From the Wall St Journal via Yves Smith at nakedcapitalism.  Self explanatory.

Even Tea Party Members Do Not Support Cutting Social Security

It seems that the efforts of the austerians to cow the public into cutting Social Security and Medicare are not getting traction. And Tea Party adherents are breaking with the Republican party line on this issue.

From the Wall Street Journal:

Less than a quarter of Americans support trimming Social Security or Medicare to tackle the country’s budget deficit, according to a new Wall Street Journal/NBC News poll that illustrates the challenge facing lawmakers seeking voter support for altering entitlement programs.

The poll, conducted between Feb. 24 and 28, found strong opposition for cuts to these entitlement programs across all age groups and ideologies. Even tea party supporters, by a nearly 2-to-1 margin, declared cuts to Social Security “unacceptable.”….

The survey also found a sharp uptick in desire for the government to do more “to help meet the needs of people.” Just over half of people in the survey backed more government involvement, the highest percentage since February 2009, just after President Barack Obama’s inauguration.

Hhm….Obama is moving to the right as the country is moving to the left. But, as Tom Ferguson first described in his book Golden Rule and has since become blindingly obvious, powerful investors dominate party politics. Thus unless the trend towards a positive view of government promoting social aims progresses, it won’t affect the state of play in the Beltway.

 

The Misunderstood National Debt

A colleague asked for my thoughts on this article/column by Michael Manning in the State News, the Michigan State student newspaper, so I thought I’d post it for all.

Basically Mr. Manning reaches the right conclusions with a correct, but weak case. In looking at the issue of the size of the U.S. national debt and the panicked concerns many politicians are now expressing about the “urgent need to cut the deficit”, he concludes:

Republicans have decided to use this opportunity to further their party’s political agenda, feeding off of the public’s misunderstanding of national debt.

Although the debt is growing at an alarming rate, it does not mean the end of times or the end of American economic dominance. Public debt largely is misunderstood and used as a tool to scare everyday Americans.

He’s right. The debt is not the end of times nor will it end American economic prosperity (other policies may do that!).  And he’s absolutely right that public debt is largely misunderstood.

But the arguments for why it’s not a crisis and how it’s misunderstood are even stronger than he argues.  Essentially, Manning argues that most all of the debt is owed to “ourselves”, meaning either American citizens, American corporations/banks, or other units of government (Social Security program, The Federal Reserve, etc). That’s all true, but there are bigger reasons why the national debt doesn’t really matter.

He quotes Glenn Beck and then responds:

In the words of Glenn Beck, “China, some day, will want their payment, America. They will demand payment and they will receive their payment.

And if we can’t pay, they will do what any other bank would do, emotionlessly take the collateral that they now own. That will be our oil reserves, our land, our resources, our rare minerals, our coal, whatever it is.”

How much stake do these Chinese bankers actually have in America? They own a mere 7.5 percent, or about $1 trillion dollars of the national debt.

Yes, China only holds a small amount of the debt. But that’s not really why they won’t “repossess the collateral”.  The reason China won’t foreclose on the U.S. more complex. First, Glenn Beck is absolutely ignorant.  There is not “collateral” on government debt.  The only security for the loan is the “full faith of the U.S. government”.  In other words, if the U.S. didn’t want to pay, or if it wanted to payoff with new bonds, or if it wanted to payoff with newly created “money”, that’s their privilege. The lender knows that at the beginning.  There is no international court of claims where one country can foreclose on another for a bad debt.  What happens when a nation defaults on it’s debt?  Basically the lenders (usually banks in other countries) get really upset. They stamp their feet. They call serious meetings. Serious communiques are issued.  Foreign ministers get “concerned”.  Then they re-write the debt and the lenders take a loss. Nothing else.  Because it can’t!  The idea of China “emotionlessly” claiming our “oil reserves, land, our resources,” etc. is absurd.  How does Mr. Beck propose this happens?  China just pulls a couple ships up to Texas, kicks everybody out and tows the state of Texas home to China?  Or maybe China just moves in, digs up our coal and ships it home while everybody in West Virginia stands around? Or does Mr. Beck believe China will invade and forcibly take over (a nation with enough nuclear weapons to make dust of all us many times)?  It’s ludicrous.  I repeat.  The government is NOT like a household, and that means there’s no analogy between holders of US debt and a car loan or mortgage you took from the bank.

But the national debt is more misunderstood than just this false household analogy.  Indeed, it’s even misunderstood by many economists.  The issue has to do with money. The U.S. government, being (1) a sovereign nation that creates it’s own money . that (2) borrows in it’s own currency and (3) has a fiat currency with floating exchange rate, means the government (federal) cannot go broke or ever not be able to pay back bonds and interest when they are due.  This is because the government creates and is the source of the underlying “base money”.  It can always create more money to pay the bonds when due.  Now I know many folks, including many economists who haven’t updated their understanding of the monetary system since the 1971, will say “but, but, but that’s printing money and that creates inflation.”.  No it isn’t. And no it doesn’t.  The government doesn’t pay it’s bills or payoff bonds with “money”.  They send checks drawn on The Federal Reserve Bank.  Those checks are accepted by your local bank when you deposit them. When your local bank gives the check to The Fed, The Fed provides the bank with bank reserves.  Bank reserves are not money.  Bank reserves do not circulate. And, since 1971 at least, bank reserves do not limit or really influence how much money is in circulation.  How much your local bank loans out creates money.  And The Fed creates reserves to match what’s needed. (for a more in-depth explanations, see Bill Mitchell’s blog BillyBlog or the UMKC Economic Perspectives or this blog and search on “MMT”).

Now some, including many economists, claim that creating new bank reserves is inflationary.  But this is based entirely on an outdated theory called the quantity theory of money which hasn’t proven useful, accurate, or valid for over 40 years, largely because it’s based on having a gold standard or fixed exchange rates (both of which Nixon abolished).  Inflation happens when the nominal economy grows too fast and the central bank controls that through interest rates, not quantities of bank reserves or money.  I realize that some of this may sound counter to what folks may find in a lot of econ 101 textbooks, but that’s because the textbooks really haven’t been updated to reflect modern monetary theory or modern central banking operations in the way they work since the end of fixed exchange rates and gold standard.  In economics we have a problem with zombie ideas refusing to die.

Finally, there’s another very important reason the Chinese or anybody else that holds U.S. debt in large amounts don’t have a problem with the size of our debt.  That’s because the “debt” itself, the bonds, really shouldn’t be thought of as “debt”.  Government debt is really more like “paper money that pays interest”.  Again this is sovereign national debt – see above conditions.  If you are a state government or a nation like Greece or Ireland that foolishly gave away control of their currency to some foreign central bank, it’s different.  That debt is really debt.  But national, sovereign, floating exchange rate, government “debt”, the kind the U.S., Japan, Australia, U.K., Canada, and a host of other nations have isn’t really “debt”.  It’s a form of interest-paying risk-free cash.  It’s used by pension funds, banks, and investors as a risk-free asset. Indeed, at one point in the previous decade when Australia was actually paying down it’s debt and not issuing new bonds, the banking community persuaded the government to borrow anyway just so the bonds would exist.

So, Mr. Manning is correct, but he’s even more correct than he argued.  The national debt is misunderstood. And a false crisis is being created in order to push an alternative agenda.

How Come Conservatives Only Hate Some “Unions”?

Michael Perelman writes an excellent post on the roots of the current conservative efforts to roll-back collective bargaining rights for public workers. (See the Michael’s full post after the ‘more” button). Namely, the target right now is public sector workers but the effort is the same effort that traces back to the 1960’s as concerted effort of the right-wing.  The idea pushed was that by eliminating workers’ rights and increasing business (particularly financial industry) profits, everybody would benefit. It didn’t work out that way, though.

One very interesting observation that he makes is that not all “unions” are targets of the right-wing.  Technically in economic terms, a “union” is any combination, cartel, or trust that aims to reduce horizontal competition and negotiate or set prices/wages/output as one group.  Any such “union” is in essence anti-competitive. But in some cases it may be justified as increasing overall social welfare. For example, labor unions are justified when there is only one or a very few, very large employers negotiating with a very large number of employees. The employers have monopsony power (a monopoly on the buy side). The union balances the scales. (See my post here for more.) The right-wing though is apparently only opposed to labor unions, not all unions:

One union stood out by its successes.  It is not generally called a union, but so long as we can abuse reality by calling corporations people, we can call the Chamber of Commerce a union.  This union is so powerful that the present United States must come before as a humble supplicant.  This union was at the forefront of the deconstruction of the New Deal.

The time has come to stop blaming the victim.  Somehow, we have to learn to fight back in this one-sided class warfare.  We have to learn to explain that more of the same medicine that made us sick is not going to cure us.  We have to learn to identify the architects of this disaster — the political manipulators, the right wing foundations and their benefactors, and if we want to begin a legitimate fight against unions, let’s start with the Chamber of Commerce.

He highlights the Chamber of Commerce (particularly at the national level), but I can name others.  For example, the American Medical Assoc is effectively a union of high-paid physicians yet the right-wing actually promotes them. The American Bar Assoc. and other professional associations are likewise unions. Yet they don’t get criticized despite doctors fees and lawsuits being a very significant part of our long-term budget difficulties (healthcare costs).

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AD-AS Model Explained

A timely post for my macro classes since we’re starting on the Aggregate Demand-Aggregate Supply (AD-AS) model this week. From EconomicsHelp.org:

Economic growth is an increase in real GDP. It means an increase in the value of goods and services produced in an economy. The rate of economic growth measures the annual percentage increase in real GDP. There are several factors affecting economic growth, but it is helpful to split them up into:

For graphs and explanations, click the more button:

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Union-busting In The Past

Since unions and collective bargaining rights are in the news lately, here’s an event of interest for students of economic history.  Ninety-seven years ago, union-busting meant murdering. Twenty-five people were shot and killed in Colorado on orders of the Governor of Colorado and John D. Rockefeller.

The Ludlow (Colorado) coal strike massacre (from About.com):

In the decades before World War I, industrialists such as John D. Rockefeller had become millionaires; by the early years of the 20th century labor unrest blossomed in the United States, particularly in the coal mine industry. Strikes grew into riots occurring throughout the US, and then into full scale battles, the most famous of which was in 1914, the Ludlow Coal Massacre, when Colorado National Guard opened fire on a tent city of striking miners and their families in Ludlow Colorado.

Basic Facts

On April 20, 1914, Colorado National Guardsmen attacked a tent colony of 1,200 striking miners at Ludlow, Colorado, looting and burning the colony. Twenty-five people were killed. This was the worst of many such skirmishes between the government and the miners in Coal Field War of 1914, which lasted for seven months.

Battle Statistics

The battle lasted 14 hours and included a machine gun and 200 armed militia; the tent city was destroyed. Of the 25 people killed, three were militia men, twelve were children, and one was an uninvolved passerby. The strikers were mostly Greek, Italian, Slav, and Mexican workers; the militia were sent by the Governor of Colorado and ultimately by John D. Rockefeller, owner of the Colorado Fuel and Iron Company.