Betrayed by Conventional Wisdom (2/3/15)

© by Mark Dempsey

From the Methodists’ 2013 - 2016 Social Principles, pp. 44-45:

"M) Public Indebtedness--The huge budget deficits produced by years of overspending by governments around the world is of great concern. We acknowledge that for a limited time in a nation's history government deficits are sometimes necessary. However, long periods of excessive overspending by governments have produced huge deficits and significant economic challenges for many nations. Such wanton carelessness cannot continue. Therefore, we call upon all governments to reduce budget deficits and to live within their means. We ask that public officials, when making financial adjustments, remember first and foremost obligations that promote the well-being of society such as the funding of schools and other opportunities that foster the growth of the individual, as well as agencies that care for the poor, the elderly, the disabled and the disenfranchised.

We recognize that, if deficits are not brought under control, future generations will be shackled with a burden of public indebtedness that will force societies to live under the specter of coerced repayments, rising inflation, mass unemployment, and despair. Thus, this is not just a financial issue, but an issue of justice for those who are yet to be born. Wise stewardship is needed today to provide for future generations. We call on church leadership throughout the connection to encourage public officials to reduce public indebtedness and to begin the process toward balanced and fair budgets."

                            --from Social Principles of the United Methodist Church 2013 - 2016

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That Social Principle restates what is conventional wisdom in present-day America. Granted, it’s a little church-y sounding--after all “wanton carelessness” makes government sound like a hussy--but you can practically hear elders of all denominations clucking their collective tongues over their pancakes at Denny’s, agreeing with this call to “fiscal responsibility,” particularly when it comes to the United States.

Yet despite the Principle’s self-proclaimed allegiance to what’s “fair,” and "responsible" the  unforgiving, debtor-crushing results of following its dictates are exactly the opposite of the kind of forgiveness Jesus preached and prayed. The Principle also contradicts Biblical traditions that limit the power of creditors. Biblical debt Jubilees forgave debt and freed slaves. The Bible also forbids usury.

(In tribute to humanity’s limitless ability to deceive itself, the Jews found an Old Testament passage that allows usury--as long as Jews inflict it only on gentiles--and set the stage to make themselves into the reviled Shylocks of medieval times.)

Current American public policy actually subsidizes usury. Not only are interest payments a tax write-off, but according to its own audit, our central bank (“The Fed”) pushed $16 - $29 trillion out its doors to help cure the banks’ financial frauds in 2007-8. Aid for ordinary borrowers was orders-of-magnitude less.

Finally, far from “transforming the world”--part of the Methodists’ mission--their restatement of the heavily-promoted conventional wisdom promises anti-transformation: more of the same.

Where does conventional wisdom go off the rails?

Pseudo-problem #1: Government "overspends."

I won’t pick the mote out of any other nation’s eye. Let’s just focus on the beam in our own. As a percentage of GDP, U.S. government spending ranks 46th in the world.  "Per capita: ...the average for the world's 20 largest economies (in terms of GDP) was $16,110 per citizen.... The federal government of the USA spent an average of $11,041 per citizen [31% below average], ahead of only South Korea ($4,557), Brazil ($2,813), Russia ($2,458), China ($1,010), and India ($226) in the twenty largest world economies." (Source: http://en.wikipedia.org/wiki/Government_spending, which cites the Wall St. Journal and Heritage Foundation as sources.)

If one adjusted military spending--about one third of the budget--so the U.S. spent only twice what its nearest enemy, China, does, U.S. government spending as a portion of GDP would rank 90th in the world, between Cape Verde and South Africa. Currently, the U.S. spends six times more than China on its military.

In brief, U.S. government’s spending on its citizens is tiny, and with the “end of welfare as we know it” it has diminished social safety nets even further from their peak in the ‘60s. Calling such stinginess "overspending" mis-characterizes it, and that distortion has an agenda; it's propaganda.  

It’s worth noting such reports of over-spending typically overlook the built in bias in reporting government mis-spending. Government meetings are public, and “sunshine” laws are ubiquitous. Finding corrupt government officials--never mind that current campaign financing practice amounts to legalized bribery--is like shooting fish in a barrel. Government imprudence appears in the news daily.

Private sector corruption is common too, but far less often reported. The minutes of Enron’s board meetings were not public domain until the bankruptcy trial.

The effect of tiny government spending is also evident in individual public sector programs too. Never mind social safety nets, or single-payer health care, just the arts budget for the City of Berlin exceeds the National Endowment for the Arts for all the U.S. Copenhagen offers free Jazz in the parks all the time. (And the Danes are reportedly the happiest people on the planet.) Can we regularly see music in American parks? Better try (private) Disneyland!

Pseudo-problem #2: Deficits amount to "Wanton carelessness"

This restates the meme that public debt threatens to overwhelm us, devouring any prospects for the future, for our children and so on. It also conflates government “debt” (for governments with sovereign, fiat currencies) with household debt, despite the fact that they are fundamentally different.

Households are currency users; governments like ours are currency creators. The U.S. government will run out of dollars when the Bureau of Weights and Measures runs out of inches. Never! So the U.S. could literally and legally mint a few trillion-dollar coins and pay the entire “debt” tomorrow.

Think of this the next time you hear from the “fiscally responsible” among us that we’re “broke.” It is literally nonsense to say an entity that can make as much currency as it needs, and whose “debts” are denominated in that currency, could be insolvent.

History validates that government “debt” is nothing like household debt, too. Since 1776, the U.S. has suffered seven episodes of “fiscal responsibility” during which it paid off a significant portion of that government “debt.” The last such “debt” reduction occurred with the Clinton surplus. The time before that occurred in 1929. Andrew Jackson even retired the national debt entirely in 1835.

What happened within a few years of each of such “debt” reduction? A Great-Depression-sized hole appeared in the economy! We’re familiar with the Great Depression following that 1929 surplus, and the current Great Recession following the Clinton surplus. For his “fiscal responsibility,” Andrew Jackson got the Panic of 1837. Economic downturns correlate with significant “debt” reduction 100% of the time.

So is paying off a currency creator’s “debt” really “fiscally responsible”? No! Conflating currency creators and currency users is the height of irresponsibility, and has historically led to enormous suffering.

What really happens, procedurally, is that government creates a dollar of “debt” each time it spends a dollar out into the economy. That means reducing “debt” actually sucks dollar financial assets out of the economy, diminishing household savings, and crushing household debtors, whose debts remain denominated in those same dollars even as the dollars grow scarcer.

Creating “debt” and currency simultaneously in equal amounts is a feature of double-entry bookkeeping. Actually, the currency is like a checking account--the asset of the depositor, but the bank's liability.You will never hear of a band of depositors going to the bank to protest the size of the bank's debt to them (i.e. their accounts). That would be crazy talk, yet that is exactly what the advocates of "debt" reduction are doing.

This also means taxes make the money valuable, they do not fund government. And the order of things is not “tax and spend,” either. Where would taxpayers get the dollars to pay taxes if government didn’t spend them out into the economy first? The sequence must be “spend, then tax.” The “debt” exactly equals the dollar financial assets left in circulation (currency, T-Bills, Treasury Bonds, bank reserves, etc.).

That also means government is the only fiscally unconstrained player in the economy.

Pseudo-problem #3: “if deficits are not brought under control, future generations will be shackled with a burden of public indebtedness that will force societies to live under the specter of coerced repayments, rising inflation, mass unemployment, and despair”

In other words: "Government debt is a burden for future generations and spending too much, or creating money to repay it would create [hyper-] inflation, impoverishing savers."

Because our government can literally issue as much currency as it needs at will, the “burden” of future “debt” does not exist. The real burden for the future comes from not employing the idle productive capacity of the current economy. As long as we do not employ the resources we have, the future suffers far more from that burden, not any “debt” burden.

As for inflation: Let's say there’s a theoretical possibility that government, with its literally limitless dollars, could bid up prices, competing with the private sector for limited goods and services. But who else is bidding for the unemployed? Or the slack in U.S. manufacturing? (Hint: No one)

So government could guarantee everyone a job, as the employer of last resort, fully employing current resources, without raising taxes or causing inflation. Given the state of U.S. infrastructure, and the public realm generally, there is certainly no shortage of work to be done.

If we paid off the national "debt" with those trillion-dollar coins, those “debt” dollars have already been spent too, so they have done whatever bidding they're going to do. That means even paying off the "debt" with a few trillion-dollar coins would have zero inflationary impact.

One historical rebuttal to this pseudo-problem comes from the (right-wing / libertarian) Cato institute, which published a study of 59 hyper-inflationary episodes in human history. How many stem from government “over-spending”? Zero.

Despite the propaganda to the contrary, the money supply does not correlate with the consumer price index (inflation). Pick any money supply measurement you like and any CPI you want (U.S. government statistics, MIT’s Billion Price Index, Shadowstats). The graphs are unrelated.

A better question might be to ask why the economics mis-education of the public has become conventional wisdom. Could this particular bit of misinformation have an agenda?

….And is the pope Catholic?

Pseudo-problem #4: “Wise stewardship is needed today to provide for future generations.”

This amounts to a politically “correct” statement that has been drained of all meaning. Wise stewardship would mean an economy that fully employs its workers and technology to produce the best, most sustainable outcome for those future generations. But the foundation of any future prosperity is the current wise use of existing labor, land and capital, not letting it sit idle while vulture capitalists pick up assets (foreclosed homes, parking revenue, etc.) on the cheap, skimming off any economic surplus and turning the population into debt peons.

Post script: Signs of Methodist Life!

In fairness to the Methodists, they have recently announced a new microlending experiment in Sacramento, making small loans with their credit union. This would provide an alternative to the usurious payday lending that keeps poor people poor, and would make money our servant, instead of our master. Making money something that serves public good rather than private profit needs to be on the front burner, so good on them!

Now it’s time for them to disavow the un-biblical “fiscal responsibility” that still manages to persuade so many people that money, not God, is in charge.