When one false starting premise leads to progressive confusion

Its my Friday lay day and brevity will triumph today. It might just be a case of a poorly edited title, but a current article in the Jacobin Magazine (September 17, 2015) – Why Leftists Should Be Deficit Hawks – shows that if one starts from a wrong premise the conclusions will lead one astray no matter how noble the intentions are. Progressives have to get the basics of macroeconomics correct before they launch into critiques of this and that. Otherwise they get stranded in this ‘neo-liberal’ space of government financial constraints without really realising it. And then the wheels fall off because they are reduced to arguments like “we have to tax the rich to pay for the services to the poor”, which of course, is nonsense and self-defeating. There are much smarter ways to proceed.

The wrong starting premise: A sovereign government is revenue constrained despite it being the monopoly issuer of the currency.

The conclusions that follow are logical enough.

First, governments have to issue debt if their spending exceeds tax revenue given the false starting premise.

Second, as fiscal deficits have risen during the GFC, “public debt in the OECD countries has reached levels that are historically unprecedented outside of the World Wars”.

Is that a problem? Yes, because progressives who ignore the debt build up:

… have ignored its regressive redistribution of both wealth and power.

Public debt issuance allows “a substantial class of super-rich rentiers” to develop who can “enrich themselves simply by collecting annuities on their bonds from the public purse”.

This, in part, “is likely contributing to growing wealth inequality, returning us to the same situation of mass poverty and concentrated wealth that characterized the nineteenth century in both Britain and the US.”

Public debt (the author quotes Thomas Picketty):

… often becomes a backhanded form of redistribution of wealth from the poor to the rich, from people with modest savings to those with the means to lend to the government (who as a general rule ought to be paying taxes rather than lending).”

Third, the US government now faces a “structural inability to raise as much money as it spends”. Presumably, this conclusion applies to all governments. Governments are “less willing to tax capital” and funds are so liquid that they move across borders to evade tax jurisdictions.

Further, countries “compete for capital by consistently lowering their corporate tax rates”.

And, while public spending has shifted away from advancing well-being (education, health, public housing, etc) to spending on prisons and the like, corporate tax subsidies have seen the tax structure “become more and more regressive, giving major breaks to the wealthy and extracting greater sums from working people in exchange for fewer and fewer services.”

So we get “a permanent crisis of wealth and power redistribution towards the top 1 percent of society” as the deficits continue and the public debt accumulates in the hands of the few.

Fourth, and as a result of adopting the false starting premise, the author says the upshot has been that:

To cover these funding gaps, the Treasury goes into debt by selling bonds to private and international investors. In 2007, the total value of this debt was equal to 35 percent of the US’s GDP. Today it is equal to 73 percent of GDP, or $13 trillion.

I agree with the conclusion that “Because the wealthiest people and institutions in society overwhelmingly hold these bonds, there is no plausible argument that it operates in the general interests of Americans”.

Please read my blog – There is no need to issue public debt – for more discussion on this point.

I have long advocated ending this source of corporate welfare – ‘dole for the rich’! Bond issuance serves no useful purpose and is totally unnecessary from a financial perspective.

But the author doesn’t take his argument in that direction. Why? Because he started with the false premise that bonds fund government spending.

Another manifestion of that false premise is that he claims that the income payments accruing to public debt holders are “paid in tax dollars”.

The related false premise is that tax payers fund government spending rather than simply lose purchasing power and command over real resources.

Please read my blog – Taxpayers do not fund anything – for more discussion on this point.

He then diverges into a strange argument that because the overwhelming proportion of public debt is held by the top 1 per cent, the government feels compelled to offer “low-risk investments for private capital” and so they cut public spending which “serves the public” leading to the conclusion that “the national debt can accelerate austerity, not prevent it.”

While the discussion is ostensibly about the US, a currency-issuing nation, the author feels compelled to use Greece and Ireland of examples of the political manipulation of the bond markets on governments, which forces them into austerity.

A basic rule of thumb in deciding whether an author understand the workings of the monetary system is whether they conflate currency-issuing states with non-currency issuing states. If they do, then you know their knowledge is awry.

Please read my blog – Who is in charge? – for more discussion on this point.

To implicate the US in a Greek-style meltdown, the author (who wants to be a progressive voice – he quotes Marx a bit) invokes the authority of none other than the neo-liberal Congressional Budget Office and quotes them as saying that the rising public debt in the US will “ultimately be unsustainable.”

Which, of course is nonsense. The US government will always be able to service its outstanding liabilities.

The overall conclusion?

A major task for the Left in the coming years therefore will be to challenge the institutions and the rhetoric that have allowed capital to evade taxation so effectively, while simultaneously recognizing the legitimacy of popular complaints about overtaxation. In doing so, the Left could begin to build a strong basis of unity across the working class.

So the government should only spend what it can raise in taxes and the taxation should be progressive to increase the spending power of the workers.

There is so much wrong with that conclusion as a manifesto for progressives and I promised brevity. I should add that we don’t have to invoke progressive values to declare that the conclusion is wrong per se.

Here is the skeleton rejection (look back through the past blogs to see the substance):

1. A sovereign government is never revenue constrained because it is the monopoly issuer of the currency.

2. Therefore it does not have to issue debt to cover the excess of its spending over taxation.

3. Issuing debt is unnecessary and should be abandoned for many of the reasons the author notes which I summarise under the heading ‘corporate welfare’.

4. Taxation is only functional if it deprives groups of purchasing power. It does not raise revenue in order to all the government to spend.

5. Equity considerations matter and guide us on which groups to deprive of purchasing power via taxation and in what magnitude.

6. Government deficits (surpluses) are equal (dollar for dollar) to non-government surpluses (deficits).

Please read the following introductory suite of blogs – Deficit spending 101 – Part 1Deficit spending 101 – Part 2Deficit spending 101 – Part 3 – for basic Modern Monetary Theory (MMT) concepts.

7. If there are external deficits and the government continues to balance its fiscal position (only spends what it raises in taxes) then the private domestic sector will run continuous deficits equal to the external deficit and thus incur ever increasing levels of debt.

That is an unsustainable state.

8. Continuous government deficits are likely to be required if the non-government sector desires to save overall and maintain sustainable levels of private debt.

9. Running a fiscal balance as a rule can never be sensible economic policy and can never be a position that the ‘left’ should take in the economic debate.

10. The ‘left’ should espouse full employment, decent wages, equity in income distribution, public goods, environmental sustainability, regulation to advance well-being, etc and understand that continuous public deficits will likely be required to advance those aspirations.

You can see that if you start of with a false premise with respect to the constraints facing a currency-issuing government how quickly one descends into a flawed analysis no matter how admirable the overall values of the author might be.

KKK star in a sousaphone piece – as comics

The sousaphone player shows us the “stupid is, stupid does” phenomenon as these KKKers in Columbia, South Carolina try to impress on us that their earnest intent is above ridiculous.

Music today is about Marcus Garvey

This is what I was listening to while I worked this morning.

It is an instrumental version of the great Burning Spear song – Marcus Garvey – and was on the 2004 album – Rock Steady – by Jazz Reggae greats Ernest Ranglin (guitar) and Monty Alexander (piano) with Hassan Shakur (bass), Quentin Baxter (drums), Gary Mayone (keyboards) and Junior Jazz (other guitars).

The whole CD is fabulous.

Marcus Garvey looms large in Jamaican political history and in reggae music. He lived from 1887 and 1940 and was a leader in the Pan-Africanism movement in Jamaica.

He founded the – Universal Negro Improvement Association and African Communities League (UNIA) – which aimed to advance the well-being and end the oppression of black people all around the world. You can learn more about UNIA – HERE

He founded a newspaper – Negro World – to publicise the intent and activities of UNIA. The organisation grew rapidly and developed a range of programs including job creation through many related businesses. They created a shipping company to foster trade among black people at fair rates.

Garveyism was a spearhead movement to relieve black people from the tyranny of racism and remove the colonial yoke.

It scared the Bjesus out of the white elites particularly those colonial vestiges in Africa and the Caribbean. The newspaper was banned in many nations because it was seen as a vehicle for raising black consciousness in their own capacity to break free.

It started to promote a ‘Back to Africa’ program (the ‘Garvey Movement’) where African Americans could return to their roots. It is a pretty grim story as to what happened next. The Liberian government had agreed to provide UNIA with land to facilitate the repatriation scheme.

However, after significant pressure from the US government the Liberian government closed entry to Garvey Movement followers and soon after announced the the Firestone Rubber Company would take a long-term lease on the land.

Garvey wrote in his – Negro World Editorial – on September 2, 1924 that despite the initial agreement with the Liberian government to help with the colonisation program and the considerable outlays that UNIA had made to ensure the first group could settle back in Liberia “as a permanent homefor the black race” that:

… these enemies of progress worked in every way to block the carrying out of the plan. For the purpose of deceiving the public and carrying out their obstruction, they tried to make out by the protest that was filed by Ernest Lyons of Baltimore, with the government at Washington, that our Association was of an incendiary character and that it was the intention of the organization to disturb the good relationship that existed between Liberia and other friendly powers. A greater nonsense could not have been advanced by any idiot. What could an organization like the Universal Negro Improvement Association do to destroy the peace of countries that are already established and recognized? It is supposed that England and France are the countries referred to when, in fact, the authors of that statement know that England and France are only waiting an opportunity to seize more land in Liberia and to keep Liberia in a state of stagnation, so as to justify their argument that the blacks are not competent of self-government in Africa as well as elsewhere.

He went on to describe the way in which Firestone Rubber Company had been “spending large sums of money” to lobby US government officials to force the Liberian government to hand over the land to them. He said that “It is the duty of every Negro in the world to protest against this rape of Liberia encouraged by those who are responsible for giving the concessions to the Firestone Rubber and Tire Company. Why, nearly one-half of the country has been given away”.

Things turned pear-shaped for Garvey after that. The constant harassment by US officials eventually led to a trumped up criminal charge (relating to the shipping companies) and he was deported back to Jamaica in 1927.

He died in London on June 10, 1940 without ceremony. The racist conspiracy funded by various white-dominated governments had all but destroyed his movement.

His importance has been elevated again with the popularity of reggae music and the associated – Rastafarian movement.

The Rastafari consider Garvey to be a “prophet” because in the 1920s he had apparently stated that black people should “Look to Africa, when a black king shall be crowned, for the day of deliverance is at hand!”.

They took his rhetoric and symbolism literary and when – Haile Selassie I – was crowned Emperor of Ethiopia, the first black king of Africa, they interpreted that as a sign that the despot (Selassie) was the divine representation of God on Earth.

They believe in a Christian-style holy trinity and Selassie is Jesus.

Interestingly, Garvey was not a rasta and deeply criticised Selassie for leaving Ethiopia for Jerusalem as the Italian forces closed in on Addis Ababa in 1936 during the Second Italo-Ethiopian War.

Selassie fled with his family to safety while the Italians took over the nation. It is not often known that the Italians actually did a deal with Selassie to allow him to leave safely and go into exile.

In an Editorial in the publication ‘Black Man’ (March/April 1937), Garvey wrote that:

When the facts of history are written Haile Selassie of Abyssinia will go down as a great coward who ran away from his country to save his skin and left the millions of his countrymen to struggle through a terrible war that he brought upon them because of his political ignorance and his racial disloyalty … Every Negro who is proud of his race must be ashamed of the way in which Haile Selassie surrendered himself to the white wolves of Europe … The future freedom of Abyssinia must be built upon the highest principles of democracy. That is why it is preferable for the Abyssinian Negroes and the Negroes of the world to work for the restoration and freedom of the country without the assistance of Haile Selassie, because at best he is but a slave master.

Garvey’s criticisms of Selassie created a major rift in his movement and partly explains why he died in relative obscurity.

But it also raises the question as to why the Rastafari so adore him and Selassie together. More on that topic another day.

For now, the music is it.

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Saturday Quiz

The Saturday Quiz will be back again tomorrow. It will be of an appropriate order of difficulty (-:

That is enough for today!

(c) Copyright 2015 William Mitchell. All Rights Reserved.

This Post Has 16 Comments

  1. You’re so very correct Billy. But there are other considerations that need to be addressed also. Like realizing that philosophy precedes policy and policy must align with and reflect philosophy. And even before that…that old paradigms gone on way too long must be replaced by new, more inclusive, more integrative and hence more unifying and wise ones. Things are speeding up more and more, and crises are multiplying, hence we are at a true paradigmatic crossroads. Monetary gifting/monetary grace the free gift IS the new economic and monetary paradigm. That is absurd to the austerians, and nearly as absurd to most progressives as you state above, but even the MMTers and modern debt jubilee advocates still remain to one degree or another in the paradigms of Debt ONLY, Loans ONLY, for production ONLY, via the system first ONLY. When one integrates these with the ideas of gifting, for consumption and direct to the individual is when one has seen past the old and looked at the new.

  2. Dear Bill

    Do rich people really get much richer on government debt? Let’s assume that the interest on government debt is 5%, that inflation is 2% and that the rich bondholder has a marginal tax rate of 50%. Then he pays half of his interest income from the government back in taxes and loses 2% of it to inflation. That leaves him with 0.5%. Strictly speaking, it is 0.49% (1.025/1.02). I’m not disputing what you wrote above, but if interest is taxable income, then bondholders pay part of their interest income themselves, just as civil servants pay part of their salaries themselves because they too pay taxes. When we read that the civil service in a country costs, say, 50 billion, then we should bear in mind that the actual cost to the rest of us is perhaps 37 billion. Similarly, if a government pays 40 billion in interest to bondholders, then possibly 14 billion of that is paid for by the bondholders themselves.

    Regards. James

  3. “Do rich people really get much richer on government debt?”

    It’s to do with the distribution of wealth. If you cover the ‘inflation cost’ of holding financial savings, then there is no reason to spend it. And so the cycle continues.

    And of course a lot of this is held offshore – which means that the currency’s taxation system doesn’t really touch it.

    For example the UK DMO states the following: “Gilts held on FOTRA (Free of Tax to Residents Abroad) terms, and the interest on them, are generally exempt from tax if they are held by persons who are not ordinarily resident in the UK.”

  4. James

    in the USA, interest income from TSY CDs is tax exempt (from federal taxes). not to mention the fact that with your example, you are looking at after tax gains which is a strange thing to do. Nobody says that investing in google is a bad idea because you get taxed on your income.

  5. These misinformed types abound in the community, They have all drunk the Kool-Ade., which is exactly what the 0.1% want. I do what I can in my blogging to set the record straight, but as I have said before we need a ‘guru’ who can explain MMT etc and beat back the reactionary forces, someone like Edward Bernays, nephew of Sigmund Freud, master manipulator, and master of public relations. Anyone got any ideas???

    Frankly I don’t care which side of politics understands it first, They are all tarred with the same brush. They are all capable of seeing advantage for them in it. The right could lower corporate taxes without a worry if they knew. The left we see here what advantages there are.

  6. QE is Social Credit for the Banks.

    MMT is Social Credit for the government.

    Debt Jubilee is Social Credit for the moment.

    What we need is actual Social Credit because breaks up the monopoly on credit and the claim to ownership of money by the Banks. We need Social Credit as specifically mandated government policy so politicians won’t meddle or cave to the powers that be. What we need is continuous consumer debt jubilee so the individual and the system can be free and free flowing in a modern age of technological abundance, and so we can progress together toward a rational, ethical, peaceful and ecologically sane future.

  7. Am I correct that all the money in an economy is the “national debt” plus outstanding private loans, so that for the government of a nation to never run deficits and/or pay down its “debt” would mean all the only money in that economy would come from outstanding private loans?

  8. Now, for Britain’s sake, can you boil that down into soundbites, please?

    To imagine money isn’t really gold is heresy here. People know it but don’t know it. In any discussion about it, the completely dominant concept and default position is that modern money in UK is still actually gold (or somesuch). Simultaneously there’s a prevalent cynicism about “money conjured from nothing”. People seem to know it happens but are very suspicious of it. [Working class people don’t tend to see any of the vast sums magicked into being, I suppose. It’s a trick of the rich?]

    I had been hoping to hear the name “Bill Mitchell” from Corbyn’s camp. Shadow Chancellor? Still, the dude McDonnell seems a better (shadow) Chancellor than I ever could have expected. Astonishing.

  9. Greg, bank loans do not create NET financial assets. They create a loan and a deposit.
    As to the second point yes pretty much see Australia 2007 and the household debt binge under Howard from 1996 to 2007.

  10. How can rational expectations be the basis for theory when man is increasingly less aware….of himself? Especially when his awareness is what controls or does not control his mind. How can any theory not begin with deciphering what would free the individual first? If economists would begin there and consciously craft policies instead of operating out of ideologies, agendas, quasi-religious beliefs in equilibrium, obsession with abstractions and (I’m sure unconscious) neglect of consideration for the individual….maybe economics and economic theory would ring with much more clarity. Provide for the individual. Free him/her economically….the rest of profit, production, control etc. would largely fall in line and regulation of the anti-social, terminally insecure and otherwise damaged…would probably be much easier than trying to grapple with an unethically unstable system where obsession with power, profit and control is rife and considered “inevitable.” We need a Wisdomics, a Gracenomics. Contemplate grace, not as some idiot pre-scientific dogma, but as a concept and NATURAL psychological experience. It being the pinnacle experience of Wisdom, and spoken of by other names by all four of the world’s major wisdom traditions, it is the best possible guide for both individual development and human systemic policy. Start at the starting point…philosophy. And then align policy with a philosophy that is adequate and reflects both our abundant productive capabilities and our most freeing potentialities.

  11. When I’m talking to most people (on other sites) about these issues I take out the whole layer of reasoning of broad/narrow or FA/NFA, as this is too much detail for most people. I simply state that “money” either comes from the deficit or from net bank lending. Then I add that net bank lending is ultimately unsustainable as proven by the GFC:

    When banks lend the money comes from nowhere using a simple keypad to mark-up someone’s account, and when the debtor repays the principal, that money returns to nothing again.

    When government spends, the money comes from nowhere using a simple keypad to mark-up someone’s account, and when we pay our taxes, that money returns to nothing again. Tax revenues are never spent by the government.

  12. Unemployment is a wealth problem. Unbelievably, there exist this huge, perverse lobby to make people poorer, in other words cut the deficit.

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