) to Wall Street’s largest banks and brokerage houses. The latter re-incorporated themselves as “banks” to get Federal Reserve handouts and access to the Fed’s $2 trillion in “cash for trash” swaps crediting Wall Street with Fed deposits for otherwise “illiquid” loans and securities (the euphemism for toxic, fraudulent or otherwise insolvent and unmarketable debt instruments) – at “cost” based on full mark-to-model fictitious valuations.

Altogether, the post-2008 crash saw some $13 trillion in such obligations transferred onto the government’s balance sheet from high finance, euphemized as “the private sector” as if it were the core economy itself, rather than its calcifying shell. Instead of losing on their bad bets, bad loans, toxic mortgages and outright fraudulent claims, the financial institutions cleaned up, at public expense. They collected enough to create a new century’s power elite to lord it over “taxpayers” in industry, agriculture and commerce who will be charged to pay off this debt.

If there was a silver lining to all this, it has been to demonstrate that if the Treasury and Federal Reserve can create $13 trillion of public obligations – money – electronically on computer keyboards, there really is no Social Security problem at all, no Medicare shortfall, no inability of the American government to rebuild the nation’s infrastructure. The bailout of Wall Street showed how central banks can create money, as Modern Money Theory (MMT) explains. But rather than explaining how this phenomenon worked, the bailout was rammed through Congress under emergency conditions. Bankers threatened economic Armageddon if the government did not create the credit to save them from taking losses.

Even more remarkable is the attempt to convince the population that new money and debt creation to bail out Wall Street – and vest a new century of financial billionaires at public subsidy – cannot be mobilized just as readily to save labor and industry in the “real” economy. The Republicans and Obama administration appointees held over from the Bush and Clinton administration have joined to conjure up scare stories that Social Security and Medicare debts cannot be paid, although the government can quickly and with little debate take responsibility for paying trillions of dollars of bipartisan Finance-Care for the rich and their heirs.

The result is a financial schizophrenia extending across the political spectrum from the Tea Party to Tim Geithner at the Treasury and Ben Bernanke at the Fed. It seems bizarre that the most reasonable understanding of why the 2008 bank crisis did not require a vast public subsidy for Wall Street occurred at Monday’s Republican presidential debate on June 13, by none other than Congressional Tea Party leader Michele Bachmann – who had boasted in a Wall Street Journal interview two days earlier, on Saturday, that she

voted against the Troubled Asset Relief Program (TARP) “both times.” … She complains that no one bothered to ask about the constitutionality of these extraordinary interventions into the financial markets. “During a recent hearing I asked Secretary [Timothy] Geithner three times where the constitution authorized the Treasury’s actions [just [giving] the Treasury a $700 billion blank check], and his response was, ‘Well, Congress passed the law.’ …With TARP, the government blew through the Constitutional stop sign and decided ‘Whatever it takes, that’s what we’re going to do.’”

Clarifying her position regarding her willingness to see the banks fail, she explained:

I would have. People think when you have a, quote, ‘bank failure,’ that that is the end of the bank. And it isn’t necessarily. A normal way that the American free market system has worked is that we have a process of unwinding. It’s called bankruptcy. It doesn’t mean, necessarily, that the industry is eclipsed or that it’s gone. Often times, the phoenix rises out of the ashes. [1]

There were easily enough sound loans and assets in the banks to cover deposits insured by the FDIC – but not enough to pay their counterparties in the “casino capitalist” category of their transactions. This super-computerized financial horseracing is what the bailout was about, not bread-and-butter retail and business banking or insurance.

It all seems reminiscent of the 1968 presidential campaign. The economic discussion back then between Democrat Hubert Humphrey and Republican Richard Nixon was so tepid that it prompted journalist Eric Hoffer to ask why only a southern cracker, third-party candidate Alabama Governor George Wallace, was talking about the real issues. We seem to be in a similar state in preparation for the 2012 campaign, with junk economics on both sides.

Meanwhile, the economy is still suffering from the Obama administration’s failure to alleviate the debt overhead by seriously making banks write down junk mortgages to reflect actual market values and the capacity to pay. Foreclosures are still throwing homes onto the market, pushing real estate further into negative equity territory while wealth concentrates at the top of the economic pyramid. No wonder Republicans are able to shed crocodile tears for debtors and attack President Obama for representing Wall Street (as if this is not equally true of the Republicans). He is simply continuing the Bush Administration’s policies, not leading the change he had promised. So he has left the path open for Congresswoman Bachmann to highlight her opposition to the Bush-McCain-Obama-Paulson-Geithner giveaways.

The missed opportunity

When Lehman Brothers filed for bankruptcy on September 15, 2008, the presidential campaign between Barack Obama and John McCain was peaking toward Election Day on November 4. Voters told pollsters that the economy was their main issue – their debts, soaring housing costs (“wealth creation” to real estate speculators and the banks getting rich off mortgage lending), stagnant wage levels and worsening workplace conditions. And in the wake of Lehman the main issue under popular debate was how much Wall Street’s crash would hurt the “real” economy. If large banks went under, would depositors still be safely insured? What about the course of normal business and employment?

Credit is seen as necessary; but what of credit derivatives, the financial sector’s arcane “small print”? How intrinsic are financial gambles on collateralized debt obligations (CDOs, “weapons of mass financial destruction” in Warren Buffett’s terminology) – not retail banking or even business banking and insurance, but financial bets on the economy’s zigzagging measures. Without casino capitalism, could industrial capitalism survive? Or had the superstructure become rotten and best left to “free markets” to wipe out in mutually offsetting bankruptcy claims?

Mr. Obama ran as the “candidate of change” from the Bush Administration’s war in Iraq and Afghanistan, its deregulatory excesses and giveaways to the pharmaceuticals industry and other monopolies and their Wall Street backers. Today it is clear that his promises for change were no more than campaign rhetoric, not intended to limit a continuation of the policies that most voters hoped to see changed. There even has been continuity of Bush Administration officials committed to promoting financial policies to keep the debts in place, enable banks to “earn their way out of debt” at the expense of consumers and businesses – and some $13 trillion in government bailouts and subsidy.

History is being written to depict the policy of saving the bankers rather than the economy as having been necessary – as if there were no alternative, that the vast giveaways to Wall Street were simply “pragmatic.” Financial beneficiaries claim that matters would be even worse today without these giveaways. It is as if we not only need the banks, we need to save them (and their stockholders) from losses, enabling them to pay and retain their immensely rich talent at the top with even bigger salaries, bonuses and stock options.

It is all junk economics – well-subsidized illogic, quite popular among fundraisers.

From the outset in 2009, the Obama Plan has been to re-inflate the Bubble Economy by providing yet more credit (that is, debt) to bid housing and commercial real estate prices back up to pre-crash levels, not to bring debts down to the economy’s ability to pay. The result is debt deflation for the economy at large and rising unemployment – but enrichment of the wealthiest 1% of the population as economies have become even more financialized.

This smooth continuum from the Bush to the Obama Administration masks the fact that there was a choice, and even a clear disagreement at the time within Congress, if not between the two presidential candidates, who seemed to speak as Siamese Twins as far as their policies to save Wall Street (from losses, not from actually dying) were concerned. Wall Street saw an opportunity to be grabbed, and its spokesmen panicked policy-makers into imagining that there was no alternative. And as President Obama’s chief of staff Emanuel Rahm noted, this crisis is too important an opportunity to let it go to waste. For Washington’s Wall Street constituency, the bold aim was to get the government to save them from having to take a loss on loans gone bad – loans that had made them rich already by collecting fees and interest, and by placing bets as to which way real estate prices, interest rates and exchange rates would move.

After September 2008 they were to get rich on a bailout – euphemized as “saving the economy,” if one believes that Wall Street is the economy’s core, not its wrapping or supposed facilitator, not to say a vampire squid. The largest and most urgent problem was not the inability of poor homebuyers to cope with the interest-rate jumps called for in the small print of their adjustable rate mortgages. The immediate defaulters were at the top of the economic pyramid. Citibank, AIG and other “too big to fail” institutions were unable to pay the winners on the speculative gambles and guarantees they had been writing – as if the economy had become risk-free, not overburdened with debt beyond its ability to pay.

Making the government to absorb their losses – instead of recovering the enormous salaries and bonuses their managers had paid themselves for selling these bad bets – required a cover story to make it appear that the economy could not be saved without the Treasury and Federal Reserve underwriting these losing gambles. Like the sheriff in the movie Blazing Saddles threatening to shoot himself if he weren’t freed, the financial sector warned that its losses would destroy the retail banking and insurance systems, not just the upper reaches of computerized derivatives gambling.

How America’s Bailouts Endowed a Financial Elite to rule the 21st Century

The bailout of casino capitalists vested a new ruling class with $13 trillion of public IOUs (including the $5.3 trillion rescue of Fannie Mae and Freddie Mac) added to the national debt. The recipients have paid out much of this gift in salaries and bonuses, and to “make themselves whole” on their bad risks in default to pay off. An alternative would have been to prosecute them and recover what they had paid themselves as commissions for loading the economy with debt.

Although there were two sides within Congress in September 2008, there was no disagreement between the two presidential candidates. John McCain ran back to Washington on the fateful Friday of their September 26debate to insist that he was suspending his campaign in order to devote all his efforts to persuading Congress to approve the $700 billion bank bailout – and would not debate Mr. Obama until that was settled. But he capitulated and went to the debate. On September 29 the House of Representatives rejected the giveaway, headed by Republicans in opposition.

So Mr. McCain did not even get brownie points for being able to sway politicians on the side of his Wall Street campaign contributors. Until this time he had campaigned as a “maverick.” But his capitulation to high finance reminded voters of his notorious role in the Keating Five, standing up for bank crooks. His standing in the polls plummeted, and the Senate capitulated to a redrafted TARP bill on October 1. President Bush signed it into law two days later, on October 3, euphemized as the Emergency Economic Stabilization Act.

Fast-forward to today. What does it signify when a right-wing cracker makes a more realistic diagnosis of bad bank lending better than Treasury Secretary Geithner, Fed Chairman Bernanke or other Bush-era financial experts retained by the Obama team? Without the bailout the gambling arm of Wall Street would have collapsed, but the “real” economy’s everyday banking and insurance operations could have continued. The bottom 99 percent of the U.S. economy would have recovered with only a speed bump to clean out the congestion at the top, and the government would have ended up in control of the biggest and most reckless banks and AIG – as it did in any case.

The government could have used its equity ownership and control of the banks to write down mortgages to reflect market conditions. It could have left families owning their homes at the same cost they would have had to pay in rent – the economic definition of equilibrium in property prices. The government-owned “too big to fail” banks could have told to refrain from gambling on derivatives, from lending for currency and commodity speculation, and from making takeover loans and other predatory financial practices. Public ownership would have run the banks like savings banks or post office banks rather than gambling schemes fueling the international carry trade (computer-driven interest rate and currency arbitrage) that has no linkage to the production-and-consumption economy.

The government could have used its equity ownership and control of the banks to provide credit and credit card services as the “public option.” Credit is a form of infrastructure, and such public investment is what enabled the United States to undersell foreign economies in the 19th and 20th centuries despite its high wage levels and social spending programs. As Simon Patten, the first economics professor at the nation’s first business school (the Wharton School) explained, public infrastructure investment is a “fourth factor of production.” It takes its return not in the form of profits, but in the degree to which it lowers the economy’s cost of doing business and living. Public investment does not need to generate profits or pay high salaries, bonuses and stock options, or operate via offshore banking centers.

But this is not the agenda that the Bush-Obama administrations a chose. Only Wall Street had a plan in place to unwrap when the crisis opportunity erupted. The plan was predatory, not productive, not lowering the economy’s debt overhead or cost of living and doing business to make it more competitive. So the great opportunity to serve the public interest by taking over banks gone broke was missed. Stockholders were bailed out, counterparties were saved from loss, and managers today are paying themselves bonuses as usual. The “crisis” was turned into an opportunity to panic politicians into helping their Wall Street patrons.

One can only wonder what it means when the only common sense being heard about the separation of bank functions should come from a far-out extremist in the current debate. The social democratic tradition had been erased from the curriculum as it had in political memory.

Tom Fahey: Would you say the bailout program was a success? …

Bachmann: John, I was in the middle of this debate. I was behind closed doors with Secretary Paulson when he came and made the extraordinary, never-before-made request to Congress: Give us a $700 billion blank check with no strings attached.

And I fought behind closed doors against my own party on TARP. It was a wrong vote then. It’s continued to be a wrong vote since then. Sometimes that’s what you have to do. You have to take principle over your party. [2]

Proclaiming herself a libertarian, Ms. Bachmann opposes raising the federal debt ceiling, Pres. Obama’s Medicare reform and other federal initiatives. So her opposition to the Wall Street bailout turns out to lack an understanding of how governments and their central banks can create money with a stroke of the computer pen, so to speak. But at least she was clear that wiping out bank counterparty gambles made by high rollers at the financial race track could have been wiped out (or left to settle among themselves in Wall Street’s version of mafia-style kneecapping) without destroying the banking system’s key economic functions.

The moral

Contrasting Ms. Bachmann’s remarks to the panicky claims by Mr. Geithner and Hank Paulson in September 2008 confirm a basic axiom of today’s junk economics: When an economic error becomes so widespread that it is adopted as official government policy, there is always a special interest at work to promote it.

In the case of bailing out Wall Street – and thereby the wealthiest 1% of Americans – while saying there is no money for Social Security, Medicare or long-term public social spending and infrastructure investment, the beneficiaries are obvious. So are the losers. High finance means low wages, low employment, low industry and a shrinking economy under conditions where policy planning is centralized in hands of Wall Street and its political nominees rather than in more objective administrators.

[1] Stephen Moore, “On the Beach, I Bring von Mises”: Interview with Michele Bachman, Wall Street Journal, June 11, 2011.

[2] CNN Republican Presidential Debate, Transcript, June 13, 2011, http://www.malagent.com/archives/1738

Stephanie Kelton recently sat down with Dara McHugh, Co-Ordinator of Dublin-based Smart Taxes, to discuss Ireland’s debt problems and the economic prospects for the Irish economy. The interview appears in the June-August issue of Ireland’s Village Magazine.

By Paolo Rossi Barnard

Intro.

The post that follows poses as an example of how the huge complexities of MMT and its political and historical contexts could be divulged to the ordinary folks out there. We named it “MMT explained to mums”, precisely for that reason. This effort is of no small importance, since we at NEP recognize that without a growing popular support for our vision of how economies should be run, we may never gather enough steam to push MMT through the barriers of Power Politics. The actual writer of this post is Italian journalist and MMT supporter Paolo Rossi Barnard. Of course this is not definitive, and we invite both our bloggers and our readers to make comments and contributions to this essential communication effort. We all know that millions of people and families out there are needlessly suffering right now for the insanity of the present economic dogmas. They must be told that there is a life saving, job saving, even nation saving alternative to the present system; it’s called MMT and it’s authoritative, but it’s being denied to them by a tiny elite of power brokers. Ordinary folks must at least know this, because, as Noam Chomsky once remarked, “When people know of injustice, sooner or later they organize to stop it. They always did.”

MMT Explained to Mums

This could change your welfare and your kids’ like nothing before. It concerns what government could have really done for you with jobs, housing, income, schooling, health. It tells you why it never did, and how you could turn things around. It’s tremendously important today for all of us, the ordinary folks.
We are not wasting your time with ludicrous theories. What follows is authoritative, it was born of high academic research. We made it simple for you to read.

One more thing: we are not politicians, we are neither the Left nor the Right. We just believe that folks should be told what’s really wrong with the economy, which means their livelihood. Truth works with the American people.

Ask yourself: What’s the government for?

The obvious answer is to run the country, ok. Anything else? Yes, government should be there first and foremost to look after its people as youths, then workers and then seniors by providing good schooling, good jobs and good welfare whenever people lack them for any reason.This is what government ought to really be about.

Does the government do it?

No. We still have rampant unemployment, underemployment, poor health care for millions and lack of good education for scores of kids and many other ills.
Could the government do it? Can it afford it?

Yes, easily, we’ll explain why.

So, why has the government never done it?

Because private corporations, big banks and the extremely wealthy knew that if government used its monetary powers (the US dollar) to look after us, the people, they would have lost. Lost what? The bigger slice of national wealth with its privileges, and also millions of insecure workers as cheap labor for their profits. Finally, they would have lost control over politics. So they organized a web of lobbies, big media, and above all a host of economic ideas that took over government and stopped it from spending for us. This way they increased their slice of the pie, but they also prevented the pie from growing, kind of they killed the goose that lays the golden eggs, and so the general US wealth pie in the end got even smaller. It’s been happening for the last 40 years. This is no conspiracy, it’s simply the reality of Power Politics in America and elsewhere, too. We are saying to you: unemployment and lack of welfare need not have existed at all in modern America. They were used as a policy tool to prevent citizens from controlling too large a share of the national wealth and political power with the help of their government. Just think: if the majority of us are stuck in a life-long struggle for subsistence, we can’t even begin to think of ruling or controlling anything. We become class B citizens, we don’t count. We don’t count at all. Do you understand now why the powerful always told us that Big Government is bad? Sure, it’s bad for them.

Here’s what government could have done instead, what it could still do.

First, the government could employ at a living salary every single American out of work, and all those working on minimum wages. It has all the money in the world to do so, because our government owns the US dollar and it can pay any wage anywhere it wants to (simple explanation below). You may ask: wouldn’t this add to big national debt? No, not at all, simply because a larger and better paid American workforce would create a lot of new production, new infrastructure, new investment and new services, that is, more American wealth in its pockets and into the government’s coffers. It’s a government expenditure that would end up largely paying for itself and benefiting all. No need for panic about big debt.

Second, government could pay for adequate welfare for all Americans, that is to say universal health coverage, good schooling, social care for the needy and the elderly, and good pension schemes. Again, there would be no big debt in D.C., because it would again make us all better workers, better students, less needy seniors. In a nutshell: we would be an even more competitive nation that creates wealth instead of wasting it on immense social problems. And a society where a sense of common security substitutes pain and fear, which means less social ills, less family disintegration, less crime.

Sounds good, right? But does the government really have all these dollars to spend on us?

A very simple answer. Ask yourself: who gives the US government its dollars? Is it us? Can we citizens print dollars? No. Can businesses print dollars? No. Can banks print dollars? No. Citizens, businesses and banks can only use already existing dollars. Don’t be fooled: when you read of a business having made a fortune, all that’s happened in reality is that a mass of already existing dollars has simply shifted from lots of places or pockets into that business’ coffers. In some cases new dollars are created by private people, but they are always offset by some sort of equally private debt somewhere, so again no net money has come into existence. And when our government sells its bonds and someone buys them, the same applies: already existing dollars move from one place to another. So, who is it that creates new net dollars then? Only our government can. It does it at the Treasury and at the Fed. Think of it this way: government creates dollars by putting its signatures to pieces of paper (notes/bonds) or to electronic money transfers. Can it ever run out of its own signatures? Does it need to borrow them from someone else? Does it need to tax people to get back those signatures that it can just create? No, of course not. So to recap: government creates US dollars anew, never has to borrow them, cannot run out of them, doesn’t need to tax anyone to get them. And so it can use its dollars to do anything it wants, like employ all of us, educate all of us, treat all of us, look after all of us. And don’t forget: this form of government expense ends up largely paying for itself, because of the virtuous circle of new net national wealth it creates. And this requires no super taxes at all. Actually, it all works precisely in this way if the government gives us more dollars than it takes away through taxation. It also beats inflation thanks to all the new things that will be produced and as long as the government stops increasing its spending (plus dollar creation) as we get full employment.

So, you may ask: then what’s all this frenzy about national debt and the deficit?

Debt and deficits are the normal way to run an economy, they have always existed in American history and have never made us broke. Panic about them is largely a ploy concocted by the corporate elites, their economists and their big media. Remember: they had to prevent government and its citizens from acquiring too large a slice of the national wealth. So, among other things, they worked out a brilliant catch phrase: the government’s budget works just like your family’s, so to be ok the government has to earn more than it spends and never spend more than it earns. They said that just as your family debt is bad news, so is government’s. They turned this into mainstream economics through their people sitting as professors in all major universities and often as government top advisers. Sounds reasonable, right? Yes it does, so much so that we all fell for it and the government started worrying so much about debt and the deficit that it stopped the deficit spending that would have made us all live better. And the consequences were disastrous. But wait: do you remember that government creates its own dollars at will? Can any family in America do that? Of course not, period. So how can government and families have the same budget rules? Your family debt has to be repaid by you finding dollars somewhere else, usually through hard work. You don’t grow greenbacks in your garden. And if you fail to find them then you are in big trouble. So yes, you ought to be very careful about debts and deficits. None of this ever applies to the government, because as we said to get dollars it has to turn only to ITSELF and creates them out of thin air at the Treasury and the Fed. Think: if you could just create the dollars you need to pay back your debts, would you ever worry about debts and deficits? Ok, you got it. That’s precisely why all this frenzy about US government debt and deficit is just a plain lie, concocted by the corporate elite to achieve their goals. And look: the richest America we have ever known, that is, the American Dream emerging from World War II, had massive deficits and yet we became a world Super Power that spilled its wealth all over Europe as well. So much for this deficit hysteria. In fact it has been created to allow the conservatives to eliminate those social programs that benefit average Americans. You must understand that this is not a Republican vs Democrat issue – both sides have teamed up to cut programs that help you in order to favor their fat cat Wall Street friends, who think they’ll be better off if you are poorer and unemployed.

In conlcusion.

Do you realize what you have just read? Yes, unemployment and underemployment need not exist in our country. Yes, universal welfare is possible. And yes, all this would come out of government deficit spending with no problem whatsoever. Actually, in the long run it would even make America richer. Think of all the suffering that the present system creates instead, today spreading to millions of decent families all over the country. And what for? Just to ensure that some tiny super wealthy elite could control the majority of our common wealth. Outrageous.

Here’s what you can do to claim back what ought to be yours. Anyone can.

First, we can provide simple to understand primers to further explain to you why the above is truly possible, and we’ll give you all the authoritative academic sources for it in case you want them. Then the immediate thing for you to do is to challenge your Representative with a simple letter and/or email to tell him/her “My family and I are for Full Employment, Price Stability and for Good Deficits for the people, as proposed by senior economists here (NEP url). Do discuss them in Congress, it’s vital for us ordinary Americans. Otherwise you can forget our vote”.

So to recap: Americans and American families were made to suffer needlessly for decades out of greed of the few and out of ignorance of politicians, and things are getting worse by the day. It’s time to stop them. Let’s get the government to do its proper job.

The Nation put this question to a panel of sixteen activists and economic thinkers. Our own Randy Wray shared his ideas for remaking capitalism into a more stable and equitable system.

Randall Wray was interviewed recently for The Real News. Video below.