Myths, Scares, Lies, and Deadly Innocent Frauds: Part One
One characteristic of modern political and economic discourse is frequent asserting of beliefs about economics and money that have been variously described by some observers as 'myths', 'scares', 'lies', 'innocent frauds', and 'deadly innocent frauds'. 'Innocent frauds' was the courteous labeling of such beliefs by John Kenneth Galbraith in his last book, The Economics of Innocent Fraud. Warren Mosler, an economist, presidential candidate, and sometime co-author of James Galbraith, has added the modifier “deadly” to Galbraith the elder's name for this belief. Mosler's label is particularly relevant today because, given the various problems and crises currently faced by the United States, acceptance of these beliefs or “deadly innocent frauds,” could well doom the United States and its people to a bleak future of economic, political, social, and cultural instability. The once proud land of opportunity could well be reduced to a gray land of despair and submergence of most of its people in a wholly unnecessary age of lost hope and increasing despair for American parents as well as their children. America and its dreams could well be sacrificed to a harsh fiscal and economic discipline based wholly on deadly innocent frauds, scares, myths, and outright lies. I'll now, following Mosler's treatment, examine some of the most influential of these, and also rely in part on the earlier work of Cavanaugh, Boettger, and Eisner.
First, all the deadly innocent frauds (difs) are frauds in light of the changeover of the United States to a fiat money system during the Nixon Administration. As Mosler describes it:
Historically, there have been three categories of money: commodity, credit, and fiat. Commodity money consists of some durable material of intrinsic value, typically gold or silver coin, which has some value other than as a medium of exchange. Gold and silver have industrial uses as well as an aesthetic value as jewelry. Credit money refers to the liability of some individual or firm, usually a checkable bank deposit. Fiat money is a tax credit not backed by any tangible asset. In 1971 the Nixon administration abandoned the gold standard and adopted a fiat monetary system, substantially altering what looked like the same currency. Under a fiat monetary system, money is an accepted medium of exchange only because the government requires it for tax payments. Government fiat money necessarily means that federal spending need not be based on revenue. The federal government has no more money at its disposal when the federal budget is in surplus, than when the budget is in deficit. Total federal expense is whatever the federal government chooses it to be. There is no inherent financial limit. The amount of federal spending, taxing and borrowing influence inflation, interest rates, capital formation, and other real economic phenomena, but the amount of money available to the federal government is independent of tax revenues and independent of federal debt. Consequently, the concept of a federal trust fund under a fiat monetary system is an anachronism. The government is no more able to spend money when there is a trust fund than when no such fund exists. The only financial constraints, under a fiat monetary system, are self imposed.
Mosler identifies seven difs, all of which are related to the basic idea of fiat money or “soft currency.” The first of these is the idea that in order to spend money, the Government must first raise it through taxation, or borrow it. This is based on the idea that money is either a material thing or backed by a material thing having intrinsic value, which the Government possesses in limited quantities and may run short of. However, fiat money is not like this. Put simply the Government declares it into existence, in whatever quantity it likes. It can print it. It can credit some entity's account with as much of it as it likes, and it can withdraw it from circulation by taxing, charging fees, or confiscating it according to law. From the Government's point of view, the money it causes to exist is legal tender and all entities under its authority must accept it as legal tender in return for all goods and services and as repayment for debts incurred. The status of money as legal tender is backed by the Government's authority and ultimately by its legal monopoly of the instruments of physical coercion within the borders of the State.
Since the Government has an unlimited authority to create its own currency, it is obviously false to say that it is or must be constrained in its spending by its ability either to tax or to borrow. It can impose such constraints on itself if it wants to, of course. And, as it happens the United States foolishly does that, as do other nations, laboring under old conceptions of the nature of money, appropriate for a commodity rather than a fiat monetary system. Nevertheless, the belief that the Government is so constrained is the first of Mosler's 7 deadly innocent frauds, because the truth is that “Government Spending is NOT operationally limited or in any way constrained by taxing or borrowing.”
Now, if one can but accept this truth, it has many implications. One implication is that the Government never can have any solvency problem with respect to repaying debts it has incurred in its own currency. It doesn't matter how large those debts are. It doesn't matter how large its obligations are. It doesn't matter how frequently it has to fulfill obligations, or how much money it has in order to create to pay its obligations. It never has to run out of money as long as it is willing to create it, and not to “obey” any constraints it has imposed on itself. The simple fact is: it always has the capability to create the money it wants or needs to spend.
A second implication is that it never need be short of money to do or spend for things it either wants to do, or wants to facilitate, or cause or encourage to be done. It is never true that “we don't have enough money to do x, or y, or z,” when “we” is the Government or the Nation. Rather, it is only true either that we don't 1) fully understand our power to create money or 2) want to do the things that people are asking us to do for reasons we don't want to talk about, so we use the excuse that money is limited instead.
This first deadly innocent fraud is of great importance in our present political context. For example, why did President Obama want to take Medicare for All off the table, at the beginning of the current health care reform process? I'm sure there were many reasons, but one was probably his belief that such a program would create much larger federal deficits, and that in the face of these deficits he would either have to raise taxes or borrow more money. Or, if he did understand that Federal spending is not limited by taxes or borrowing, he perhaps felt that he might not be able to escape the cultural influence of the first deadly innocent fraud, and explain to the American people that the increased deficit was nothing they had to worry about. Whatever the reason, Obama let Congress know that the health care reform had to be limited to less than $1 trillion in expenditures over 10 years, a level that would have been dwarfed by Medicare for All.
Why did Obama decide to limit the size of the stimulus package to roughly $800 billion, when some of the best macro-economists were telling him it needed to be twice that? The answer, again, is either that he believes himself that government spending is ultimately limited by what the Government can raise by taxing or borrowing, or he thinks that he can't explain to others that this is not true, and therefore that he wouldn't be able to defend himself politically against charges of irresponsible deficit spending coming from the Republicans and, perhaps, from the blue dogs.
More generally, why is President Obama, except in the case of the War and the financial system bailouts, approaching other legislation from the viewpoint of deficit neutrality? Why is he applying that lens to reinventing the energy foundation of the American Economy, to legislation aimed at climate change and environmental protection, to infrastructure spending, to education, and to new legislation aimed at creating jobs and lowering unemployment? It is either because he, himself believes in the first deadly innocent fraud, or it is because he thinks that the belief in it is so deeply ingrained in others, that he can't educate them to the truth about our soft currency economy, and can't defend himself or the Democrats against the old-time budget balancing religion, that past generations of Democrats may have thought they had overcome a long time ago.
Whatever the reason for Obama's adoption of the deficit neutrality point of view, we can see now (see his speech at Brookings today) that he is fixing to apply it during the remainder of his Administration with, perhaps the exception of the wars. The Administration is now making noises about entitlement reform, as well as expressing its fealty to the idea of deficit neutrality in program spending. And the Press is responding with articles and analyses raising the issue of the size of the deficits, the national debts, and the possibility that purchasers of US Securities will raise interest rates creating a burden the Government cannot handle. The Press is also saying things like: “It's unlikely that the nation will ever default, but neither is that any longer unthinkable,” a statement that, of course is based on belief in the deadly innocent fraud that the Government's resources are limited to what it can raise by taxing and borrowing, since if the Press understood that the Government's fiat money can be created in whatever quantity the Government needs, it would clearly see that there is never is any possibility of default,unless the Government has been captured by the belief in the innocent fraud itself, and declares a default, when all it really has to do is to make money and repay its debts in its own fiat currency.
And so the first deadly innocent fraud maintains its destructive grip on American society, economy, and politics. The old-time religion, represented by people like Judd Gregg, Mike Spence, Olympia Snowe, Ben Nelson, Evan Bayh, and yes, evidently, Barack Obama, expects us to reinvent out economy and its foundations and to adapt to the new challenges of the 21st century, while refusing steadfastly to use the tools we can apply under our fiat monetary system. In fact, it expects us to ignore that we have such a system, and to act instead according to the economic principles that governed us when we were still on the gold standard. It expects us to seek a budgetary surplus relative to our fiat currency, and to forget about evaluating a particular Government expenditure by the proper standard of whether its balance of benefits to costs in the value or non-monetary sense is positive for us and American society. If we persist in obeying the dictates of this first deadly innocent fraud, American prosperity will never be re-captured. The American Dream will die, and Democracy in America will, increasingly, be replaced by Plutocracy, a process that has now been going on for 33 years since President Jimmy Carter initiated it. In the next installment in this series, I'll discuss some other deadly innocent frauds, and their implications for current issues.