The Weekly Sift

In one memorable scene from The Matrix, a boy apparently bends a spoon with his mind, and then gives Neo advice on how it’s done: by realizing that there is no spoon.

At first “there is no spoon” sounds like mystic mumbo-jumbo, but eventually you come to understand that it is literally true: The world the boy and Neo share is a computer simulation, and the apparent spoon is just a pattern of data. If you believe it is a solid object, you expect it to obey physical laws and not bend. But if it is a pattern of data, why couldn’t it be a different pattern of data — a bent spoon — instead?

As you watched that scene, you may not have realized you were learning about economics, but you were. If you need that idea spelled out more clearly (as I did) you should read a down-to-earth little book that is available for free on the internet: The Seven Deadly Innocent Frauds of Economic Policy by Warren Mosler. (Don’t let the blank first page confuse you. Keep scrolling.)

The deadly frauds, which very serious pundits and politicans tell you every day (innocently, because they don’t know any better) are:

1. The government must raise funds through taxation or borrowing in order to spend. In other words, government spending is limited by its ability to tax or borrow.
2. With government deficits, we are leaving our debt burden to our children.
3. Government budget deficits take away savings.
4. Social Security is broken.
5. The trade deficit is an unsustainable imbalance that takes away jobs and output.
6. We need savings to provide the funds for investment.
7. It’s a bad thing that higher deficits today mean higher taxes tomorrow.

Now, chances are all seven of those seem like common sense to you, just as the spoon looked very solidly spoonlike to Neo. What people have trouble grasping, Mosler explains, is what dollars are: Dollars are numbers on a spreadsheet at the Federal Reserve. Dollars are a pattern of data, and (like Neo’s spoon) could just as easily be a different pattern of data.

When, for example, the government pays my Dad’s monthly Social Security benefit, the Fed just increases the balance in the account of Dad’s bank. No object of any real-world value moves or changes.

Where else do we see this happen? Your team kicks a field goal and on the scoreboard, the score changes from, say, 7 points to 10 points. Does anyone wonder where the stadium got those three points? … Do you think all bowling alleys and football stadiums should have a “reserve of points” in a “lock box” to make sure you can get the points you have scored? …

Just keep this in mind as a starting point: The federal government doesn’t ever “have” or “not have” any dollars. It’s just like the stadium, which doesn’t “have” or “not have” a hoard of points to give out. When it comes to the dollar, our government, working through its Federal agencies, the Federal Reserve Bank and the U.S. Treasury Department, is the score keeper.

Not bankrupt. So Mosler immediately discards any notion that the U. S. government might “go broke”. Paying interest or redeeming a bond means changing the numbers in the spreadsheet, not coming up with real assets that are conserved by physical laws.

Ditto for parts of the government going bankrupt. If the Social Security Trust Fund “runs out”, that just means that the corresponding entry in the spreadsheet is zero and about to go negative, not that some real cupboard is now bare.

Taxes and inflation. The purpose of taxing is not to acquire assets that the government needs to fund its programs (because the government never has or doesn’t have any dollars). It is to take dollars out of circulation so that they don’t cause inflation.

Inflation happens when the real economy isn’t able to produce enough goods to satisfy all the people who have money to spend. So consumers bid up the price of scarce goods and businesses bid up the wages of scarce workers.

Seen any scarcities of goods or workers lately? There are occasional bottlenecks (like gasoline), but in general the economy has plenty of room to produce more goods to cover more dollars. There is no good reason not to create those dollars so that more people can work and spend.

What about saddling future generations with government debt? Again, the problem is our mis-framing of what money and debt means: Everything produced in the future will be consumed in the future, not sent back in time to pay for our spending today.

Some day it will be our children changing numbers on what will be their spreadsheet, just as seamlessly as we did, and our parents did, though hopefully with a better understanding!

There are many more quotable passages, but I’ll limit myself to this one, where Mosler answers the people who think that we need to change Social Security because the worker-to-retiree ratio is shrinking.

Let’s look at it this way: 50 years from now when there is one person left working and 300 million retired people (I exaggerate to make the point), that guy is going to be pretty busy since he’ll have to grow all the food, build and maintain all the buildings, do the laundry, take care of all medical needs, produce the TV shows, etc. etc. etc. What we need to do is make sure that those 300 million retired people have the funds to pay him??? I don’t think so! This problem obviously isn’t about money.

Mosler’s book falls into three parts: the explanation of the seven frauds (56 easy-to-read pages), the story of his career as a banker and fund manager (entertaining if you like business stories, but not necessary to get the point), and his prescription for the economy (which I’ll cover next week).

Another common-sense story that explains money-supply issues is Paul Krugman’s 1998 article about a baby-sitting co-op whose “money” consisted of coupons the participating parents traded when they baby-sat for each other.

Now what happened in the Sweeneys’ co-op was that, for complicated reasons involving the collection and use of dues (paid in scrip), the number of coupons in circulation became quite low. As a result, most couples were anxious to add to their reserves by baby-sitting, reluctant to run them down by going out. But one couple’s decision to go out was another’s chance to baby-sit; so it became difficult to earn coupons. Knowing this, couples became even more reluctant to use their reserves except on special occasions, reducing baby-sitting opportunities still further.

In short, the co-op had fallen into a recession.

They got out of the recession by printing and distributing more coupons, which worked because their “economy” was willing and able to produce more nights-out and more hours of babysitting.

A related discussion this week has concerned a novel solution to the debt-ceiling “crisis”. The Pragmatic Capitalism blog claims that the Treasury, which unlike the Fed is completely under the President’s control, has unlimited authority to produce palladium coins. Treasury could strike a small coin, stamp $1 trillion on it, and use it to redeem $1 T worth of bonds, thereby creating $1 T of space under the debt ceiling.

Independent of whether this is good economic policy, it completely avoids the current hostage situation. Even skeptics like Matt Yglesias are coming to believe that this would work.