Saturday, May 21, 2011

My Reply to Senator Coburn

Here is my response to Senator Coburn's letter in the previous post. I do not make any claims of expertise in the field of macroeconomics. I am doing my best to understand, and I challenge everyone to pursue knowledge on their own from multiple sources. One thing I do feel strongly about is that our common sense about these matters can only be trusted when we understand the context correctly, and federal debt is a different animal than household debt. Therefore our common sense about our own household budgets alone is not enough when considering the federal budget.

Senator Coburn,

Thank you for the thrill of interacting with you on these vital economic issues! Although I disagree with many of your positions, I have always felt that you genuinely care and that you are a thinker. I hope that you will prove me right by giving the following ideas more consideration. As the father of two young children, I am deeply concerned that our leaders, such as yourself, will inadvertently shortchange our nation's future by pursuing a path of spending austerity, freezing the vital investment in our future that needs to be made now to insure American competitiveness for the coming generations.

You repeatedly claim that deficit spending by the federal government does not create jobs. I believe that this claim is false. For instance, the Congressional Budge Office states that millions of jobs and multiple percent GDP growth has come from the stimulus. One can search through the details at the following link:

Government spending creates jobs by introducing new demand for goods and services into the economy, first by the government itself. Then the dollars paid for those goods and services do not disappear into thin air. Rather they end up as private assets in people’s pockets. When those dollars are spent, it continues that increase in demand, stimulating job growth in the private sector. Government spending may not be politically or aesthetically pleasing to some, but it is incoherent to say that it does not create jobs. All income comes from spending, so government spending creates income - jobs.

Federal spending is the introduction of new financial assets (money) into the economy. Taxation is the way that the government destroys excess dollars (or excess potential demand) to prevent too many dollars from existing, which could stimulate demand to the point that it could outstrip productivity and create excess inflation. Obviously, with our unemployment rate so high right now, our capacity for productivity is not even close to being fully utilized.

And this is the real irresponsibility going on right now. Despite the fact that demand-driven inflation is not even close to becoming a problem, we are not investing in our collective future by spending on science, technology, education and infrastructure. We are allowing our potential productivity, specifically in the form of workers and their skills, to atrophy.

Saying that our current deficit spending is generational theft makes little sense. Our children cannot send resources back in time to us anymore more than the baby boomers can send resources back in time to cover the much larger deficit spending of World War II. We must really think about what it actually means to “pay back” the debt of the federal government. I will use China, one of our “creditors” as an example.

Paying back China, paying back our debt, simply means exchanging China’s bonds for dollars (which are both forms of IOU’s). Then what happens? Nothing. Nothing until those dollars are spent. And what happens when those dollars are spent? It stimulates the economy. People buy our products and since spending equals income, it helps our employment rate to decrease.

People think that China (and other US “lendors”) have the better of us. But the opposite is true. China sends us real products, real resources, and yet they refuse to exchange the dollars they receive for products. So we are getting all the stuff. So “paying back” our debt means China buying our products instead of sitting on dollars or bonds. And they are free to do this at anytime, but for some reason right now, they don’t want to spend their dollars, then want to hold them in the form of government bonds.

So “paying back” our debt is simply turning one set of IOU’s (bonds) into another (dollars), which makes little difference until the dollars turn into demand (when they are spent). And inflation, the real risk, only becomes a problem when our prodcutivity cannot keep up with demand, hardly a problem now. If it did happen, there are many courses of action to deal with it.

You are right that the stimulus was not effective enough, but that is because it was far too small to deal with the downturn. Trillions upon trillions of dollars in potential demand evaporated with the housing and stock market collapses. The stimulus was hardly enough to offset that. We can’t say that ibuprofen doesn’t cure a headache when we only take half of one.

Your claim that public spending requires taking money out of the private sector is false. Once again, public spending puts new financial assets into the private sector. When the federal government spends, it does so by creating money out of nothing. When it taxes, it destroys money. This is operationally how it works, even if we SAY that the federal government taxes in order to spend. Where did the money being taxed originate if not with government spending?

So If the government spends more than it taxes, it creates money into the economy. Say it spends $20 more than it taxes. Then it sells a $20 bond to correspond to this debt (which it operationally does not have to do, but does so because of old laws corresponding to the age of the gold standard). The government has spent $20 into the economy, taken $20 out of the economy through a bond it’s equal right? No! Because a bond has been created - a new financial asset, which is very liquid. It pays interest and it can be borrowed against or sold. And people buying bonds are looking to save anyway, so it transfers their money from relative inactivity into the active hands of the recipient of the government spending. For instance, the government stimulates the economy by hiring military personnel with deficit spending and then sells a bond which simply puts money into a bond for a person who was looking to save it rather than spend it anyway. The new bond is created, and inactive money is transferred into active money.

But I agree completely with your point that the entrepreneurial spirit of American must be engaged. And the only way this will happen is with enough demand (dollars actively being spent) to stimulate the creativity of industrious American businesspeople. There is no money to be made if there is no money!

Thanks again for your time. I appreciate the genuineness with which you approach your job.


Steven Stark

No comments:

Post a Comment