no third solution

Following up on a teaser article, Pure Keynesian Nonsense, I’m not sure what offends me most about Mosler’s particular brand of political economy. There’s an awful lot to read at Mosler Economics, and if this is his “law” I’m afraid to say it’s probably not worth my time.

There is no financial crisis so deep that a sufficiently large increase in public spending cannot deal with it.

Really? Surely this is a joke, right? Even if “Mosler’s Law” were true — and there is ample reason to believe otherwise — the difficulty in applying it is one of precision.

Either it is true that some level of Government spending would be too much and that this would be problematic in its own right, or everyone who matters (policy makers and their advisors) are afraid that the former is true, otherwise, they would’ve long ago created Utopia and put an end to human suffering caused by the scarcity of resources. So it seems likely that a government could spend too much, and could wreck the economy in the process. Else, we can assume that a sufficiently large increase in public spending would fix any financial crisis, and that the amount of public spending is somehow related to the size of the financial crisis. However, if the amount of public spending that policy makers settle upon is insufficient, things are bound not to get any better, and may even get worse.

Indeed, we are witnessing the failure of a trillion dollar bailout, which is only consolidating economic and state power within the very organizations that failed so magnificently in the past year or so.

In either case, there is now a new problem, which requires a new solution, which is prone to the same precision problem. If you don’t get it exactly right, it’s still broken. This is the essence of the “Calculation Problem” faced by Socialist central planners. No group of men in whatever alphabet-soup of a government agency can have all of the necessary information to mandate the appropriate prices and allocation of scarce resources, nor with the omnipotent power of the State, could they be possessed of the proper incentives, even if the knowledge were available.

But that’s just for starters.

Mosler suggests that when the government raises taxes in order to spend, people must work in order to meet these new tax obligations.

Once the government levies a tax, the private sector needs the government’s money so it can pay the tax…Because the private sector needs the government’s money to meet its tax obligations, the government can literally name its price for the money it spends. In a market economy it is only necessary to define one price and let the market establish the rest.
(emphasis in the original)

Any “market” in which one party has such omnipotence that it may unilaterally alter the rules of the game at any time, can hardly be characterized as a fully-functioning “market economy.” Under this condition, the government determines where and in what quantities money is eventually spent. This distribution must necessarily diverge from what would otherwise be chosen (this is a necessary condition unless government spending is superfluous, in which case devoting thousands of words in an attempt to justify such measures seems silly). Scarce resources like land, labor, capital, tools, etc., are bid away from their most valuable uses by the government’s blank check.

One implicit assumption, the moral question discussed below notwithstanding, is that the work that is forcedencouraged in this manner is genuine productivity which will heal the ailing economy. But no nation ever taxed itself into prosperity.  It simply can’t happen.  The miracle cure can be delivered by simply injecting more fiat money into the system. (At least he is intellectually honest enough to accurately describe the nature of fiat money).

Fiat money is a tax credit not backed by any tangible asset…Under a fiat monetary system, money is an accepted medium of exchange only because the government requires it for tax payments
(emphasis in the original)

He illustrates the process with an example. The parents in a household issue scrip-currency to their children upon the completion of chores. The children see this scrip-currency as worthless. Then the parents “create a market” for the scrip, by demanding payment (in scrip) for food, lodging, etc.

Do you see where I’m going here? Why bother with the scrip-currency in the first place? Why don’t the parents simply demand labor from their children, in exchange for food and lodging. Surely the parents have enough “market” power (and physical strength) to enforce these demands. The scrip-currency in Mosler’s example is a ruse — a cunning attempt at trickery. The same is true of the fiat currencies in use throughout the world, none of which could ever have emerged without deception and theft, none of which could be maintained without violence.

In a market economy, production buys production. Under Mosler’s brand of State-capitalism, the government spends money it doesn’t have, creating an immediate tax burden for the citizens, who must then produce and repay the government under penalty of law. This process is objectively more reprehensible than the traditional “levy taxes first, then spend the revenue later” since under this model, individuals are forced to work, in order to pay off obligations they did not incur.

Arguing that taxes cause people to work, in order to meet the tax obligations, is just a fancy way of saying, “We’re going to force you to work, whether you like it or not.” The fact that you have some discretion over how much you work is beside the point, since the taxes levied upon you without your consent create an obligation that must be met — or else!. Fiat currencies, as the scrip in Mosler’s illustration, are designed more or less intentionally, to give the “earners” the illusion of freedom and sovereignty, when in fact they are hardly more than slaves.

On saving and investment, Mosler offers the following Keynesian prescription:

Putting part of one’s salary into a savings account means only that an individual has not spent all of his income. The effect of not spending as such is to reduce the demand for consumption below what would have been if the income which is saved had been spent. The act of saving will reduce effective demand for current production without necessarily bringing about any compensating increase in the demand for investment. … Savings equals investment, but the act of investment must occur to have real savings.

The act of saving will reduce effective demand for goods produced at some time in the past, and even to the extent that such saving represents “hoarding” (the Keynesian four-letter word), since we can be reasonably certain that at some point in the future the money will be spent, the entrepreneur should begin restructuring his processes accordingly, in order to satisfy the (now) longer time preferences of consumers. Or, he should be satisfied with smaller profits now. In either case, he has failed to accurately estimate future consumer demand in an ever-dynamic world.

It is (and was) the entrepreneur’s responsibility to make goods and services available in the right times, places, and quantities that consumers demand them. When people decide to save, for whatever reason, the entrepreneur may lose (or gain) revenues/profits, to the extent his forecasts were accurate. Rewarding or subsidizing entrepreneurial failure is a road map only to poverty.

There is no justification whatsoever for suggesting that when an entrepreneur has erred in his forecasts, that he should be encouraged, nay subsidized, to continue producing, to continue earning income. The overwhelming sense of entitlement in this instance, that the money I (or we) choose to save is in fact the rightful income of someone else, and that if I do not spend now, someone else is still entitled to that income through government transfers, inflation, etc., is Fascism at its finest.

It appears then that the problem isn’t savings, but rather lack of investment. Why aren’t people investing while they are saving? Perhaps because all of their previous “investments” have been decimated by monetary inflation.

The root of this paradox is the mistaken notion that savings is needed to provide money for investment. This is not true. In the banking system, loans, including those for business investments, create equal deposits, obviating the need for savings as a source of money. Investment creates its own money.

The paradox is not the “mistaken notion that savings is needed to provide money for investment”. In a free market, this idea is neither mistaken nor paradoxical. True money never “leaves” an economy, it is only kept for future use. This may be in the form of investment loans, or it may be in the form of under-the-mattress hoarding. The former seems not to be a problem, so we concern ourselves with the latter. In a corrupt banking system which creates money out of thin air, malinvestment is the necessary consequence of inflation.

If money is permanently destroyed, the purchasing power of all remaining money increases. Free market money is only lost or destroyed in miniscule quantities: the total above-ground stock of gold in the world has never diminished year-over-year, for the 500 years or so, for which reliable data exists.

“Hoarding” money is a precaution against uncertainty. For every individual with “excess” money under the mattress (excluding perhaps, the institutionalized) for a given risk, there exists some level of return that would entice him to loan money. If he does not invest money, by his estimation the risks are too great, or the returns too small (or some combination of the two), relative to his estimation of his needs — which are the only estimations that matter ina free society.

By temporarily removing from circulation some quantity of money (e.g., I keep my cashed paycheck under my mattress), I am signaling to the market (silently, anonymously) that no investments offer a satisfactory return relative to their respective risks. In a free market, the interplay between the supply of, and the demand for loanable funds serves to equilibrate risk and reward — competition among borrowers performs the socially valuable function of eliminating the poorest propositions from the field.

The real paradox, the unanswered question, is how one presumes that creating money out of thin air can actually increase the amount of real wealth (remember: goods and services), and further, how conceivably one can justify privileging a few lucky, connected individuals with the legal right to profit from that ex nihilo money creation: this money which did not exist a second ago, has created an obligation backed by law and the full force of government, which must be repaid with the product of real human labor.

As I said in the prelude,  I’m not sure which argument offends me the most: the overwhelming sense of entitlement, that governments justifiably appropriate and redistribute individual savings beyond some nebulous level Mosler deems appropriate, or the idea that, in order for individuals to produce, the government must tax them first.

Possibly related posts:

1. Economic Optimism: Reading Between The Lines

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This entry was posted by David Z on Tuesday, February 3rd, 2009 at 11:20 am and is filed under Macroeconomics, Monetary Policy, Taxation is Theft, bailout. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.