The Weekly Sift

Two weeks ago I introduced you to Warren Mosler’s Seven Deadly Innocent Frauds of Economic Policy, a short and insightful book you can read for free.

Review. Mosler’s main point is simple: Money doesn’t work the way you think it does. A dollar is just a data entry at the Federal Reserve, and doesn’t represent any physical substance. So if the Fed’s computer says you have a billion dollars, then you do. Those dollars didn’t have to “come from” anywhere or correspond to anything; they’re just data. (If Delta gave you a million frequent flier miles, would those miles have to come from somewhere?)

Consequently, the U.S. government’s spending is not limited by it’s ability to tax or borrow. Dollars can simply be created out of nothing by making an entry in the Fed’s database. Here’s how it works: The Treasury “borrows” by issuing a bond which the Fed “buys” by entering a credit in the Treasury’s account. Checks to Social Security recipients, defense contractors, or whoever eventually wind up at the Fed, which “cashes” them against the balance in the Treasury’s account.

According to the Fed balance sheet at Wikipedia, the Fed currently owns $1.6 trillion of the total $14.5 trillion of Treasury securities. That’s $1.6 trillion that came from nowhere.

A debt-ceiling aside. Those debt-ceiling clocks have been ticking down to the moment when the Treasury’s account at the Fed hits zero. Tuesday, CNBC’s John Carney asked the trillion-dollar question: Does that event actually mean anything? Or would a negative number in the Fed’s database work just as well?

Carney thinks it would.

Think about it. The check comes into the Federal Reserve. It looks at the U.S. government balance and discovers that we’re at zero. What does the Federal Reserve do?

I’m pretty sure the Federal Reserve would go ahead and credit the bank submitting the check with the deposit to account for the fund transfer.

What are the constraints? Then what keeps the government from giving us all a few million? Fear of inflation. Since our economy doesn’t produce enough goods to satisfy 300 million millionaires, those magically-created dollars would bid up the price of everything.

But here’s the next major point: We have unemployed workers, idle factories, empty storefronts, and so forth. The economy is just dying to produce more, if only somebody had dollars to pay for it. In this situation, there really is a free lunch: The government creates more money by spending without taxing or borrowing, and the economy creates more goods and services. No extra inflation.

Go back to the airline analogy. If Delta created and distributed massive numbers of frequent-flier miles, all the frequent-flier seats would fill up instantly, making most people’s miles more-or-less worthless. But what if most those seats had been flying empty? Then Delta could create some quantity of new miles without damaging the value of existing miles.

If you believe that, what do you do? Obviously you spend more and tax less, until the economy starts producing close to capacity.

Some of Mosler’s proposals are larger versions of things that have already been tried: suspending the collection of Social Security and Medicare taxes while continuing to pay benefits (not threatening future benefits, since the trust funds are also just data at the Fed), and giving money to the states (because it makes no sense to lay off teachers and construction workers when we still have work for them to do).

Mosler also wants to establish universal health care through a combination of a conservative idea (health savings accounts for the first $5000 each year) and a liberal idea (Medicare-for-everybody for larger expenses).

His most creative proposal is for a new category of federal job, which pays $8 per hour plus benefits. These new hires would work throughout the government rather than in a few big make-work projects. Any government office that wanted to employ them could do so without using money from its budget.

If you’ve ever worked in an office, you know that there are always useful projects that nobody can get around to doing. You may not be able to pull a shovel-ready thousand-worker project out of the air, but you could easily put two temps to work tomorrow morning, if you could just find the money.

As the economy moves closer to capacity, many of these workers will move into better jobs (aided by their continuous work history). If industry starts to have trouble finding workers, the government can ramp up the amount that the $8 workers cost project budgets.

Mosler would clean up the residue of the housing bubble in two ways: (1) Give banks freer access to loans from the Fed in exchange for tighter regulation. (2) Have the government buy foreclosed houses from the banks (making the banks eat any negative equity) and rent them back to their owners for two years. After two years, the owners have first crack at re-buying before a general auction is held.

The real economy. Probably the best thing to glean from Mosler’s book is a respect for the real economy (goods and services) as opposed to the financial economy (dollars).

This comes through clearest when you think about future generations. We have worried way too much about the numbers in future Fed databases, as if numbers make an economy robust. Instead of good numbers, we should be trying to leave future generations skills, good health, peace, a clean environment, social cohesion, and a solid physical infrastructure.

If they have those things, they will be able to produce the goods and services they need. If not, dollars won’t help them.