The Jefferson Tree - A platform for debate and discussion of current events and politics...

Palestine Borders and Demographics Prove to be A Ghetto

Thanks to a good idea given to me by my partner here at STL, I started to research and analyze some geographic information regarding the Jewish land-grab in Palestine. I then followed by studying some demographic info on the Gaza Strip and drew some interesting conclusions. Here’s what I found: First, some great maps over at Wikipedia with adjoining historical context info and links portraying the boundaries of Palestine/Israel since the 1916 Sykes-Picot Agreement (The linked information could have you reading ...

Social Protest Lit: Ebenezer Elliot, “The People’s Anthem”

A poem from Ebenezer Elliot entitled The People’s Anthem from Book IV called “Out of The Depths.” This chapter is focused on man’s pursuit of remedy for social injustice: When wilt thou save the people? O God of mercy! when? Not kings and lords, but nations! Flowers of the heart, O God, are they! Let them not pass, like weeds, away! Their heritage a sunless day! God save the people! Shall bring crime for ever, Strength aiding still the strong? Is it thy will, O Father? That man shall toil for wrong? “No!” ...

Stephen Moore’s Ridiculous Anti-Clean Energy Rant

Hard right-winger Stephen Moore took a break from pushing debunked trickle-down economic policies to take a pathetic shot at clean energy.  Let the stupid begin. …radical Greens, one of the most influential political forces in America today… Seriously?  He goes on to mention the famed Sierra Club as one of these forces.  And where did they rank in 2013 on lobbying: 755.  In fact, if we look at the top 50 interest groups giving to members of Congress this year, no sign ...

Anti-Israel Policies/Actions Is Not Anti-Semitsim

There have been growing protests in Europe against the mass murder of Palestinians in the Gaza Strip by the State of Israel. These actions are in response to the IDF killing 500 Muslims there with the vast majority of them being civilians. But what is troubling about these movements is, according to this article in the NYT, an anti-Semitic tinge has taken place at these protests. The story reads that in France: Several recent pro-Palestinian demonstrations in Paris have boiled over ...

Warren For President?

Today at the the annual Netroots Nation conference in Detroit, the nation’s largest gathering of liberal activists and organizers, Massachusetts Sen. Elizabeth Warren (D) reportedly drew an applause that Hillary could only dream of. According to NYT and Politico reports, Warren was a rock-star while Hillary Clinton, the likely Democratic candidate for President, was absent. Warren’s populist talking points and her history of taking Wall Street to task (remember that Warren was an early advocate for the creation of a new Consumer Financial ...

Social Protest Literatue at Sparking The Left

Here at STL we are starting a new feature. In between our political-insight posts, I will start publishing excerpts or entire pieces of great literature that speak to crucial social and political issues which span the centuries. Though almost all in the Western tradition, the subject matters are transcendental. Now first to name my source, I am taking pieces from Upton Sinclair’s selected and edited collection “The Cry for Justice: An Anthology of the Great Social Protest Literature of All Time.” ...

Pulitzer-Winning Journalist Detained for Being Undocumented

I was first brought aware of Jose Antonio Vargas’ story last week in a piece he penned in Politico. He explained that he was in the Rio Grande Valley, in the city of McAllen, just north of the Mexican border. He was there to see first hand the tens of thousands of undocumented children, most of them from Central America, and observe how they were being treated. The trip was also used for a news conference appearance and vigil organized by United We Dream, ...

GOP Refuses Funding for Border Children Projects

A humanitarian crisis unseen before at our borders is becoming more and more urgent everyday at Rio Grande Valley, TX, and other Southwest locations. And yet the GOP is arguing over numbers. Yesterday President Obama requested an amount of $3.7 billion from Congress to help aid the 57,000 unaccompanied minors who illegally crossed the border from the Mexico side since October. They are mostly from violence-ridden Central American countries, like El Salvador, Guatemala, and Honduras (Honduras has the world’s highest murder ...

Selective Outrage

War is hell.  All we have to do is look around the world to see its toll.  That being said, I don't understand the lack of outrage coming from this President and his administration other than that aimed at our one ally - Israel which is doing no more than trying to protect it's people from rocket fire and constant raids from Hamas. The fact that Palestinian civilians are getting killed is a tragic yet unavoidable aspect of this war.  Why ...

Why Are We So Full Of Hate?

What has happened to human kind?  No matter where you look we find ourselves surrounded by a world filled with hate. What puzzles me is how it's combined with political correctness.  Take this country where so many words are now frowned upon and even forbidden because they are hurtful to certain people.  Redskins, squaw, savage plus a whole lot applying to blacks, orientals and hispanics not to mention middle easterners.  Has it dawned on anyone banning the names has done nothing ...

Has Putin Over Reached Once Too Often?

My, oh my.  We've watched this man make mince meat of Obama over the past several years.  Each time you could see the smirk broaden and the swagger get more pronounced. He and his allies - Iran, China, Syria and North Korea were truly enjoying themselves. But as happens with a lot of bullies, they get over confident and suddenly everything around them collapses. I'm wondering if this is the case with the downing of the Malaysian passenger jet. With the death ...

If Only It WERE The Heat!

What a day.  A passenger plane has been shot down over Ukraine uncomfortably close to the Russian border. Hamas reneged on the humanitarian cease fire so Israel launched their ground offensive. Children still pour across the border while Congress dithers. It's now being reported parents are giving them birth control in case they are raped during the journey. Along that line former member of Congress, Todd Aiken, who once talked about legitimate rape and the idea that women's bodies protected them from becoming ...

Hannity's Histrionics

For a person who doesn't have much faith in the intellect of pundits, I wonder why I watch them so often.  I wonder even more why the cable outlets and networks that employ them don't take more care in who they hire. Many of them get on crusades that bear no resemblance to reality.  Sean Hannity is one of the most prominent. The night before last  he was on his Bowe Bergdahl kick demanding to know why he was returned to ...

Do Actions Speak Louder Than Words?

If the President could run away from the border mess any faster I'm sure he would. It's being said it's because being seen in the setting of kids crammed into confined spaces with their scabies and lice would reflect badly on him.  It could even be his Katrina.  Well, maybe.  But who's fault is that? It goes to show his handlers aren't as smart as they think they are.  For one, drinking beer and shooting pool in Colorado, a state where ...

The Kids Always Went Home

Watching the immigration mess going full bore brought to mind a lot of things that have involved children from other nations.  The first thing that comes to mind is the Disney song It's a Small World After All that speaks to all we have in common. Hopes, dreams, all the warm fuzzy stuff. We've had exchange student programs where a student from another country lives with a local family to learn not only academics but what life in American and Americans ...

The Militia Is Coming, The Militia Is Coming!

That's all we need! News has it a call has gone out for militia, both unarmed and armed, to gather along the border to help private land owners protect their property in something called Operation Save Our Borders.  Terrific! Remember how well it went when militia turned out to help to  help Cliven Bundy in his fight over Federal grazing rights in Nevada?  It came within a hair's breadth of turning violent. I really feel for the border towns who are the ...

A government is republican in proportion as every member composing it has his equal voice in the direction of its concerns, not indeed in person, which would be impracticable beyond the limits of a city or small township, but by representatives chosen by himself and responsible to him at short periods. Thomas Jefferson
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Ralph Musgrave - Ralphanomics

Fast fiscal consolidation would not hinder the recovery or involve austerity.

I’m tired of being told “we must consolidate the debt, but too fast a pace of consolidation would hinder the recovery”.

This message comes from numerous “authorities” who should know better, including the IMF, a long list of Britain’s academic elite, and William Dudley of the New York Fed. (For some directions to the relevant paragraphs in their pronouncements, see references at the end.)

The phrase “fiscal consolidation” is defined in the Financial Times online Lexicon as a reduction in the deficit but not the debt. In contrast, the OECD defines it as reducing both.

This disparity is not important for the arguments below because these arguments apply regardless of whether a country wants to reduce just its deficit, or both deficit and debt (DD).

As implied above, the argument here is that the pace of consolidation is largely independent of stimulus or attempts to adjust aggregate demand. To explain this, it is necessary to divide the DD into two parts: the structural DD and the part of the DD that results from stimulus. These two are significantly different, and I’ll start with the structural DD.

The structural deficit and debt.

The structural DD arises simply from a failure by politicians to collect enough tax to cover public spending. That is, they borrow instead of taxing.

Since there is no intention to give the economy any stimulus (or anti-stimulus) here, the deflationary effect of the borrowing ought to equal the stimulatory or “inflationary” effect of the spending (had that spending not been covered by tax or borrowing). At least, the two will be the same if those implementing the deficit know what they are doing.

Thus disposing of a structural DD is child’s play: just reverse the process that brought it into being. I.e. the debt needs be paid back. That is, taxes need to be raised and creditors paid off. Those tax increases would NOT mean “austerity”. Reason is that, as mentioned above, incurring a structural DD does not involve stimulus, thus reversing the process would not involve “anti-stimulus” or austerity. Put another way, there would be no reduction in GDP, total numbers employed, etc. At least that is certainly the case with a closed economy. Open economies are slightly different, and I’ll deal with them below.

As to where some stimulus DOES inadvertently result from incurring a structural DD (and I think this DOES happen to some extent), this is not a problem. It means that an exact mirror image of incurring the DD would involve an anti-stimulatory or demand reducing effect. But countering the latter demand reducing effect is not difficult: anyone who has studied economics for more than a year knows how to raise demand. For example, some of the money for the debt buy back could come from the printing press (as is the case with QE).

Having said that GDP, numbers employed etc remain unaltered, it is of course it is not ESSENTIAL to aim for this “everything stays the same” outcome. It would be possible to mix some stimulus with the DD reduction process. But to keep things simple, I’ll stick with the “everything remains constant” assumption.

And for any readers who are puzzled as to how taxes can be raised while all the above factors remain constant (especially take home pay), the explanation is that the effect of the debt buy-back would be to raise pre-tax incomes, while tax would nullify that increase.

So that’s the structural DD gone. Vanished. A few apparent problems associated with this cure for the DD will be dealt with below, but the stimulus DD will be considered first.

The stimulus DD.

Making a reduction in the stimulus deficit an objective is COMPLETELY BALMY.

The purpose of a deficit is to raise aggregate demand where there is a shortfall in AD (for example when indebted households rein in spending because they find the value of their houses falling dramatically compared to their debt – ring any bells?)

So long as the latter shortfall in demand persists there is NO POINT in trying to reduce the stimulus deficit.

But if such a deficit lasts a relatively long time, that might appear to involve an unacceptable expansion in the debt.

The answer to the latter non-problem is that as Milton Friedman, Keynes and others pointed out long ago, a deficit does NOT HAVE TO BE FUNDED BY DEBT. That is, a deficit can be funded EITHER by increased debt, OR it can be funded by expanding the monetary base.

There isn’t actually a huge difference between the two: that is, monetary base and government debt both appear on the liability side of a central bank’s balance sheet. Moreover, a chunk of government debt is simply a promise by government to pay the holder of such debt some money on a particular date. As to where that date is in the NEAR future, (i.e. where the debt is near maturity) there is virtually no difference between the two.

Given this rather small difference it is reasonable to ask whether it is worth turning debt in to monetary base. Well, one good reason is that the world is full of panic stricken folk who think an expanding debt means the end of the world. So keeping these folk happy is no bad idea.

Second, as I explain here, the traditional arguments for having governments run into debt do not stand inspection.

The stimulus debt.

As pointed out above, given inadequate demand, government should feed financial assets to the private sector (bonds or money). In other words, given inadequate demand, the stimulus DEFICIT should not be reduced.

However, if over recent months or years a stimulus deficit has accumulated in the form of bonds or “national debt”, there is nothing wrong with reducing or “consolidating” that debt in the sense of converting the bonds to cash. In other words the buy-back proposed here can perfectly well extend to the stimulus debt.

There is a minor problem involved in doing this, namely that simply “doing a QE” on such debt (i.e. printing money and buying it back) might be too stimulatory, and thus too inflationary. But the solution to this little problem was referred to above, namely that the funds for buying back debt can come from the printing press or alternatively from extra tax. The former is stimulatory and the latter has the opposite effect, that is it is “anti-stimulatory” or “demand reducing”.
So mix the two in the right proportions, and you get a neutral effect. That is, no effect on GDP, numbers employed, and so on.

Apparent problem No.1: distributional matters.

I’ll now consider a few apparent problems with the above DD reduction ploy.

The first apparent problem is that the ploy might benefit the asset rich (holders of government debt) at the expense of the average tax payer. Well the answer to that is that in principle, matters and policies relating to wealth and income distribution should not be mixed up with matters relating to DDs.

For example, when governments expand a deficit, the prime aim is NOT to re-distribute income or wealth (although given the less than perfect competence of governments, some inadvertent re-distribution probably does take place normally). Likewise, when the process is reversed, assuming it is reversed in a competent manner, there ought not to be any significant distributional effects. I.e. if changes to the income tax and social security system are needed to counter-balance any distributional effects of reversing a DD, then so be it. That is not a big technical or economic problem. (As to the politics, that’s a different matter!)

So let’s move on to the next problem.

Apparent problem No 2: a large monetary base expansion would be inflationary.

Laugh out loud!

The monetary base in the US just has expanded by an astronomic and unprecedented amount: it’s TREBBLED IN THE LAST TWO YEARS!!!! And where’s the hyperinflation?

To be more serious, there are some very good reasons for this lack of serious inflation. First, additions to the money supply are not inflationary till they are spent, and spent in sufficient volume and speed to cause excess demand and thus inflation. (David Hume, the Scottish philosopher pointed this out 250 years ago. It would be nice if we’d learned something about economics in the last 250 years, would’nt it?)

But wait a minute: an increase in demand IS THE SOLUTION TO THE PROBLEM! In other words it is not possible to get serious inflation without first “solving the problem” (i.e. the recession). Of course the tricky bit is to avoid overshooting the solution, to coin a phrase. But certainly in principle, it is not possible to get excess inflation without having first “solved the problem”

Second, as to the idea that this additional money might cause inflation a few years down the line, that is a feeble point, and for two reasons.

First, increases in demand and thus inflation can perfectly well occur EVEN WITH NO INCREASE IN THE MONEY SUPPLY AT ALL. For example a big increase in consumer confidence, i.e. a willingness by consumers to go into debt and a willingness by banks to lend to them would cause a rise in demand. Indeed, this was the source of a sizeable portion of many countries’ aggregate demand prior to the recession.

Perhaps the “anti money supply increase” brigade can tell us what they propose doing with the money supply given that inflation can arise ABSENT any money supply increase. Do they advocate abolishing money altogether?

Of course, expanding the monetary base raises the RISK of inflation in a few years time to a finite extent. But that should not be difficult to deal with: there are a host of anti-inflationary measures that every government has at its disposal. One of these measures is simply to reverse the above “money printing”. I.e. raise taxes, rein in money and “unprint” it, or extinguish it.

Any additional tax imposed for the latter reason would not, repeat not, mean austerity or “hindering the recovery” in any way. The sole purpose of such taxation is to remove money from the private sector, which, were it left in the private sector would cause excess inflation. And inflation REDUCES living standards rather than increases them. I.e. tax, paradoxically, can improve living standards.

Second, as to the idea that banks will lend money just because they have loads of it sitting in idle accounts, LOL yet again. Right now, as I write, banks ACTUALLY ARE sitting on larger than ever reserves, while not lending it out with any great enthusiasm. And apart from the latter evidence, there are some simple theoretical reasons that explain why banks do not automatically lend out “idle” money, as follows.

Any bank with its head screwed on, lends where it sees a PROFITABLE LENDING OPPORTUNITY, not when it happens to have money in idle accounts. Likewise car hire firms do not hire out cars at any old bargain basement price just because they have cars lying idle.

Indeed, as long as banks see profitable lending opportunities, banks will lend EVEN IF THEY HAVE INADEQUATE RESERVES!!!!! In short, the amount that banks have in idle accounts or reserves, is one big irrelevance. For more on this, see here, or Google “banks are capital constrained not reserve constrained”. Or see here.

And if by any chance it turns out that banks do lend simply because they have money in the kitty, that just proves they are incompetent. And that is a good reason for tighter bank regulation, not an argument against letting households have the amount of money they feel comfortable with, which in turn should bring full employment. Given the numerous crooks and incompetents running banks, personally I’d favour much tighter bank regulation that Basle III.

Third, one daft aspect of the idea that “money supply increases cause inflation” is that those who promote this view never tell us what the OPTIMUM amount of money per person should be. This is exactly the same as saying that ANY increase in speed for a car on a particular stretch of road will be dangerous, without saying what the OPTIMUM speed is (i.e. where the best trade-off is as between reduced journey time and danger).

In contrast, a very clear idea has been set out above (hopefully) as to what the optimum amount of money should be: whatever brings the maximum level of demand that is consistent with acceptable inflation.

Apparent problem No.3. Permanent low interest rates.

Buying back debt as advocated here is similar to QE. And the large scale and long lasting “QE” operation advocated here possibly implies low interest rates for an extended period, but this is not a problem. Far from being a problem, there are actually good arguments for the current zero or near zero interest rates to become a permanent feature. First, see two of Warren Mosler’s works: here and item No.3 under the heading “Proposals for the Federal Reserve” here.

Second, as far as stimulus is concerned, it makes no sense for a government which wants to do some Keynsian “borrow and spend” to pay any interest for the money borrowed. That is, what is the point of paying for the privilege of borrowing something (money) which you can produce yourself at no cost?

Third, one of the few valid reasons for government debt (or monetary base) is that this provides the private sector with the net financial assets it wants. Put another way, without such assets, one gets “paradox of thrift” unemployment. But in demanding such assets, private sector entities do not do society as a whole any favours. Thus there is no reason to reward such private sector entities.

Put another way, the attitude of government to private sector entities which threaten to go into saving mode and cause unemployment unless they have the savings they want should be “OK, here are the savings you want, but there is no reason taxpayers should be burdened with paying you interest, so you’re not going to be rewarded for demanding these savings”.

Should we abolish interest rate adjustments?

The above argument, of course, implies abandoning attempts to adjust aggregate demand by adjusting interest rates. That is, the implication is that it is the quantity of money that should be adjusted not its price (though of course adjustments to the quantity will inevitably impinge on the price).

This idea may be novel, but there are actually a host of weaknesses in the idea that interest rate adjustments are a good idea, which I set out here.

Apparent problem No.4: balance of payments effects.

QE has lead, particularly in the US, to funds quitting the country in search of better returns elsewhere. And this in turn will have depressed the dollar relative to other currencies.

Given that what is proposed in this article is QE writ large, is there a problem here?

The answer is that ANY form of stimulus depresses the value of a country’s currency. That is, the alleged “problem” here is not unique to the policy advocated here.

Given excess unemployment, any country is better off reducing that unemployment, even if there is a slight drawback in the form of its currency losing value.

_______________

References.

Dudley: see para starting “As discussed earlier….”
IMF: see para starting “The policy advice to advanced economies….”

Ralph Musgrave - Ralphanomics

Author: Ralph Musgrave - Ralphanomics

I wrote a book on unemployment recently with James Galbraith, and others. Galbraith is one of Obama's economic advisers. I love the different cultures that exist in this world. I took an interest in them long before the daft word 'multiculturalism' was widely used. I want to see these cultures preserved. I want to see Tibet staying Tibetan, and Britain staying British.

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