Economics, Politics and Modern Democracy
Can this nation achieve justice and equality for all-II
Discussions and Debates on Fiscal Deficits are all the rage these days in Washington; I would like to summarize what I feel is the most important discussion going around the internet blogs these days and that is the talk about Modern Money Theory. I will put up the references at the end of the article; I feel the summary points are the most important right now and the proofs or discussion can be looked at later. Right now I just want to put up some basic premises that I would ask the reader to consider as factual. They will be proven later.
At the national collective level, spending equals income-
This point should be obvious but is basic enough to get started. Just to point out then, that the biggest spender, the government, has a major influence on the economy.
The Deficits of one sector must be offset by surpluses of another
To point out another obvious fact, Government deficits or the negative balance sheet of the public sector, then leads to surpluses in the private sector. The reverse is also true-Government surpluses lead to private sector deficits. During the Clinton years, the government deficits were offset by a huge credit bubble that saw too cheap money flow from the banks to households and to some extent businesses. The holders of this cheap credit felt well off for a decade and a half until the morning after struck in late 2007 and the gut wrenching hang over began with the hurling back of all the trash consumed the night before. We are still in the midst of the dry heaves. But hey, until the economy has some destructive capacity driven at all of the now useless consumer debt, we can expect the hangover to continue. Actually pneumonia has set in but then no one is really paying attention.
Flows of income, assets and wealth accumulate to stocks
In the simplest model, the government spends money into existence and the private sector accumulates the creation of wealth. Without that flow of money from the public sector the to private sector, there would be no wealth anywhere. Again the building up of a public deficit causes a flow of stocks of wealth into the private sector. Adding in a flow from a foreign sector to our model will give us the basis for an analysis of stock flows first discovered by Wynne Godley: Domestic private sector balance + Domestic public Balance + Foreign Balance = 0. The empirical basis for this series of flows has been well established since the published works of Hyman Minsky and Wynne Godley who first began writing about this in the early 1980s.
The United States Government is an issuer of a Sovereign Currency
No one else can issue U. S. dollars except the U. S. government. As many dollars as are needed to be placed into the economy to keep it running smoothly may be placed into circulation by the Issuer-the Federal Reserve bank in conjunction with the U. S. Treasury. Concerns about inflation may be raised by critics-so far we have minimal inflation-see the link below as to why so many important commodities are fluctuating heavily in price, causing much unwanted and unnecessary inflation. So at this time, the Congress, the ultimate arbiter of how much the government spends, should be finding ways to spend more money into existence as the economy flounders. Below the fold is a summary statement that is really important and then I ’d like to move to the conclusion that is a response to the age old question-“Am I my brother’s keeper?” From L. Wrandall Wray's primer on MMT:
Statements that do not apply to a currency-issuer. Let us begin with some common beliefs that actually are false—that is to say, the following statements do NOT apply to a currency-issuing government.
- Governments have a budget constraint (like households and firms) and have to raise funds through taxing or borrowing
- Budget deficits are evil, a burden on the economy except under some circumstances
- Government deficits drive interest rates up, crowd out the private sector…and necessarily lead to inflation
- Government deficits leave debt for future generations: government needs to cut spending or tax more today to diminish this burden
- Government deficits take away savings that could be used for investment
- We need savings to finance investment and the government’s deficit
- Higher government deficits today imply higher taxes tomorrow, to pay interest and principle on the debt that results from deficits
While these statements are consistent with the conventional wisdom, and while they are more-or-less accurate if applied to the case of a government that does not issue its own currency, they do not apply to a currency issuer.
Principles that apply to a currency issuer. Let us replace these false statements with propositions that are true of any currency issuing government, even one that operates with a fixed exchange rate regime
- The government names a unit of account and issues a currency denominated in that unit;
- the government ensures a demand for its currency by imposing a tax liability that can be fulfilled by payment of its currency;
- government spends by crediting bank reserves and taxes by debiting bank reserves;
- in this manner, banks act as intermediaries between government and the nongovernment sector, crediting depositor’s accounts as government spends and debiting them when taxes are paid;
- government deficits mean net credits to banking system reserves and also to nongovernment deposits at banks;
- the central bank sets the overnight interest rate target; it adds/drains reserves as needed to hit its target rate;
- the overnight interest rate target is “exogenous”, set by the central bank; the quantity of reserves is “endogenous” determined by the needs and desires of private banks; and the “deposit multiplier” is simply an ex post ratio of reserves to deposits—it is best to think of deposits as expanding endogenously as they “leverage” reserves, but with no predetermined leverage ratio;
- the treasury cooperates with the central bank, providing new bond issues to drain excess reserves, or retiring bonds when banks are short of reserves;
- for this reason, bond sales are not a borrowing operation used by the sovereign government, instead they are a “reserve maintenance” tool that helps the central bank to hit interest rate targets;
- the treasury can always “afford” anything for sale in its own currency, although government always imposes constraints on its spending; and
- lending by the central bank is not constrained except through constraints imposed by government (including operational constraints adopted by the central bank itself).
Some of these statements will seem cryptic at this point. We will clarify further in the following weeks. Here we are setting out the general principles that will be discussed later in order to contrast them with the “conventional wisdom” that likens a government’s budget to a household budget.
Let us be careful to acknowledge that these principles do not imply that government ought to spend without constraint. Nor does the statement that government can “afford” anything for sale in its own currency imply that government should buy everything for sale in its currency. Obviously, if things are for sale only in a foreign currency, then government cannot buy them directly using its own currency.
A step up into a little more advanced explanation of MMT -My favorite part of this:
Your taxes do not pay for any federal government expenditures. Taxes are instead a form of private sector demand reduction. Remember, the economy can only hold a certain amount of money dictated by its maximum productive capacity. If the government wants to spend more money to purchase goods and services, it should tax more to reduce the amount of money in the private sector. If it doesn’t tax more then it risks inflation from having too much money in circulation. Likewise, if it wants to spend less, it should tax less and let the private sector do more spending. If it doesn’t tax less, then the amount of money in circulation is too low and productive capacity sits unused. The idea here is to keep the total amount of money chasing goods and services near an optimum, maximum level. Again, taxes reduce demand in the private sector to make room for government spending.
Note that this turns our normal reasoning on its head. The federal government does not tax you so that it can then spend your money on buying or providing goods and services. It taxes you so that you cannot spend as much of your money on goods and services, which then makes room for it to spend money on them instead.
I believe the time has come to make my point as we see that taxes are merely a device to control spending in the private sector. Since the economy is at a very low level of output, I see no reason why anyone whose income is below the 50th percentile should pay any taxes anywhere in the society-at the gas pump, the grocery store or to the state or local government. More importantly, if the public deficit is just a method for keeping track of the transfer of money from the Federal Reserve to the private sector, there is absolutely no reason to get upset by the large numbers. The government, because Congressional idiots have decided it shall be so, is stifling the economy by taxing massive private spending out of the economy. The idea that absolutely nothing is done with this money is of course incomprehensible given our 1960's style macroeconomics courses which hint (they never really explain what money is) that taxes pay for government spending. Eighteen percent is a lot of spending to just siphon off from the private sector; this is similar to the medieval doctors applying leaches to the forehead.
In 2008 the federal government collected $2.5 trillion, an amount equal to 17.7 percent of GDP. Federal revenue has ranged from 14.4 to 20.9 percent of GDP over the past five decades, averaging 18.2 percent.
A more philosophical look at MMT and some commentary on the predatory nature of the current banking system. This the third in a six part series by Dan Kervick and is really very good in fact the best overall synthesis of MMT and political philosophy to come across in some time.
L. Randall Wray's Modern Money Theory primer at New Economic Perspectives
Friday, December 30, 2011
Can this nation achieve justice and equality for all?
Reading some of Phillip Pilkington’s writings over at Naked Capitalism.com, especially the articles about Modern Macroeconomics as faith based philosophy has caused me to reappraise my own understandings of both economics (in general) and my understandings about my personal life. Here’s the quote from Freud that hit home:
If the intensity of a phantasy increases to the point at which it would be bound to force its way into consciousness, it is repressed and a symptom is generated through a backward impetus from the phantasy to its constituent memories. All phobias are derived in this way from phantasies which, in turn, are built upon memories.
The connection to the title listed above—Economic, Politics, Democracy and all inclusive and pervasive Justice through out the land—may not be apparent not but will be by the time this page is finished. The previous part of this website for November explored Modern Money Theory which basically shows that to jump start our economy out of its miserable (as in millions of people suffering) position either government spending needs to be increased (.01% chance of that happening) or taxes need to be gradually made to be made lighter on a sliding scale based on the ability to pay-about a 50% chance of that happening but more realistic. However, if specific spending programs are tied to ‘good’ projects—rebuilding roads, new roofs on school gymnasiums, mass transit systems,—than most people give it a thumbs up. The problem is spending enough-$750 billion being a mere beginning-and instituting Federal tax cuts that lift the bottom 30% entirely off the Federal roll. The least well off still face stiff tax bills from their State or municipal government along with taxes imposed by the State and-Feds on necessities that range from gasoline, home furnishings, soap, clothing, cars: just about anything except food or prescription drugs-at least in Michigan that is the picture. This obviates any benefits derived from any economic stimulus-in other words the best our leaders can do for millions is a slice or two out of the economic loaf, we can only expect more of the worst kind of economics compared to what we all deserve.
Detroit Symphony Orchestra provides Musical Magic for listeners
Performances of Schubert’s Eighth (D 759 subtitled ‘Unfinished’) and Rachmaninoff Third show the skill sets of the group have been restored and the excellent musical performance and unique sound is back on track after a hiatus caused by a lengthy strike. I greatly enjoy live symphony music just to see and hear what will happen during the performance and I was not disappointed on Saturday, November 26th when during a the performance of the Schubert a voicing of one chord was out of balance. Voicing is a term used to describe which of the notes of a chord will predominate and the voice leading was off a bit as the violins retreated into a softness that was too easily covered up by the protruding brass. Mr. Slatkin made certain, with the cooperation of the players of course (!) that no such fluff occurred again-or at least I failed to detect it. Interesting though not momentous “mistakes” during live performances are the stuff that excite my little ivory tickling heart. The other reason that Symphony concerts are so much fun is the performance of the audience keenly interests me as well: why do so many folks arrive five minutes before the start of the performance, how many people understand, to any extent that an understanding can be achieve by non professionals, the music that is performed? But most of all, and this is unique to Detroit, why is the freeway back to the northern suburbs jammed with folks racing back home after the concert? Detroit audiences empty the place out in less than ten minutes flat! Hmmm. Speaking of empty the place out:
Let the stormy clouds chase
Everyone from the place
Come on with the rain
I've a smile on my face
I walk down the lane
With a happy refrain
Singin' in the rain
Lastly though my interest is in the whole cultural phenomena of concert attendance. In addition to the questions asked above I seek answers to:
- Why is there such a major difference in the degree of support found in Detroit, Michigan and say St. Louis, Missouri, for symphony music. Maestro Slatkin, the current conductor had excellent results in assisting St. Louis move the orchestra up to the upper ranks of the top 50, will he restore Detroit-now in the depths lower half of the top 50-to somewhere near the top half of the list ? My casual ranking of the country’s top orchestras and a reason for that ranking.
- New York, Philharmonic-most willing to perform new music and place the old tried (and tired)classics on second billing-Yah! Besides connection to some of the first rank music schools, besides being in the cultural center of the world besides having more millionaires per square block and many of those millions flow into Lincoln Center-it does make a difference for good music ain’t cheap, besides . . . .Ah, such munificence is only for Detroiters to dream about. One day D, one day.
- Chicago Symphony— here only because there has to be a second place (just like the jurists at the Tschaikovsky concerto contest, I threw some names into a jar) but seriously Chicago has as many virtuoso players and Northwestern University —located in the heart of Chicago’s famous Loop, is no slouch of a school. Also, Chicago has to be the busiest city for conventions anywhere on the North American Continent. All those travelers need something to do and that something is orchestra concerts. I recently traveled to Chicago and had a great time listening to this group perform Mahler's Sixth.
- Boston Symphony
- Los Angeles-versatility in programming
- Cleveland Orchestra —struggles with a heavily indebted community, the city is synonymous with Rust Belt—and yet supporters keep virtuoso players going and going and going. Bravo!
- St. Louis Symphony
- Philadelphia Orchestra
- San Francisco Symphony
- Discussion on this whole mess
The Detroit Symphony has suffered very large financial losses in the past three years, due in part to the economic disaster that has struck the whole world. However, they have also been ensared by the vampire Squid Banks: From the Detroit Free Press of 09/18/2011
Detroit Symphony Orchestra leaders have long said that fixing the organization's troubled finances for good meant repairing the business model on three fronts -- the musicians' contract, real estate debt and the endowment. But with the start of the 2011-12 season just around the corner, the DSO's turnaround plan has stalled at step two.
DSO leaders say that the new contract hammered out in April cutting musician salaries by 23% was a critical first step toward a sustainable future, though it came only after a horrific six-month strike that threatened to permanently cripple the orchestra.
Now the DSO has to restructure the $54 million in real estate debt on which it has defaulted, and the orchestra has to rebuild its decimated endowment. In the wake of massive deficits and stock market losses, the value of its unrestricted endowment has fallen to just $19 million -- from nearly $60 million in 2008.
But orchestra leaders find themselves stymied. Two years worth of talks with the banks that hold the debt on the Max M. Fisher Music Center have not produced a compromise. And without a bank deal, officials can't begin the serious groundwork for an endowment campaign. The stalemate threatens to derail the DSO's post-strike recovery before it has a chance to fully blossom.
"We have a chance to seize a more viable, vital future as a result of the hard work that's already been done," said DSO executive vice president Paul Hogle. "But that opportunity is fragile and requires making progress in a way that earns the community's confidence."
At the heart of the DSO's dilemma is a catch-22. The major donors needed to rebuild the orchestra's endowment won't pony up their millions if they think the money is going to go straight to the banks rather than support the orchestra.
"They want to know that they're giving money to a viable organization," said Bud Liebler, a DSO board member.
At the same time, banks would typically view those same donors as a prime source for repaying the debt, said David Blaszkiewicz, president of Invest Detroit, which bankrolls local redevelopment projects.
"It can be a little bit like a standoff," he said.
When a business or nonprofit defaults on a loan, the case is mediated by a special unit within the bank charged with recovering as much of the bank's money as possible while exiting the deal.
A spokeswoman for Bank of America, the leader of the consortium that holds the DSO's debt, declined to discuss details of the talks. "The DSO issues are multifaceted and complex and in a bank syndicate such as the one working with the DSO, decisions are made jointly and need the support of the group," said Shirley Norton, a San Francisco-based senior vice president of Bank of America, adding that the banks recognize the DSO's unique role in the community.
The other banks are JPMorgan Chase, Comerica, PNC and RBS/Charter One.
DSO officials also declined to discuss details of the talks. However, whatever form a final agreement takes, it will likely wipe out a substantial part of the $19 million in cash reserves that remain in the unrestricted endowment. The DSO also has a restricted endowment that stands at $26 million. But this money, an interest-earning nest egg, can't be raided to cover operating shortfalls.
The orchestra has been in default on its debt for two years, ever since the value of its unrestricted endowment fell below the $54 million it owes. Late last year the banks paid off the orchestra's bondholders and assumed control of the debt. The DSO has since stopped paying the interest charges and fees that total $2 million to $3 million annually.
The banks could foreclose on the Max and push the DSO into bankruptcy, though there are no indications that this option is on the table.
The bank negotiations aside, the five months since the strike ended have been promising. The DSO hit its revised, post-strike fund-raising goal of $9.5 million for the fiscal year that ended Aug. 31 -- though the sobering reality is that that still left a $1.5-million deficit on a pre-strike budget of $25 million. The original fund-raising goal before the strike was $11 million.
In a more complete snapshot of the depth of the orchestra's challenges, however, the DSO is still projecting $9 million in operating deficits over the next three years, excluding any interest payments. "The next step is undeniably removing the debt that hangs over this institution," said Hogle.
The glittering Max M. Fisher Music Center, which opened in 2003, stands as a symbol of the DSO's boldest aspirations but also as a key contributor to the more than $20 million in red ink since 2008. To pay for the building, the DSO issued $54 million in bonds in 2001 with plans to pay the annual interest with endowment income, a typical strategy for nonprofits. The principal was due in 2030.
At first, there was enough endowment growth to fund the debt, seed operations and reinvest in the principal. But then the stock market nosedived during the recession, and millions in expected new endowment gifts and pledges also disappeared. With costs rising and annual donations and ticket sales falling, the DSO burned through cash at an alarming rate.
The financing plan for the Max became an issue during the strike as musicians and their supporters called it poorly conceived and proof of shortsighted management. The plan required an annual market return of 7.75% to work -- a figure comfortably in line with pre-recession industry standards, according to financial experts consulted by the Free Press.
"No one could have predicted the depth of the economic collapse," said Blaszkiewicz of Invest Detroit.
Assuming the DSO reaches an agreement with its banks, it will have to pivot to recapitalize the institution. That means replenishing the money paid to the banks and then raising at least $50 million to $75 million to push the endowment to a level that would generate enough income to fill current operating gaps.
That's a tall order in this economy, especially in metro Detroit, where many nonprofits are starving for annual support and the relatively small pool of big-money arts supporters is already complaining of donor fatigue.
Nor will the orchestra have a splashy building project like the Max to hang an endowment campaign on like it did in the 1990s. DSO board member Liebler said one possibility might be to tie a campaign to both the rebirth of the city and the rebirth of the orchestra. With all of the recent development downtown, he said, a revitalized DSO -- including its world-class artistry and expanded outreach programs -- would be another jewel attracting people to play and live in the city.
More on the tie with vampire Squid Banks and symphonic music.