As an addendum to yesterday’s post, before I begin, I’d like to clarify the point that taxes reduce spending power and thus, can reduce the spending power of the rich whilst raising the spending power of the poor. When progressives say, “tax the rich!”, what they’re saying, though they do not know it, is, “destroy currency that is in possession of the rich!”. Under our current fiat monetary system, that is precisely what taxation does. It doesn’t get collected by government then respent on social programmes, or the military, nor does it end up in the hands of the poor. The national government does not need revenue today enabling it to spend. In fact, the national government’s job as a sovereign currency-issuer is to conjure currency out of thin air and then spend it into the economy. Progressives fail to realise this and so, their mantra of tax the rich will do nothing to help the poor in any way, nor will it secure and fully fund necessary public programmes. The illusion that taxing the rich funds national spending comes when progressives then spend an amount equal to what was destroyed in taxes.
As an example, let us assume that through taxation progressives destroy, say, $30 billion of what the rich have, then spend $30 billion on some programme. Progressives maintain the neoliberal illusion through faith; a belief that they must be careful and either spend what they can raise in taxes or “find cuts” in one initiative to “pay for” another initiative. In the end, if they find they’re short of the required funding, progressives then say they can expand the deficit a bit, but not too much, or else the national government will become insolvent. What actually occurred is the $30 billion was destroyed and then the US government issued $30 billion new dollars out of thin air to fund the progressive programme. On this correct view, government spends first before it taxes, so the act of taxing the rich first does the poor no good, nor progressives who sit spinning their wheels going nowhere. Government still has to do something; which progressives do realise – that something that it must do is either increase spending or reduce taxes on everyone else at the same time. But what progressives cannot fathom is it’s something that government can always do whether it taxes the rich or not and has been doing whenever it spends, since 1973.
It is no wonder then that progressives view a neoliberal, “trickle-down with a heart economics” enthusiast like Hillary Clinton as one of their own. Whilst it is true that orginisations such as the Democratic Socialists of America view Hillary for what she is, a neoliberal, the DSA itself remains infested with neoliberal groupthink on the subject of taxation. Even the DSA believes that national taxation funds national spending and that they can do little to advance the socialist cause without first taxing the rich.
A glaring example of neoliberal thinking can be found in Vol, XLIII, No. 3, Winter 2015 edition of the DSA’s “Democratic Left”. In an article entitled “Building a Political Revolution. The Sanders Campaign and the Future of the Left”, we read,
“Most of northern Europe has publicly funded universal child care, truly universal health care, and more generous public pensions that replace 60% of average income.”
Which is a goal that the DSA and all US progressives should strive to achieve. But it is through the question of how to achieve that goal which the DSA falls into the trap of neoliberalism and becomes its unwitting errand boy,
“Could the United States afford these goods? Certainly, but only if the 1% and corporate America pay their fair share. In 1962, corporate taxes constituted more than 25% of federal revenues. Today, corporate taxes account for 8% of federal revenues. If the country just went back to pre-Reagan and pre-George W. Bush tax levels on the top 5% of income earners, federal spending could immediately expand by $250 billion or more than 7%.”
And there you have it: neoliberal nonsense at its finest, advanced by a socialist organisation – the DSA. Shame! Progressives everywhere should think about that for a while and let it sink in until it burns. Here then is the left’s zen koan; its “mu moment” so to speak. In Christian churches throughout America, prior to communion, the congregation spends a few minutes in silent meditation. Let us do the same for a moment and meditate on the implications of a socialist organization advancing neoliberal nonsense. If you came to the conclusion that something is all to cock, then you are right. The DSA and other progressives will never defeat neoliberalism, nor will they implement their agenda of infrastructure work, national healthcare and other desperately needed programmes by promoting the false teaching of neoliberalism that the1% has all the “money” and we must tax the rich before we can do great things. On this errant view, progressive change is a pipe-dream for both the DSA and progressives everywhere. I need not continue my critique of the above statement by the DSA on corporate taxes in 1962, because if you read yesterday’s post, you would understand that such thinking is born of the now defunct Bretton-Woods monetary system which ended in 1971 and I’d only be repeating myself.
Fallacious thinking on behalf of progressives concerning inflation
We now come to another problem which is persistent within the progressive movement – inflation. First of all, progressives worry that should the government spend first to create full employment and advance the public purpose without taxing the rich, then inflation would surely kill us all. False progressives, such as Hillary Clinton, routinely warn that if the federal government were to print too much money, the US would become Zimbabwe and at that point, actual progressives begin biting their nails, fidgeting about. It can be seen then, that neoliberalism has progressives on a tight leash. And so, as we’ve discussed, because of neoliberalism, the left is incapable of recognising their own kind, mistaking Hillary Clinton for a progressive. Regardless of what neoliberals like Clinton tell you, the US, UK, Canada, Australia, Japan, et al., becoming like Zimbabwe should these governments do great things now without taxing the rich is an errant view. Coming from the mouth of Clinton, not only is it an errant view, but also malicious in intent.
Cries of “Zimbabwe!” and other hyperinflation nonsense put to rest
Whenever hyperinflation arguments arise, so does fantasy, because those like Hillary who insist that federal spending without tax increases or finding cuts to pay for something will result in hyperinflation, ignore causation. There is only a blind suggestion that “printing money” (something a sovereign currency-issuing government does not do today to fund spending) causes hyperinflation. The question that is never asked is, what was happening prior to the episode?
Robert Mugabe came to power and threw white farmers off of their land, handing that land to people who didn’t know the first thing about farming. In doing so, Mugabe destroyed Zimbabwe’s food supply. Secondly, through other corrupt initiatives, Mugabe proceeded to damage Zimbabwe’s infrastructure and railways. These actions collectively resulted in extremely high unemployment rates of 80% + and so, Zimbabwe’s capacity to produce goods and services was reduced significantly. Then afterwards, Mugabe began spending in excess of the real capacity of Zimbabwe’s economy. With absolutely no possible way for Mugabe’s immense spending to result in greater employment and output, hyperinflation occurred. The case of Weimar is no different.
Weimar was forced to make war reparation payments in gold. When Weimar ran out of gold and defaulted, the allies seized Weimar’s industrial region. Workers quit working, but Weimar continued to pay workers in local currency. So then, as output fell, inflation rose. When exports finally collapsed, hyperinflation occurred. So it is a case of what was happening prior to the immense spending that was the problem, not the spending itself and by using Zimbabwe as an example for why the US cannot do great things first without the tax dollars of the 1%, Hillary Clinton is maliciously attempting to thwart real progress. Since we’re discussing Clinton, let us use the US as an example here.
If the US government issued $50 trillion today, whether or not that $50 trillion would result in accelerating inflation depends entirely on what is done with the $50 trillion. If the dollars merely sat in an account somewhere unspent, then no inflationary pressures will arise. In order to result in accelerating inflation, the $50 trillion must be spent on goods and services. The act of spending $50 trillion on the consumption of production will raise aggregate demand. If that demand continuously exceeds the real capacity of the US economy to respond with increased output, then accelerating inflation will occur. Spending, whether public or private, carries an inflationary risk. The 1% have a hoard of currency, but what progressives fail to realise is that since the rich do not spend that hoard, there is no problem with regard to inflation. A problem with equity? Yes. Demand-pull accelerating inflation? Not if it isn’t spent on goods and services.
So, to create a hyperinflation episode in the US, the US government would either have to spend far, far in excess of the current real capacity of the US economy on a continuous basis, or somehow destroy its food supply and infrastructure to the point where unemployment rates skyrocketed with no way for new spending to result in greater output. The last time I checked, progressives weren’t asking for a nuclear war, praying for the Yosemite volcano to go off, nor demanding that the US government actively destroy the nation’s food supply and infrastructure before it began spending on progressive initiatives. If that was the intent of FDR’s “New Deal”, then FDR did it wrong.
Errant Views of the “Money Supply”
Second, progressives do not understand that the central bank does not control the “money supply”. It is here again, like the argument “we need the tax money of the 1% first, before we can do anything” that neoliberalism holds an iron-fisted grip on progressive thinking.
Contrary to orthodox opinion, the “money supply” is an endogenous phenomenon, determined by demand for bank credit. Endogenous, being defined as having an internal origin. When demand for credit expands, the “money supply” expands and when demand contracts, the “money supply” contracts. The quantity of “money” is outside of the central bank’s control, because the central bank sets the price of money, or in layman’s terms, it sets the interest rate.
As the government is both the currency issuing and regulatory authority, it can choose to exercise control over either the supply of money, or the interest rate, but it cannot do both at the same time. Credit is “money” that private banks create. Contrary to the orthodox opinion, banks do not lend customer deposits. Banks lend their own IOU, which is then denominated in the government’s unit of account, allowing those IOUs to act as “money” which must be paid back. Hence, unlike currency issued by the national government, bank credit money is an asset with a corresponding liability attached to it. Credit “money” is created and destroyed through transactions within the private sector, which we call “horizontal transactions”. Since these transactions occur inside the private sector, they are endogenous. Progressives everywhere should stop listening to Paul Krugman – banks are not intermediaries.
I do not wish to confuse laypersons with the complexities of banking and central bank operations, so I will briefly describe these items, condensed for better understanding. Bank loans are made regardless of what a bank might have in reserves. Should a bank find itself short of reserves later on, it can borrow from another bank. If the entire banking system is short of reserves, the bank has two choices:
1. Sell bonds to the central bank
2. Borrow reserves from the central bank
Note that borrowing from the central bank reduces the return that the bank expects from lending which gives us a clue: If the difference between the rate the bank pays and what it can profit from lending is acceptable, the bank will continue to lend. Therefore, should a bank expand its lending to the point that it becomes short of reserves, the bank might stop lending if the price it would have to pay for reserves from the central bank is too high. In other words, bank lending is not reserve constrained, but rather, it is constrained by expectations of profit and solvency. Thus, we understand that banks neither lend out reserves, nor are they constrained by such as is suggested by orthodoxy.
Secondly, we can also clearly see that the central bank does not expand the “money supply” through open market operations either. The purchase of bonds from the market by the central bank might add reserves, but banks do not lend out reserves. Banks will lend reserves to other banks on the interbank market, however, and the resulting competition will push the overnight rate down. If it wishes to maintain control over monetary policy, the central bank must intervene and drain off any excess reserves that it injected through open market operations, or set the target interest rate at or near zero. Since the central bank clearly sets the interest rate, it cannot control the “money supply”. Hence, the “money supply” is determined by demand for bank credit, which in turn determines the monetary base and so, the orthodox viewpoint collapses.
Third, as we can now see, this understanding throws QTM into question. The central bank doesn’t control the money supply, the velocity of money is not constant, nor is output constant. Given these facts, any increase in M will not necessarily result in an increase in P, thus the orthodox viewpoint of the central bank causing inflation via expanding the “money supply”, which it cannot do, is total fantasy and such neoliberal teachings on inflation and hyperinflation should immediately be vacated by the progressive movement.
So, what we understand thus far from yesterday’s discussion and today’s, the question progressives should never ask is, “how do we afford it”. The question progressives should be asking is, “does the nation have the real resources available to achieve our desired outcome?” In the US, UK, Canada, Japan, Australia, et al., the answer is yes. Real resources are finite. Currency is infinite.