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Innocent Frauds and Deadly Myths [Updated]

I met a very interesting person at the Fiscal Sustainability Teach-in.  His name is Warren Mosler.  Mr. Mosler is running for the U.S. Senate seat in Connecticut.  He has something very important going for him - he understands how our monetary and economic system operates better than his opponents and current members of the Senate.  He also recently published a book called “The Seven Deadly Innocent Frauds of Economic Policy.”  Let’s cover some of the “Deadly Innocent Frauds”. 

Here is a link to a draft of the “The Seven Deadly Innocent Frauds of Economic Policy”.

John K. Galbraith first coined the phrase “innocent fraud” in his last book before his death “The Economics of Innocent Fraud”.  I have not read Mr. Galbraith’s book (yet) but Mr. Mosler talks about it in the introduction of his book. 

Let me say upfront I don’t agree with everything Mr. Mosler says in his book.  For instance, under Deadly Innnocent Fraud #5: The trade deficit is an unsustainable imbalance that takes away jobs and output, Mr. Mosler says:

Imports are real benefits and exports are real costs.  Trade deficits directly improve our standard of living.

Imports are a benefit if, and this a big IF, the economy is operating at Full Employment.  Otherwise, imports can be and are a real cost to the economy in the form of lost domestic manufacturing capacity and jobs.  Unfettered globalization has resulted in downward pressure on wage growth for American workers.  The trade deficit has helped because the huge influx of cheap goods sold at domestic supermarket chains.  This has helped with keeping prices relatively low and help ameliorate the effects of stagnate wages.  However, the use of cheap imported consumer goods to offset the lack of wage growth has severe limitations particularly in the form of huge increase in consumer debt.

That disagreement aside, here are several of the “Deadly Innocent Frauds” that Mr. Mosler covers in his book:

#1 - The government must raise funds through taxing or borrowing in order to spend.  In other words, government spending is limited by the government’s ability to tax or borrow.

Two key points: 1) the federal government doesn’t need taxes to spend particularly when it is the monopoly issuer of the dollar and 2) the federal government is NOT revenue constrained like us or businesses.  Also, government spending must come before collection of taxes otherwise how else are people going to get US dollars to pay their taxes.  Shocking, but true.

#2 - With government deficits we are leaving our debt burden to our children.

This is a big myth.  There is no intergenerational transfer of wealth because federal budget deficits or federal debt in the form of US Treasuries.  Mr. Mosler says it best:

Of course, we all know we don’t send real goods and services back in time to pay off federal government deficits, and that our children won’t have to do that either.  Nor is there any reason government spending from previous years should prevent our children from going to work and producing all the goods and services they are capable of producing.  And in our children’s future, just like today, whoever is alive will be able to go to work and produce and consume their real output of goods and services, no matter how many US Treasury securities are outstanding.

Remember government deficits have been the norm and surpluses have been the exception.  We are still standing despite government deficits and debt.  The real issue is how we are spending - are we spending to maximize productivity of current and future generations or are we just wasting money.  Right now, we are just wasting money.

#3 - Government budget deficits take away savings.

The truth is government sector deficits mean that non-government sector - particularly the domestic private sector can save.  Savings is important for domestic private sector because a lack of savings means more leverage or debt.  More debt or leverage in the private sector IS a real burden.

#4 - Social Security is broken.

Those who say Social Security is broken are just fear mongering.  What we need is more straight talk and a real substantive debate about Social Security.  Right now all we are hearing is noise from those who want to privatize Social Security.

I strongly encourage people to read Mr. Mosler’s book.  It’s good food for thought.  I wish Mr. Mosler the best of luck in his campaign for U.S. Senate.

Good luck.

UPDATE:

Warren Mosler responded via e-mail to this post - specifically our disagreement regarding imports and exports - with the following:

Agreed with what you say, except in economic terms jobs are costs, not benefits. The output is the benefit, the inputs, including labor are the costs. so while unemployment is a negative for sure, it is not an economic cost per se. the lost output is a cost, the social destruction is a cost (lost economic benefit that comes from social structure, which is like a capital good, etc.)

So net imports do improve our standard of living, and if we cut domestic output in response and reduce employment, from the macro point of view we have the same amount of stuff to consume and have to work less to produce it. So it’s a benefit. The fact that we turn this benefit into a socially destructive force, etc, is a tragic failure of policy. And the ease/attractiveness of the policy that turns the negative to a positive- a tax cut and/or spending increase- makes the policy error all the worse.

Hope this helps!