What "Give People Money" Gets Right--And Wrong at the Same Time

One of our favorite journalists, Annie Lowrey, recently wrote a book called Give People Money:  How a Universal Basic Income Would End Poverty, Revolutionize Work, and Remake the World.  As its self-explanatory title suggests, she is clearly in favor of the idea, at least in principle, and notes all of the many benefits to society that a Universal Basic Income (UBI) would have.  She does a great job of delineating such benefits and thoroughly debunks numerous myths about this big idea.  So overall, it is a good book.

That said, while her thesis starts out practically on fire in terms of ambition, it really starts to coast towards the end when the practical issue of cost starts to seep in.  Then, her proposals start to get significantly less ambitious than a true UBI, namely a negative income tax (like the kind Nixon once proposed and was ultimately weakened into what became the Earned Income Tax Credit) and/or a smaller UBI-style payment for children only.  True, those weaker versions would indeed be cheaper, and far better than doing nothing at all.  And it would certainly be more likely to pass through Congress, no doubt about that.  But the larger point is still being missed in terms of the nature of the cost issue.

And that larger point is that since the United States federal government is Monetarily Sovereign, the whole cost issue is really a non-issue when you think about it.  It is a Big Lie that federal taxes actually pay for federal spending, and that the federal government can somehow run short of dollars.  They can literally create infinite money, thus money is literally no object in that regard, if only they would act like it and dispense with the Big Lie once and for all.

In fact, Rodger Malcolm Mitchell himself advocates a form of UBI that he calls the Economic Bonus (EB), which is Step #3 of his recommended Ten Steps to Prosperity.  It is similar to Social Security for all, but without the FICA tax (which he believes should be abolished), and paid for entirely via money creation (i.e. spending it into existence).  Though the figures he provides are not set in stone, he advocates that we start with $1000/month for everyone over the age of 21 and $500/month for everyone below that age.  The TSAP fully agrees, except that we think the age threshold for the full amount should be 18 instead.  Or perhaps give the same amount (say, $500) to everyone regardless of age to start with.  Either way, once it is started, the numbers can be easily adjusted.  And $1000/$500 is a very handy number since that is roughly the amount that would be enough to eliminate poverty as well as give workers much more bargaining power than they have currently, while still not being so ludicrously high as to trigger runaway inflation or other adverse effects.  And best of all, it wouldn't cost the taxpayer one penny.

And Presto!  The square has thus been circled--or is that the other way around?

Oh, and about that inflation thingy, keep in mind that despite three rounds of QE, nearly $30 trillion in secret bailouts for the banks, $21+ trillion in national debt, and the Pentagon "losing" another $21 trillion despite putting two (or four) wars on the proverbial credit card, all of this money created out of thin air in fact, and economic growth finally roaring back to life (for now), we are still nowhere near the point of runaway inflation.  Not by a long shot.  If anything, we are still under the shadow of what Larry Summers calls "secular stagnation" thanks to chronic, extreme economic inequality and related socioeconomic ills.  And if ever we did get anywhere near that point, we know now exactly how to prevent and cure such inflation via interest rate control, and failing that, simply create less new money going forward.

So what are we waiting for?

RIP John McCain, A True American Hero

After learning of the recent passing of Senator John McCain on August 25, 2018, we would like to give a brief eulogy for this great man.  We at the TSAP have clearly had our differences with him politically on most issues, but we could never deny him the respect that he deserves.  To call him a hero would be the understatement of the century, both for his undeniably great courage as a war hero in Vietnam as well as his constantly fighting the good fight against the current corrupt cesspool of an authoritarian regime during America's dark night of the soul, up until the very moment that he lost his final battle with brain cancer.  Few could honestly say that they have done even a fraction what he has done in his 81 marvelous years on this Earth.

And shame on anyone who tarnishes his name by spreading vicious lies and slander about him as some people (and bots) have apparently been doing lately, regardless of where they happen to fall on the political spectrum.  Seriously, knock it off.  NOW.

Whether you love him, hate him, or are altogether indifferent about him, one thing is absolutely for certain.  If there is a heaven, John McCain is one of the very few Republicans (or anyone in Congress these days for that matter) getting in.  May he rest in peace.

The Jig Is Up, Donald!

Wow, today must be the Donald's very worst day ever, or least in a great while.  First, his former campaign chair Paul Manafort (of Russiagate infamy) was found guilty of eight out of 18 counts related to tax fraud and bank fraud (the rest were a hung jury), and is thus now a convicted felon.  Secondly, his former lawyer and personal "fixer", Michael Cohen, has just pled guilty to eight counts of his own as well, most significantly including two related to campaign finance violations. You know, that whole bit about illegally paying hush money to two porn stars to keep quiet about Trump's affairs with them, so as to influence the 2016 election in Trump's favor, turned out not to be a hoax after all--and it directly implicates Trump himself since the payments were about him.

So not only have both of these former associates of his now effectively joined the growing club of convicted felons in his orbit, but now they are in a crucial position to "flip" on Trump.  And there is a very good chance that they will both sing like a canary, if they haven't done so already.   It's only a matter of time.  Check checkity check check, checkmate!

The jig is up, Donald.  The mounting evidence of your numerous high crimes and misdemeanors can no longer be denied.  So do us all a YUUUUGE favor and RESIGN, yesterday.  Clean out your desk now, and don't let the door hit you on the way out.

Or, as you like to say, "YOU'RE FIRED!"

Interest Rates: A Razor-Sharp, Double-Edged Sword

After debunking the Big Lie of Economics (namely, that federal taxes actually pay for federal spending and that the federal government can somehow run short of dollars) in our previous post, the question of inflation and how to control it remains.  Most economists (including Rodger Malcolm Mitchell) believe that raising interest rates is the best way to do control inflation, while others (mainly in the Modern Monetary Theory (MMT) school of economics, along with Ellen Brown) believe that doing so is practically blasphemy and will only make things worse, relying instead on taxes of various kinds (if anything at all) to control it, albeit crudely.  So which is it?

Well, it seems that the answer is a lot more nuanced than either side likes to believe.  For starters, there are at least two different kinds of inflation: 1) cost-push inflation, and 2) demand-pull inflation.  Sometimes both types occur together almost equally, other times one clearly outweighs or excludes the other.  And whether raising interest rates is helpful or harmful depends on exactly which kind of inflation one is trying to fight.

For cost-push inflation, which is caused by rising production costs resulting from things like higher fuel prices, taxes, or borrowing costs on businesses that get passed onto consumers.  And raising interest rates will only make that kind of inflation worse by increasing borrowing costs for businesses even higher still.  Doing so is like fighting fire with gasoline, and should generally be avoided like the plague.

For demand-pull inflation, which is caused by demand for goods and services outstripping supply for same, on the other hand, raising interest rates is highly effective at preventing and curing such inflation.  If interest rates are (artificially) coupled to money supply, raising the former will effectively shrink the latter, which is of course disinflationary or deflationary.  But even more importantly, whether they are coupled to the money supply or not, raising interest rates also increases the demand for dollars by increasing the reward for holding them.  Remember, as Rodger Mitchell explains, Value = Demand/Supply, and Demand = Reward/Risk, where inflation and default are the risks and interest is the reward.

(Since the risk of default is by definition zero for a Monetarily Sovereign government that consistently acts like it and is not foolish enough to borrow money denominated in a foreign currency, that leaves only inflation vs. interest.  And the net reward is given by:  Interest Rate - Inflation Rate = Real Cost of Money.)

Note too that interest rates can have both types effects, but which one outweighs the other depends on the type of inflation as well as the general condition of the overall economy.  At the same time, the effects of raising and lowering interest rates need not be symmetrical, since lowering interest rates to stimulate the economy often amounts to "pushing on a string" in terms of effectiveness.  Especially since interest on Treasury securities is literally new money that is pumped into the economy, and lowering rates will reduce that money accordingly.  True, there is in fact a positive correlation between the effective Fed Funds Rate and the CPI inflation rate, but that is as much of a chicken-and-egg problem as anything, given that the two types of inflation are both measured the same way, and that the FERAL Reserve usually raises rates in response to or in anticipation of inflation.  (For all their faults, they have generally succeeded in keeping inflation more or less under control at least since the post-gold standard era.)

But how exactly does one distininguish which type of inflation predominates at a given time, and thus whether to raise or lower interest rates?  Usually it is fairly simple.  When the velocity of money (the rate at which money circulates through the economy) is going "too fast for conditions" relative to the economy, that is a fairly strong indicator that demand-pull inflation predominates and that interest rates ought to be raised, even if there is some cost-push inflation mixed into the overall inflation rate.  But if the velocity of money is sluggish, raising rates will likely be counterproductive, at least in the absence of massive deficit spending (i.e. new money creation).

Because regardless of whether or not there is any link at all between interest rates and the actual supply of money, raising rates (especially when raised higher than the inflation rate) will always slow down the velocity of money, ceteris paribus.  Likewise, cutting interest rates accelerates the velocity of money at least somewhat, even if that alone doesn't always stimulate the economy enough in practice.

So what about taxes, then?  In theory, raising taxes and/or cutting government spending should also control inflation by effectively shrinking the money supply.  Remember, since the federal government is Monetarily Sovereign, any tax revenue they raise is effectively destroyed in practice (just like how all deficit spending effectively creates money out of thin air).  But this is a very crude way to do it, and is too slow and political to be particularly useful.  That said, having some level of federal taxation can indeed act as an "automatic stabilizer" even with no changes to the tax code, since when the economy overheats, the velocity of money is high and thus more tax revenue is removed from the economy, while the reverse is true during recessions when the the velocity of money is slower.  That is especially true for the idea of the Universal Exchange Tax, since it specifically taxes the movement of money, but can be true for all taxes.  But interest rate control is ultimately a superior method--as long as the inflation in question is the demand-pull variety resulting from an excessive money supply and/or velocity of money.  And knowing that, there is no good reason why a Monetarily Sovereign government should be shy about creating enough money to fulfill any of its ambitions that benefit the the bottom 99%.

The best, of course, is when interest is NOT coupled to the creation of money.  But until they end the charade and implement Overt Congressional Funding instead, and also fully nationalize the FERAL Reserve, the best way to fight stagflation is to raise interest rates (to fight inflation) while also increasing deficit spending (to fight stagnation), effectively decoupling the two for the time being.  And to fight high inflation in an overheating economy, raise interest rates first with no changes to deficit spending, and if that doesn't work, then reduce deficit spending.  But don't keep interest rates too high for too long--eventually they need to be cut to avoid doing more harm than good to the economy.  And note also that there is no historical correlation between deficit spending and inflation, at least not during peacetime and post-gold standard.  Only during truly major wars has there been any sort of correlation between the two, given how wars tend to create shortages of goods and services.

Wait, what?  That's right, there has been no correlation between federal deficit spending (i.e. money creation) and inflation in recent decades, meaning that any relationship between the money supply per se and inflation is a very tenuous one.  Let that sink in for a moment.  So we are nowhere near the point where increasing the money supply poses any risk of runaway inflation.  And even if we were, we know precisely how to prevent and cure it.

In other words, it looks like both Rodger Mitchell and Ellen Brown are both correct to one degree or another.  But what about what the FERAL Reserve is doing right now, raising interest rates (and implementing Quantitative Tightening) in the midst of historically high deficit spending?  Well, seeing as how inflation is still low and currently dominated by oil prices and the Trump tariffs that are just beginning to bite, it is safe to say that cost-push inflation, not demand-pull inflation, thus predominates now and in the near future, and thus raising interest rates any further now is probably not the wisest idea.  Especially given that, as Ellen Brown notes, the banksters have currently set a minefield of trigger points for variable-rate loans and mortgages, that will be set off if the Fed Funds Rate goes up much higher.  And these oligarchs thus stand to pull off one of the greatest wealth transfers in history, from the bottom 99% to the top 1% and especially the top 0.01% (i.e. to the oligarchs themselves).

Bottom line:  While taxes are more of a blunt instrument when used to control inflation, interest rates are essentially a razor-sharp, double-edged sword, one that we need to be very careful about using willy-nilly.  Don't say we didn't warn you.

The Big Lie of Economics

Big Lies have a very long history indeed.  As the infamous Nazi propaganda minister Joseph Goebbels (who knew quite a thing or two about lying) noted, the bigger and dumber the lie is, the more likely people are to believe it.  And you know what, it works. Counterintuitive, perhaps, but true nonetheless.

So what if some politician, pundit, academic, or activist were to make the following claims, which you probably have heard over and over again, ad nauseam?  Would you believe them?  Here goes:

• Federal taxes pay for federal spending, and any shortfall in revenues (i.e. "deficit spending") must be made up by the federal government borrowing money to cover the deficit.
• It must be this way, because otherwise the federal government will run short of dollars, which are finite.
• The federal government is literally bankrupt and can no longer afford to keep paying for Social Security, Medicare, and Medicaid, let alone anything more ambitious and progressive.
• Things like Universal Basic Income (UBI), tuition-free public college for all, state-of-the-art infrastructure, and single-payer Medicare For All sound like good ideas on paper, but we literally can't get the numbers to add up.  Sorry.  Oh well.
• If the national debt as a percentage of GDP rises above some arbitrarily high level, the federal government will have no choice but to default.
• Thus, we will have no choice but to accept an austerity "menu of pain" at this point, both large tax hikes and/or deep spending cuts. (Austerity for the bottom 99%, that is.)

Well, guess what?  Each and every one of those specious statements is absolutely FALSE.  Period.  Not even a kernel of truth in there, except for the completely contrived self-fulfilling prophecy that believing such lies leads to, starting with the very first statement on that list, and it goes downhill from there.  Wait, what?  That's right, federal taxes do NOT actually pay for federal spending, because our federal government is Monetarily Sovereign.   They literally create brand new dollars out of thin air every time they spend money, with no need to borrow any money or raise any tax revenue at all.

So why do they borrow, if they don't really need to?  First, it is due to one of several arcane and archaic rules left over from when we actually had the gold standard, which we haven't had since 1971*, that requires matching spending with either taxes or borrowing.  Secondly, federal government borrowing is simply issuing Treasury securities, which are in practice  really a fancy kind of national savings account rather than "debt" as the term is usually understood.  And those Treasury securities are a safe haven for investors that helps to stabilize the financial system, and also provides a handy platform for the government to control interest rates.  So Congress could simply pass a law changing the rules and implement Overt Congressional Funding instead, thereby completely decoupling spending, borrowing, and taxes, while still allowing investors to park their money in Treasury securities if they so choose.

Oh, and how about taxes then?  Where exactly does all of that money go?  Well, that is where it really gets, um, interesting to say the least.  (Sit down before you read any further.)  For practical purposes, all of those trillions of federal tax dollars each year get....DESTROYED upon receipt.  Yes, you read that right, DESTROYED.  Since the federal government by definition has an infinite amount of money since they can create it at will by fiat, taking money from We the People is like bringing coals to Newcastle only to destroy them.  Of course, due to those arcane and archaic rules, the money does not get destroyed immediately, but rather it first makes a brief pit stop at the privately-owned FERAL Reserve. But the end result is exactly the same nonetheless.   

(In contrast, state and local governments are NOT Monetarily Sovereign, so they must either raise taxes or borrow money in order to spend, and their tax dollars are deposited in private bank accounts prior to spending them.  Ditto for the Euro nations as well.)

That does not meant that federal taxes are entirely useless, however.   For one, they can be used to give the official currency "teeth" by compelling its use to pay such taxes and not accepting any other currency as payment for such taxes.  They also function as a useful tool for social engineering that is difficult or impossible to do otherwise (think vice taxes and Pigouvian taxes, as well as taxes on the ultra-rich) as well.  And they can also act as a (rather crude) tool for inflation control as well, by being a sort of "automatic stabilizer" when the economy overheats.  But paying for federal spending and servicing the national debt?  If you believe that we need to actually take money out of the economy to pay for that which the government can literally just create out of thin air, well, we've got a nice bridge we'd like to sell you.

Thus, it follows logically that the rest of the aforementioned list of lies are, well, lies all the same.  Austerity (which does far more harm than good) need not be on the menu any longer, and we can opt for truly shared American prosperity instead.  And that means that all of the right-wing, neoliberal pack of lies about the economy also falls like the house of cards that it is.  All of those things that both corporate parties claim that we cannot afford can now be ours.  If only our politicians would just be honest for once (as tall an order as that may be).

Bottom line:  Money is really nothing more than a tool.  And like any tool, it can indeed be weaponized--in this case, by the oligarchs and their sycophantic lackeys in government against We the People.  They use the con-tricks of austerity and artificial scarcity to systematically widen the Gap between the haves and have-nots (and between the have-mores and have-lesses).  But it does not have to be this way at all, and in fact We the People can turn the tables on the oligarchs by electing honest representatives that know the true meaning of Monetary Sovereignty. 

So what are we waiting for?

(Hat-tip to the ever-insightful Rodger Malcolm Mitchell, Alan Longbon, and Joseph M. Firestone, for all showing us the wisdom of Monetary Sovereignty and the related Modern Monetary Theory, respectively.  Before first discovering their writings on the topic in 2018, even the TSAP had previously fallen for at least a few of the variations of the Big Lie above.)

*NOTE:  The Gold Standard in the USA functionally ceased to exist when Nixon suspended convertability of dollars to gold in 1971. Though originally intended to be temporary, this "Nixon Shock" was made permanent in 1973, ending the Bretton-Woods System for good, and any remaining nominal link between dollars and gold (along with any restrictions on private gold ownership and trading) was subsequently removed from the law books by 1976. The United States Dollar is now a purely fiat currency and the federal government is now fully Monetarily Sovereign (even if they don't always act like it).

Protectionism Without Tariffs and Trade Wars? Easy-Peasy

Looks like Trump's asinine trade war (not just with China, but also our own allies as well) has now begun in earnest.  And that does not bode well at all for our economy OR theirs, since no one really wins a trade war.  Smoot and Hawley must both be spinning in their graves right now, as any history buff will note.

You may remember that one of our previous posts outlines the TSAP's rather nuanced position on tariffs and trade, but we should also elaborate more on how it is possible to have an intelligent and rational kind of protectionism that does NOT depend on tariffs, quotas, or any other beggar-thy-neighbor policies.  For example, since our federal government is Monetarily Sovereign, they can easily afford to do the following to actually protect important domestic industries, as the ever-insightful Rodger Malcolm Mitchell notes:

• Federal government purchases from domestic suppliers, even at higher than import prices.
• Federal tax breaks for selected industries
• Direct federal cash infusions (i.e. direct subsidies) to the selected companies.

And that is true because, as he also notes, a Monetarily Sovereign government like ours literally has the unlimited ability to create and spend its own sovereign currency.  All federal government spending, without exception, involves the ad hoc creation of brand new dollars every time, arcane and archaic rules notwithstanding.  No need to bring the proverbial coals (i.e. tax/tariff dollars) to Newcastle only to effectively destroy them.  And unlike tariffs and quotas, these measures result in a positive-sum game rather than a zero or negative-sum game. 

Of course, all of these things are proverbial carrots, so what about the sticks, you ask?  Even then, most tariffs (and quotas) are far too blunt an instrument, are prone to backfiring, and should be narrowly tailored and used only as a last resort (i.e. to enforce specific trade and other agreements that are being blatantly flouted, and/or for strictly Pigouvian reasons), if even at all.  If outsourcing/offshoring of American jobs is the real concern, it would be far better to start by closing the ludicrous loopholes in the corporate tax code that encourage outsourcing/offshoring of such jobs in the first place.  The latter tactic is the basis for Bernie Sanders' Outsourcing Prevention Act, which would also end or claw back subsidies for American corporations that send jobs overseas.  And his other big idea, the Rebuild America Act, would create additional jobs rebuilding America's obsolete, neglected, and/or crumbling infrastructure as well.  

Note that Trump had clearly stolen, bastardized, and ran with several of Bernie's ideas while combining it all with empty rhetoric and beggar-thy-neighbor policies.  That is, when Trump's ideas are anything even close to coherent, as opposed to the usual incoherent verbal defecation that he is famous for.

But make no mistake.  Our nation's once-great manufacturing base has been hollowed out for decades, and much of it is currently rotting and rusting thanks to the neoliberal "free trade" scam brought to us by Reagan (and Thatcher in the UK) and embraced by both corporate parties ever since.  We ignore it at our own peril.  And the genuine political left would truly do well to abandon this highly toxic and corrosive ideology yesterday.