The government of the largest economy has run short of money. At least that is what Mr. Obama sought to convey at his “jobs summit” last week. The President said he would entertain “every demonstrably good idea” for creating jobs, but he cautioned that “our resources are limited.”
What a confidence inspiring notion! How can we possibly solve the problem of unemployment in these circumstances? The preposterousness of the statement is only matched by the paucity of economic understanding that it manifests.
For the hundredth time, Mr. President, a government which issues its own sovereign currency cannot go broke. It cannot “run out of dollars”.
Does any other entity in the world issue US dollars? No. The national government does this under monopoly conditions. If you or I tried to do it, we would go to jail for counterfeiting.
So here’s how it really works:
Any US dollar government deficit exactly EQUALS the total net increase in the holdings US dollar financial assets of the rest of us- businesses and households, residents and non residents- what’s called the ‘non government’ sector. In other words, government deficits = increased ‘monetary savings’ for the rest of us. It doesn’t matter if the financial assets are owned by American citizens or by Chinese manufacturers. The government spends money by electronically crediting bank accounts and those funds show up in the bank accounts held by the rest of us – the non-government sector.
This is accounting fact, not theory or philosophy. There is no dispute. It is basic national income accounting.
So, for example, if the government deficit was $1 trillion last year, it means the net increase in savings of financial assets for everyone else combined was exactly $1 trillion. We, as the non-government sector can then take that $1 trillion of financial assets and spend it on REAL assets, whether building a home, developing a business, shopping for a new car or laptop, or deciding to save the money by buying a Treasury bill. The expenditures on real assets create additional wealth in the economy, which in turn helps to reduce unemployment, and enhance incomes.
Think of this like a poker game at a casino. The “casino” (government) issues 100 chips, each representing $1.00. The chips are divided equally four ways. At the end of the evening, the distribution of those chips might well be different. 2 people might have lost everything, the third might have come about ahead by 15 chips and now has 40 and the fourth player might well have done even better, and gained a further 35 chips to give him 60. The aggregate amount of chips has not changed. On a straight accounting basis, there are still 100 chips, but they have been distributed differently
The casino, however, being the government, is never short of chips. The casino can always create additional chips, much like an electronic scoreboard at a football game can “create” additional points at will on a scoreboard. To speak of “a shortage of resources” or an insufficiency of “public dollars to fill the hole of private dollars that was created as a consequence of the crisis” (as the President said), reflects a complete abdication of responsibility on the part of Obama. “The hole in private dollars”, which the President describes, is just the fall in private spending brought about by an increased saving desire. That “hole” means that productive capacity will become unused and the jobs that could have been applied to that capacity are lost. This is why we have an unemployment rate that has almost trebled in the past 2 years.
At a recent symposium, Intel boss Paul Otellini, a contributor to both parties, expressed concern about the “amount of variability in the system” created by the state of policy flux in healthcare, energy and tax policy. “It is very difficult to make a hiring decision,” he said. General Electric chief executive Jeffery Immelt, added he would just like to “know what the rules are.” Fair enough. A business, unlike a government, does face external funding constraints. Get a decision wrong and the business cannot compensate by creating more currency. The problem is that income growth is dependent on aggregate demand (spending) growth. If spending growth falters, then output and income growth falters and the capacity to save by the private sector is compromised.
But the government doesn’t have to wait. As a sovereign issuer of its own currency has all the capacity it needs. The budget deficits (net public spending) can maintain growth in demand to keep income growing and hence support private saving. Budget deficits should aim to fill in that “hole in private savings” (a curious phrase used by the President in his opening speech at the summit), and not allow aggregate demand to “fall through it”, which would lead to income and employment collapses. Government spending has to rise so as to ensure that firms are willing to maximize the use of their productive capacity which in turn generates further employment. You don’t need a job summit to figure that one out, Mr. President.
Caution is only warranted when there is inflation, and inflation will only arise AFTER we’ve come significantly closer to full employment and higher output. And the constraint that a government faces is nothing like the constraint faced by a household. The Federal Government itself neither has nor doesn’t have dollars, any more than a bowling alley ever has a box of points or a football scoreboard has a “hoard” of points that it uses. When the federal government spends, the funds don’t ‘come from’ anywhere any more than the points ‘come from’ somewhere at a football stadium or the bowling alley.
In today’s economy, it is hard to imagine inflation occurring in an environment where almost 20 per cent of our workforce is underemployed. It’s equally hard to imagine how a government which creates its own currency can ever “run out of money”. To go back to our bowling analogy: If you knock down 5 pins at the bowling alley, your score goes from 10 to 15. Do you worry about where the bowling alley got those points? Do you think all bowling alleys should have a ‘reserve of points’ in a ‘lock box’ to make sure you can get the points you have scored? Of course not! But this is exactly the way that government “spends” our money. It provides computer data entry, much as the bowling alley scoreboard “creates” points.
Does this mean the government can spend infinite amounts of money? No. The economist Abba Lerner understood that a government’s spending and borrowing should be conducted “with an eye only to the results of these actions on the economy, and not to any established traditional doctrine about what is sound and what is unsound.” In other words, Lerner believed that the very idea of what good fiscal policy means boils down to what results you can get. If we want jobs, then government spending to create them is ‘sound’. Period.
A government should decide what to spend and tax based on a simple idea: getting everybody employed without causing inflation. This does not mean the government can spend all it wants without consequence. If it spends too much, government can ultimately create a lot of inflation, but we have to stop our economy from going further down a hole before we concern ourselves with building up pressures via price increases.
What it does mean is there is no solvency risk. There is no such thing as our government ‘running out of money to spend’ as President Obama has incorrectly stated repeatedly. The only reason we would want the government to spend less is if the private sector desired to spend more (without overwhelming itself in debt again) and/or our exports were surging. Neither of these occurrences is happening today. Hence, there is a need to restore the government contribution to create growth and jobs along the lines that were evident in the full employment period of the 1960s.
The only “resource deficiency” here is one of political courage. The Obama Administration continues to fantasize that it can get away with creating Potemkin prosperity of levitating asset prices via trillions of dollars of financial guarantees to Wall Street in lieu of deploying fiscal resources needed to lay the groundwork for the real thing.
If the President really believed that the government’s capacity was genuinely limited, then why bother holding a jobs summit at all? Or, at the very least, why not hold it in China, so that our Chinese “bankers”, who allegedly “fund” government expenditures, can vet each program and then decide whether they will continue to “finance” us. What’s next? Declaring wars only in times of national budget surpluses when we can “afford” to go to war?
You can see where the President’s incoherence leads. Do we really want to apply a “solvency” paradigm to questions of national security? Of course not! So why do it for unemployment?
The problem is a lack of jobs, not a lack of resources. The solution is more government spending. The only unemployment increase worth applauding would be the sacking of the President’s entire economics team, all of whom persistently regurgitate deficit myths that constrain output and employment and prevent us from recouping genuine prosperity. Unless Obama gets lucky and the fiscal stimulus really begins to catch in early 2010, this is just going to get messier.
MARSHALL AUERBACK is a market analyst and commentator. He is a brainstruster for the Franklin and Eleanor Roosevelt Intitute. He can be reached at MAuer1959@aol.com