Ordinary citizens find it difficult expressing their dissatisfaction with the overall state of affairs in their nations. Sure enough we can vote a poor government out in many nations but the neo-liberal infestation is now so entrenched that the choices in terms of macroeconomic policy have narrowed to be no choice at all. At the corporate level, shareholders can cause trouble at annual meetings as they did last week in Australia when the bosses of the poorly-performed BP tried to push through a massive executive pay deal for themselves. 60 per cent of shareholders rejected the deal. But then not many of us a shareholders so that is a limited strategy. One thing we can do however is use our powers as consumers to punish corporations that lie to us in pursuit of profit. Consumers, united, do have power. Enough of us, pursuing a common goal, can send a corporation broke, just like the mainstream textbooks, which claim ‘consumer sovereignty’ drives the pattern of production, tell us. In this respect, I urge all readers of this blog to cancel any subscriptions that you might have to Time magazine and run a social media information campaign urging everyone you know (and everyone they know) to do the same. If you are a company who advertises in Time Magazine, I urge you to stop doing business with them. And then seek information on other products the owners of the magazine sell and boycott them too. That might given the company some reason to stop publishing erroneous material designed to distort the public debate.
I outlined the boycott strategy in this blog – Time for progressives to adopt more direct actions – which was in relation to the signing of the so-called Trans-Pacific Partnership.
I noted in that blog that Modern Monetary Theory (MMT) provides a consistent and coherent framework for evaluating the consequences of macroeconomic policy choices taken by government.
In that sense, policy justifications become more transparent. It is clear that austerity will damage growth and cause unemployment to increase. If the principles of MMT are widely understood, then, in that case, politicians who want to impose austerity cannot hide behind spurious claims that it enhances private confidence because future tax rates will be lower.
Rather, the austerity proponent is clearly demonstrating a preference for higher unemployment and that opens the public debate to a series of different questions, which conjecture would suggest would also lead to different policy outcomes (for example, a rejection of austerity).
But we assume that government is elected by the people and becomes an effective agent for the people to accomplish outcomes that individual libertarian action is incapable of achieving.
I often write that sovereignty means that the nation issues its own currency, sets its own interest rates, floats its currency, and desists from issuing foreign-currency denominated debts.
That is my emphasis as an economist. But it also requires that governments are not captured by corporations and/or trapped by multilateral arrangements which compromise their discretion to act in the best interests of their own population.
We know that often the public has very little influence on policy because governments do become captured by corporate interests and the lobbying capacity of the very wealthy (like the Koch Brothers in the US).
In the cited blog, I outlined ways in which the population might seek to defend their rights and ensure that policy is advancing general well-being rather than being ‘pro-business’ (which is code for pro profits).
We need to refine what power we actually have.
Mainstream microeconomics textbooks tell the students that consumers are sovereign, which is code for saying that what the consumers want, firms will supply unless they want to lose market share. It makes the ‘market’ look like it is the ultimate democratic arena – what we vote for is what we get by way of goods and services.
There are of course major problems with this conception.
First, the voting system is highly undemocratic because it is not one person one vote but rather one dollar one vote and the income distribution is so highly skewed in favour of the top-end that voting power is not even remotely distributed in a reasonable manner.
Second, consumer sovereignty assumes that the final pattern of goods and services produced and sold is demand-determined by consumer preference.
However, the reality is different. Advertising transcends the state of being pure information and becomes manipulation and brainwashing preying on the weak and vulnerable (which in terms of this mass consumption age is almost all of us).
That means that the final pattern of goods and services produced and sold is supply-determined and the demand-side is manipulated to accord with the preferences of corporations for profits.
The truth is somewhere between and it is this netherland that provides progressive activists with scope to really damage lying capitalists like the Time magazine, which produced this cover story (April 14, 2016) – The United States of Insolvency – that is tantamount to gross deception of the public.
Here is the front cover:
I recommend those responsible for the magazine and the publication of this particular article be prosecuted under US Code §52 and be subjected to both the maximum fine and imprisonment allowed for under that code.
If there are stronger violations of US law then they should also be applied.
Almost all inferences in this article including its much-feted calculation are wrong and heiniously so.
Start with the calculation – it divides all the outstanding US public debt by the population to get a per capita ‘debt’. Presumably, this is based on some misleading notion that each person has some tax liability equivalent to that per capita allocation.
But if you followed that logic then the per capita figure would be much higher because children do not pay taxes, retirees do not pay taxes and the top-end-of-town (as the Panama Papers tell us) do not pay taxes.
But I trifle here, really because the rest of the article is so bad that I consider it an example of white collar crime.
Even the introductory drumming up the scare defies its own logic.
We are told – to sensationalise what is just the normal operations of a government – that:
We conjure dollar bills by the trillions–pull them right out of thin air. I won’t insist that this can’t go on, because it has. I only say that it will eventually stop.
I don’t know the date, but I believe that I know the reason. It will stop when the world loses confidence in the dollars we owe. Come that moment of truth, the nation will resemble Chicago, a once prosperous polity now trying to persuade its once trusting creditors that it is actually solvent.
Get the problem. “We” is actually meant to be the US federal government, which is quite different from ‘us’ (‘We’) because the real ‘We” cannot “conjure” dollar bills out of thin air. Duh!
That is the crucial point in all this.
The household budget analogy is false. Households use the currency that the federal government issues under monopoly conditions and must finance their spending.
A sovereign government issues the currency and must spend first before it can subsequently tax or borrow in that currency.
A household cannot spend more than its revenue indefinitely because continuously increasing private debt is unsustainable.
The budget choices facing a household are thus limited and prevent permanent deficits.
A currency-issuing government can never be revenue-constrained in a technical sense and can sustain deficits indefinitely without solvency risk.
The Euro nations are an exception. They surrendered currency sovereignty and thus have to borrow to cover deficits, which make them dependent on bond markets (in lieu of European Central Bank support) and exposes them to solvency risk.
The city of Chicago is not a currency-issuing government and while it might have revenue-raising capacities (tax base) that a typical household doesn’t have, it can still become insolvent – it is financially constrained therefore and not like the federal US government in any way.
And what about the world losing “confidence in the dollars we owe” (we being the US government)? Presumably this would manifest in the bid-to-cover ratio at the bond tenders (that is, the $ volume of bids to purchase US-dollar denominated bonds to the volume to be auctioned) falling such that the authorised bond dealers no longer wanted to purchase the bonds.
What then? Not much. The federal government would just natter with the US Federal Reserve Bank and bank accounts would still be credited to reflect the government spending intentions and the balance sheet of the central bank would just show a new accounting entry reflecting a ‘book’ liability it holds against the Treasury department.
The right-hand of government owing the left-hand hand – not much to write homeabout really!
Of course, the non-government sector’s future income stream would decline as their ‘lack of confidence’ would lead it to surrender an income stream from the federal government.
It would also surrender its access to the only truly risk-free financial asset there is and various segments of the financial sector would have to find a new benchmark asset with which to price their own riskier products against. That is possible but inconvenient and you can imagine the howl from this sector if the government stopped issuing debt.
Please read my blog (specifically the section under the heading ‘Special Pleading Classic One’ – Bond markets require larger budget deficits – for more discussion on what happened in Australia when the Federal government actually started reducing the net outstanding government bonds between 1996 and 2001.
It is a hilarious display of public deception.
Anyway, the implications of using “We” instead of ‘them’ are clear:
1. The household budget analogy is inapplicable.
2. Our own personal budget experience generates no knowledge relevant to consideration of government matters.
3. An alternative narrative must highlight the special characteristics of the government’s currency monopoly.
The Time article should have stopped at that point and put a footnote in that the author didn’t know what day it was and they apologise for the attempted deception.
It proceeded to tell the readers that, in fact:
… the government is different from you and me (and Chicago). It has a central bank.
The Federal Reserve is the government’s Monopoly-money machine. It sets some interest rates and influences many others. It materializes dollars. It regulates–now regiments–the nation’s banks. It pulls levers to make the stock market go up.
Which means there is no issue. “We” actually do not own any debt at all. The Federal government is liable for it and has the US Federal Reserve Bank as its source of funds to meet any outstanding liabilities whenever it wants.
We also get a lesson in how the US government (like all national governments) spend money into existence:
Dollars aren’t so much minted these days. Rather, they issue from the Fed’s computers in billowing digital clouds. The cost of producing them is only the energy expended on tapping the keys. The Fed emits these electronic greenbacks to attempt to control the course of economic events.
Yes, out of thin air. A number typed into a computer which shows up in bank accounts that can then be drawn on to purchase real goods and services (including all the unemployed labour if their was the political will to do so).
There is an intermission in the article to drum up some fear:
So cast your eyes on the exact numerical rendering of that slightly smaller sum: $13,903,107,629,266. It is unmanageable.
And the US nominal GDP in 2015 was $US 71,788.00 billion … or in scary long-hand $US71,788,000,000,000. Which is very big if you are an ant comparing it with your size in millimetres!
But apparently, the US government debt is equivalent to a “chocolate cake” which if it “cost a penny a slice, the best of us would be tempted to break our diets. Well, government debt is priced at less than 2%, and Washington fell off the wagon years ago.”
Hmmm, metaphors. Governments needing to go on a diet because it will get fat! Crazy stuff really.
The author then warns the reader that:
The public debt will fall due someday.
Then realises how stupid that statement is and so follows it up with “Some of it falls due just about every day”. And has been doing that for as long as we have recorded data.
So saying it “will fall due someday”, by which the author means to scare the reader into thinking a great big rock is going to fall on our heads or Damocles Sword is about to slice our heads open, is irrelevant.
The outstanding debt is maturing and being paid frequently with no ‘to do’ at all. Bank accounts are credited and liabilities extinguished. New auctions are held and new liabilities incurred. They mature at some point (depending on the type of bond being auctioned). Bank accounts are adjusted.
And then we get to it: “The debt is ultimately a deferred tax. You can calculate your pro rata obligation on your smartphone.”
I would rather play chess on my smartphone because I might get the sum wrong given how many zeroes are involved.
But it is simply wrong to consider the public debt liabilities to be a deferred tax liability.
Even the Peter G. Peterson Foundation, one of those abhorrent lobbying organisations that lies on a daily basis to advance their agenda – smaller government for most of us (less services etc) and as much government for them as is needed to provide bailouts when they overstep the risk threshold, to provide lucrative supply contracts for the private corporations that feed off the public sector, and lax legislation to ensure tax havens are not closed down (which a legislative stroke of the pen could easily do) – sees through that ruse.
Last week (April 14, 2016), it produced a blog post – The US tax burden is low compared to most advanced economies – which said that:
The tax revenue collected by the federal, state and local governments in the U.S. each year is about a quarter of the nation’s gross domestic product (GDP). This is less, as a share of GDP, than the revenues collected in several other high income countries, including Japan, Canada, the United Kingdom, Germany, Italy and France.
But also square the ‘deferred tax liability’ against the author’s earlier statements that the US federal government just creates dollars out of thin air.
No taxes are therefore needed in order to spend.
So then the authors moves on and coins another scary term “squandermania” and wants to firms to hand out paychecks each week as cash and then physically “pluck its taxes” out of our hands. ‘Our’ being American wage and salary earners and certainly not the top-end of town who avoid taxes.
This would apparently engender a “tax revolution” and would “Make America solvent again”.
All it would do is to force the US government to actually employ more workers in the Inland Revenue Service to physically interact with workers each week as they line up to get their ‘taxes’ plucked.
Employment would rise and that would be a good thing!
I seriously hope all readers of this blog will cancel any subscriptions that you might have to Time magazine and run a social media information campaign urging everyone you know (and everyone they know) to do the same.
If you are a company who advertises in Time Magazine, I urge you to stop doing business with them.
And then seek information on other products the owners of the magazine sell and boycott them too.
Consumers, united, do have power. Enough of us pursuing a common goal can send a corporation broke, just like the textbook says.
Go to it.
Also recall that Time excluded Bernie Sanders from its shortlist of 8 finalist for their 2015 Person of the Year award despite him winning their readers’ poll for that award
That is enough for today!
(c) Copyright 2016 William Mitchell. All Rights Reserved.