Sunday, December 11, 2011

Payroll Tax Cuts and a bigger picture

Mark Kirk on C-SPAN re: Payroll Tax Cuts (and more)
Jonathan Allen, Politico
Lisa Mascaro, LA Times
Sen. Mark Kirk

Today on C-Span, you all discussed Social Security.  However the Washington reporters, not being financially astute, missed the opportunity to raise several issues and challenge Sen. Kirk.  (The main reason this is lengthy is the great quantity of "common wisdom" that must be debunked with what is actually a very simple explanation of our monetary system.)

For example, defining FICA tax payments as Tax Collections vs. SS Contributions.  This is not some new political talking point from Obama.  It was *called* contributions by FDR, but it's still a process of govt subtracting money from everyone's paychecks. 

And where does this electronic money go?  There is no piggy bank.  There is no lock box.  The "trust fund" is an accounting formality.  Social Security is not kept isolated.  Not only are the electronic funds allocated to purchase electronic Treasury Bonds --- some account shuffling --- but for decades now these payroll deductions have been seized upon in propaganda politics as more Federal Tax Revenue, to claim that the annual Budget Deficit is lower.  So the SS "Trust Fund" is already completely intermingled with the Federal Budget -- and it must purchase either T-bonds (not volatile stocks, thank goodness).  Yet it's bogus to claim this as "deficit reduction", and even worse to then turn around and claim that Federal spending is unable to replenish whatever was taken.

Therefore, Social Security in fact *IS* a welfare fund, Mark Kirk --- welfare for military contractors and for other lavish handouts for the Super Rich.

FICA payroll tax was increased dramatically under Reagan already, and ahead of the time it was allegedly needed to be increased.  And this increase was NOT needed, except by politics and American ideology that says that SS must be covered by paycheck deductions.  

Adam Smith believed that taxes should fall on the rich and those who live on investment income.  Even during the great "robber baron" era, Andrew Mellon as USTreas Secy believed that paychecks should not be taxed.  Mellon's income tax was on the top 2% only.  No one below that level even had to file.  This was both a moral argument (Smith's "Moral Sentiments") about limited economic security of people who live on their own labor, and a macro-economic argument about how taxes reduce vital demand-consumption by the working class.  More on that below.


Paul Craig Roberts is a Reagan Republican who was the key architect of Reaganomics aka Supply-Side.   Not only he persona non grata with the GOP these days, grassroots conservatives have attacked him as a "communist" and accused him of being a "traitor", accused him of being one who "hates America", and told him to "move to Cuba".  This is the typical slop of "liberal-bashing", but they didn't realize who they were talking at.   Yet Roberts' economic theories and understanding have not changed.  Conditions have changed since 1980.  (Why is it necessary to explain this point?)

once promoted reductions in high-end taxes to push up development and expansion, to meet high demand, and thereby to reduce inflation --- to meet the conditions of 1980 and to engage comparative advantage with China. (Roberts says it's now all "wage arbitrage" and no advantage to America or to Americans.) Reagan's policies also included some Keynesianism -- Military Keynesianism -- ramped up spending, but only on Defense.  Reagan policies harmed other domestic growth, harmed manufacturing.  What growth occurred was via cheap Greenspan credit bubbles -- unsustainable in the long-term. 

And speaking of Keynesian "stimulus", Keynes did call for cutting spending vs taxation (a.k.a. running a govt surplus) as part of his overall theory.  That was supposed to be implemented whenever the economy is overheating, when approaching full employment for everyone who wants a job and full manufacturing capacity. 

Are we there now?  Obviously, we are at the far opposite end.  This is why Roberts and a fellow Reaganomics guru Bruce Bartlett both promote increased Keynesian domestic spending now.  Of course this must be a "gimmick", as Kirk calls Obama's lightweight stimulus.  Of course this cannot be intended to be a "permanent" policy formula.  It's intended to be flexible to changing conditions --- not an ideological set of beliefs about good vs evil.

Related to Keynes' "anti-stimulus": Keynes' vision applied to monetary policy might also call for reductions in the supply of easy credit a.k.a. raise the cost of credit, such as during an over-heated Bubble.  Clinton and Bush era policies should have included the "Keynesian" slow-down of that Asset Bubble in mortgages and new building. 

That's more a Greenspan issue than Congressional spending, of course, but it is now clear that the entire Elite gang and neoliberal economists were totally committed inflating asset bubbles no matter how disruptive the Crash would be.  They attacked Brooksley Born and others who raised the alarm early.

As far as Social Security, Paul Craig Roberts quoted figures on a huge PAST SURPLUS of several Trillion dollars, and a huge FUTURE SURPLUS of over 30 Trillion dollars, from the CBOs own stats.

Sen. Mark Kirk and his like-minded colleagues should not get away with manipulating these discussions with this particular "austerity" rhetoric
-- nonsense.  Neither should Obama or his "advisors" be granted that luxury.  If Kirk frames his case to his constituents that FICA reduction "threatens" Social Security, of course his constituents are going to call for "keeping" Soc Security taxes high.  But this threat arises from this ideological argument that revenue from workers must balance benefit payments each year.  

That's not sensible -- sound businesses do not balance revenue to income as a knee-jerk policy  --- but this argument is being applied anyhow.  It makes even less sense considering that elected govt is supposed to have more leeway as stewards of the public good, not private profits.  Capitalist govts are supposed to "lose" economically, so the private sector can "win".  That what the following section says about sovereign currency.


But without going further down this road about Social Security, let's BACK UP and discuss "Debt" and "Deficits".  First off, where does your money come from?  Most would say "my job" or "my investments".  But where does the MONEY actually come from?  Take out a bill and look:  United States of America is the SOLE MONOPOLY creator of Dollars -- through it's "Fed" facility.  So much for arguments about "entitlements".  How can we NOT have "govt spending" when MONEY comes into existence ONLY from "govt spending"?  We might as well complain that we have to breathe air.

When a business or person borrows from a bank, they have a liability.  But from the bank's perspective, that loan is an *ASSET*.  As a matter of fact, with "securitization", debt is now an easily-tradeable asset, and can be sold or used as collateral.   The banking system went off the rails with these "creative" techniques, but the fundamantal facts show that this is how banks operate.

Likewise, when a business or person deposits say $10,000 into a bank account, from the bank's perspective that DEPOSIT is the banks' *LIABILITY* to the depositor.  That's a DEBT.  But who has seen any bank panicking about having "too many depositors", and worrying because this represents "too much debt"?  Of course that's silly.  Banks WANT MORE liabilities.  Some give you a gift to open a savings account.

The Federal Govt --- Treasury & Fed --- is similar to private banks but not exactly like banks.   The banking system creates credit and deposits which balance each other.  That's double-entry bookkeeping.  The credit assets and deposit liabilities may not be at the same branch or same bank, but they exist across the US banking system.  On the other hand, the Federal govt creates MONEY ... yet it calls that money "notes".  The Fed has a "liability" to redeem your dollars -- but only with more dollars.  It's circular logic, but this is what we have.

Bank credit has been called "horizontal" money, since credits and deposits are created within the private sector.  The Federal Govt --- on the other hand --- creates what has been called "vertical" money, money from the public sector created freely and pushed down into the private sector.  Money is added to the private sector by Congress  -- deficit spending.  Every NET dollar of financial wealth in existence, over and above balanced assets/liabilities, has been created and spent by Congress.  Every dollar in your wallet says United States of America.

It is therefore impossible to eliminate the "national debt" because that would mean reverting to a barter economy ... BUT "deficit reduction" pushes us towards barter.

People today are already "bartering" -- giving their possessions to pawn shops for food and rent, and some are bartering food and other casual labor with other people who also have no money.  Some are forced to barter sex.  This is a definition of "jobless recovery", aka Depression.

If Congress were to unilaterally order gasoline rationing,
an immediate 20% reduction in fuel availability, regardless of the economic effects, there would be a tremendous uproar.  The "Dictator" Obama would be destroying Capitalism again.  (There is already GOP hysteria uproar over mild regulations on drilling and fracking, how that's "hurting jobs", regulations which are very light considering the heavy impact of the BP disaster, on residents, on business, and on another govt bailout.  Ken Salazar is a Bush appointee.) 

Yet conservatives *WANT* Congress to ration the supply of Dollars -- which are virtual Fed money, created by keystrokes, not bound by physical limits -- regardless of the serious economic effects of dollar shortages.  WHY?   This is not "destroying Capitalism"?  Dollar rationing is fiercely attacking Capitalism, even moreso when we're already in a slump.

When China "loans" money to the USA, that means the central bank takes excess dollars from US corporate purchases, over and above what dollars it uses to purchase oil and other trade, and China deposits those dollars in its Fed securities account.  China uses those dollars to purchase Treasury Bonds, because T-Bonds pay interest every month.  The interest is paid only in more dollars --- electronic form --- which are created by the Fed/Treasury.

There is ZERO risk of Treasuries "defaulting" on creditors.  The Fed cannot run out of dollars, nor the Treasury.  Pure nonsense.  Screw S&P.  That's political BS.  S&P and the other raters said all the Securities filled with "Liars' Loans" deserved AAA "no risk" ratings.  We now pretend such bald-faced liars are accurate oracles of our economy?

We could end this "debt crisis" quickly and painlessly --- if anyone seriously wanted to.  (They don't!)  Congress could BAN corporations from purchasing from China, from transferring dollars to any Chinese firm.   Congress could raise high tariffs and eliminate the Trade Deficit and the Balance of Payments Deficit.  China's exports to the US are the root cause of China's central bank having "excess dollars".  It accepts dollars and converts dollars to Chinese currency for Chinese people, and it must return most dollars to the Fed, for sound financial reasons.  That is "loaning" to the USA.

No one in America wants to cut business with China, except under-employed workers perhaps.

Raising Tariffs might set off Tariff Wars, as during Great Depression, but tariffs would probably create many domestic jobs -- IF that was what they really wanted, then do it.  (They don't!)   Congressmen and other ideologues seem to be SOOOOO concerned about "jobs" whenever they address any policy question.  Demagoguery.  Empty demagogues.  Or tariffs might hurt trade that is helpful for US workers.  It depends on specifics.

Is anyone suggesting new high tariffs?  NO.  Of course not.  Wall Street is BULLISH on China.  They WANT dollars to flow to China.  Far from being pro-Tariff, they are anti-Tariff, and pro "free trade" -- even pushing outsourcing that is subsidized and goosed by the US govt, any by various agencies and political relations.  Therefore, China will keep collecting lots and lots of dollars, so China will keep buying Treasuries.  So America will continue to grow it's "liabilities" (debt) to China.

They're describing normal economic activities as a "crisis".

Here's one more possible solution to the "debt" between the Treasury vs. the Fed.  Never mind the fact that the Fed remits back to the Treasury all it's profits after operating expenses --- including profits from interest-bearing Bonds.  Yves Smith noted that without changing a single law, nor even having to re-interpret "power to coin money" as "power to create money", Tim Geithner could order the US Mint to produce one or two $1 Trillion coins.  The cost would be about $50.  (Heck, they could put Obama's face on them.)  Tim could then give one or more coins to his brother Ben Bernanke at the Fed, and that "debt" would vanish.  Perfectly legal and sound.

Is anyone proposing that?  NO.  Why not?  Many reasons, but mostly because the US *benefits* from its debt position and the wealthy elites *like* those T-bonds and T-bills.  This "debt" situation makes the USA a powerful economic player.  We have a sovereign currency.  And govt creditors like to be rewarded.  They like the "safe haven" of the dollar.  (A year ago, banks were enjoying the "carry trade" spread of (1) borrow huge from the Fed at 0.2%  (2) loan same to the Treasury at 3.0%  (3) Profit!)  Many of the framers of the Constitution were govt creditors.  It's part of the elite gravy train.  Don't expect much change here.

If we REALLY wanted to permanently end the "debt problem", Congress could get behind the NEED Act by Dennis Kucinich.  (Chirp, chirp.) The Fed or its functions would be "rolled into" the Treasury.  The Fed would no longer create "Notes" a.k.a. FRNs, Federal Reserve Notes.  A revamped Fed could create "US Dollars".  These would be debt-free and interest-free.  Treasury would no longer "borrow".  These dollars could then be spent to retire ALL US debt as it comes due.  The US would be debt-free in few years.   The National Emergency Employment Defense Act is no more radical than the original 1913 Federal Reserve Act itself.

Is anyone supporting this?  Of course not!  Congress and their elite constituents WANT the Treasury to keep selling Bonds and keep paying interest, because that's how our monetary system and the global monetary system operates.  Ending that would have many troubling ramifications.  The Gold Std was killed a hundred years ago.
Other central banks WANT interest-bearing T-bonds.  Private Banks -- US-based and foreign -- also act as middlemen -- called "primary dealers" -- between Treasury and the Fed during "Open Market Operations".  Private banks are likewise bullish on T-Bonds, unless there's a bigger, better short-term profit opportunity.

So this internal "debt crisis" is also a non-issue.  Rather it's describing how this debt-based financial monetary system functions, by design.  Congress passed these laws and regulations that define our financial system as "
debt-based".  This is why T-bonds pay interest.

Here's the summaryX Trillions of public debt = X Trillions of private assets.  Again, this is similar to how YOUR personal financial assets in your savings account are your bank's debt.  This relationship is called an "accounting identity".

The ONLY way to reduce "public debt" without revamping our entire monetary system is to reduce "private assets", i.e. to shrink the economy.  How is it that so many "pro-business" conservatives and so many "jobs creation" liberals are so strongly committed to policies which MUST shrink the economy ... for no sane or sensible reason?

The Fed and Bernanke hardly sweated when they created some $16 Trillion in "EMERGENCY" buy-ups of "toxic assets" (at "mark-to-myth" prices, not "mark-to-market").  This was said to be necessary to "rescue the banking system".  In reality, the FDIC could have rescued "vanilla" savings with far less spending.  The Fed's actions and TARP were to rescue the exotic stuff, the speculation, the "mortgage-backed securities" and other inflated derivatives. That spending was a choice ... and a bad choice at that.

Is this QE stuff inflationary?  Yes, purposely so.  Not so much to inflate street prices, although prices of commodity futures like energy and food are being inflated, but the intentional plan is to cause inflation in all those other debt-based assets, rather than "Letting the Market Decide" their real value.

Hardly any American outside of financial circles understands Quantitative Easting and the entire huge
maze of bailouts packages and interest-free "loans" for free money used to "pay back TARP", few even KNOW about the Fed's multi-Trillion contribution, let alone some of these other secret deals, nor do people understand all that was done.  All people know about is Obama's $1 Trillion "Stimulus", which failed (naturally) at replacing $14 Trillion in wealth that evaporated from our Main Street "real" (Adam Smith) economy of production and consumption.

Hardly any American fully grasps that TARP and QE were purposely never linked to any Quid Pro Quo to write down inflated mortgage debts on "underwater" homes, nor other debts gone
unpayable in our atrophied and shrinking job market.  OCCUPY understands that "Banks got Bailed Out, We Got Sold Out", which is true.

I guess banks feel that leaving the debts in place WILL result in long-term economic calamity for millions,
economic atrophy, foreclosures, dislocation, forced moving, homelessness, declining values of abandoned properties, but they can still benefit more in the short-term (with govt help?)  than if they did a huge RESET on the entire housing/mortgage market.  Investors would have to take a haircut on their fictional wealth.

They would rather rely 100% on Uncle Sam for a permanent rolling bailout than to take personal responsibility for their own RISK.

Still, even in this unfair situation, the Fed and Treasury and Congress could EASILY provide various semi-permanent "stimulus" options (a) to jump-start industry and (b) to pay for elder-care and so many other things which are not readily compatible with a for-profit business model (EXCEPT with govt spending).  This kind of stimulus spending would add to the "budget deficit" and that means spending would grow private sector assets.  That's good.  FICA suspension is a tiny part of that.

The "welfare state" has long been understood to be an integral part of what was done decades prior to FDR, the "corporate welfare state" of the late 1800s and early 1900s, that Gabriel Kolko and Murray Rothbard and Joe Stromberg and Kevin Carson described.  As long as the US Govt has been applying all it's efforts to help Wall Street gain more money and assist Big Business in outsourcing work and dumping American workers -- really jumping off with Nixon's "Detente" with Mao --- it's only fair and sensible that this windfall and cornucopia
(for the rich) of "cheap labor" production be counter-balanced with commensurate social welfare for the non-rich.  (Kevin Carson's answer is to wipe out all aspects of the corporate welfare state first, then wind down social welfare, as a sane "natural" economy is restored and social welfare is no longer necessary.  How many big Capitalists on the Fortune 500 are lobbying to end their Federal gravy train?  Hello? Koch Brothers?   I didn't think so.)

We KNOW that the Super-Rich are not willing to give up THEIR welfare status.  They fight and lobby like crazy to keep THOSE aspects of "Big Government".  Dean Baker's recent 'conservative' book highlights *many* examples of "wealthfare" that go beyond bickering about taxes.  On the other hand, the original "liberal" aim of Federal taxation in our "fiat" money system *IS* to balance out the economy and to sop up excess financial gains from "unearned" wealth, economic rent.  George Orwell
described in Wigan Pier those "toffs" who lived on "dividends" vs. those lazy coal miners.

A rollback of FICA taxes -- without rationing dollars for so-called "entitlements" -- is one ideal way -- bare minimum -- to actually GROW the economy and truly strengthen Social Security.

Would these kinds of policies drive inflation?  Hopefully!  Ordinary wages have been flat for decades.  Small business could also enjoy some price inflation instead of a deflationary spiral of discounts, sell-offs, layoffs ... and bankruptcy.

The only way in which a "damaging" kind of inflation would occur, would be if the economy grew to full employment and full production, yet the govt KEPT increasing spending beyond that which could cause more growth. 

Hyper-inflation of the past, including Weimar Germany, were caused by intentional inflation of financial assets, and NOT from having an economy "rigged" to increase the wealth and prosperity of of the other 99%.  If people could retire at 50 instead of 65 and STILL spend money, this would further boost the entire economy and make room for youth.  More people could afford to volunteer or work in paid "help" roles for aging Baby Boomers ... or coach children and teens.  There is SOOOO much that could be done, but it goes begging due in large part to the bogeyman of "spending" and "debt" in a debt-based system.  This is crazy.

For more details, see Warren Mosler's Huffington article on "Progressives" (Modern Monetary Theory) (not really a "theory") or various articles on the Pragmatic Capitalism site.


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