Mosler’s 11 steps to fix the economy (2010ean)
January 8, 2010
1. A full ‘payroll tax holiday’ where the US Treasury makes all FICA payments for us (15.3%). This will restore ‘spending power’ and, by allowing households to make their mortgage payments, will fix banks from the bottom up. It may also keep prices down as competitive pressures may lead businesses to cut prices, passing on their tax savings to consumers even as sales increase.
2. A $500 per capita federal distribution to all the states to sustain employment in essential services, service debt, and reduce the need for state tax hikes. This can be repeated at perhaps 6 month intervals until GDP surpasses previous high levels at which point state revenues that depend on GDP would be restored.
3. A federally-funded $8/hr job and healthcare benefits for anyone willing and able to work. The economy will improve rapidly with my first two proposals and the private sector far more readily hires folks that are already employed. In 2001 Argentina implemented this proposal, putting to work 2 million people who had never held a ‘real’ job. Within 2 years, 750,000 of those 2 million were employed by the private sector.
4. Making banks utilities. The following are disruptive, serve no public purpose and should be done away with:
–Secondary market transactions
–Lending against financial assets
–Business activities beyond approved lending and bank account services.
–Contracting in LIBOR. Fed funds should be used.
–Subsidiaries of any kind.
–Contracting in credit default insurance.
5. Federal Reserve — The liability side of banking is the wrong place to impose market discipline.
The Fed should lend in the fed funds market to all member banks to ensure permanent liquidity. Demanding collateral from banks is disruptive and redundant, as the FDIC already regulates and supervises all bank assets.
6. The Treasury should issue nothing longer than 3 month bills. Longer term securities serve to keep long term rates higher than otherwise.
–Remove the $250,000 cap on deposit insurance. Liquidity is no longer an issue when fed funds are available from the Fed.
–Don’t tax good banks for losses by bad banks. This serves only to raise interest rates.
8. The Treasury should directly fund the housing agencies to eliminate hedging needs while directly targeting mortgage rates at desired levels.
9. Homeowners being foreclosed should have the option to stay in their homes at fair market rents with ownership going to the government at the lower of the mortgage balance or fair market value of the home.
10. Remove ‘self imposed constraints’ that are disruptive to operations and serve no public purpose.
–Dump the debt ceiling – Congress already votes on spending and taxes.
–Allow Treasury ‘overdrafts’ at the Fed rather than forcing it to sell notes and bonds. This is left over from the gold standard days and is currently inapplicable.
11. Federal taxes function to regulate aggregate demand, not to raise revenue per se, and therefore should be increased only to cool down an overheating economy, and not to ‘pay for’ anything.
Urre estandarreko sistema
January 20, 2010
Reader note: This is Jim’s second piece in an ongoing debate with Warren Mosler about the economy. Here are links to previous posts in the series: Writer biographies / Mosler #1 / Rickards #1 / Mosler #2. There will be one more post from each writer.
Before I lay siege to Warren Mosler’s remedies, let me say he’s a brilliant guy I’ve admired for 25 years going back to his days at AVM. I got reacquainted in 2004 when I lived in St. Croix and Warren ran for Congress from the Virgin Islands. His campaign ads were 5-minute infomercials; tutorials on economics and gems of sound fiscal advice. But this is a debate, so let’s begin.
Warren makes eleven points and I agree with two – the elimination of payroll taxes and converting banks into utilities. Payroll tax elimination spurs consumption and stimulates job creation. As for banks, we need them, we just don’t need casinos that call themselves banks. Bring back Glass-Steagall, separate deposit and loan functions from proprietary trading and banish the latter to hedge funds. Speculation should survive on its own dime.
I don’t need to take the rest point-by-point because they’re the same thing – an unlimited belief in the Fed’s power to print money. Warren calls for a $500 per capita state rebate, a federal job for all takers, direct Treasury funding of housing, unlimited deposit insurance, no debt ceiling, Treasury overdrafts at the Fed and federal purchase of foreclosed homes. He doesn’t propose free ice cream for children but I don’t see why not; just print some money and go for it!
Warren’s program would work if the world had as much faith in the dollar as he does. But it doesn’t, and neither do the American people. If we were all captives of a government dollar monopoly with no alternative, then maybe his plan would work for awhile. But we do have alternatives in land, art, commodities and the oldest form of money – gold. It’s no coincidence that when FDR debased the dollar in 1934 he simultaneously banned private ownership of gold. He knew citizens would hoard gold when he trashed the dollar so he made that illegal. One of Reagan’s lasting gifts to the American people was a law in 1985 which made U.S. mint gold coins available to average citizens. Now when the Fed cranks up the printing presses, citizens have a choice. Foreign central banks have the same choice in terms of gold bullion and commodities such as oil and copper which serve as stores of value and industrial inputs.
Here’s where complexity theory comes in. Each citizen, company and central bank is an interdependent agent with a threshold for dollar rejection based on the thresholds of others. Some will not flee the dollar unless many others go first. But some have already bought gold and others are on a hair trigger. What does the complete system look like? Are we in the critical state where a small shift brings the entire edifice crashing down – the tipping point? It’s impossible to say, but we’re certainly closer than ever. Warren’s cavalier approach to printing money as the cure for all ills guarantees the greatest disease of all – destruction of the dollar.
James G. Rickards is a writer, lawyer and economist. Twitter.com/JamesGRickards.
Gaurko sistema monetarioak nola funtzionatzen duen
Gobernuaren rola gastuetan eta zergetan. Defizitak
January 19, 2010
Reader Note: This is the second entry from Warren Mosler in a debate with Jim Rickards about how to fix the economy. More on the authors here. This is a response to Rickards first piece. Mosler’s first piece is here.
Jim’s recommendations are “sound money, lower taxes, and light regulation.”
We do agree on lower taxes. My proposals include a full payroll tax holiday to support demand. And while Jim suggests a return to Glass-Steagall, my banking proposals are even more narrow and dramatically reduce the need for regulation. I also support price stability.
We also agree that the Monetarist concept of “velocity” is flawed, but our reasons differ. Jim’s derive from the long-dead gold standard where velocity is a calculation of how many times the given amount of money (gold) is used to buy and sell goods and services. Today, however, monetary expansion has nothing to do with money supply like it used to under the gold standard. The reason banks aren’t lending isn’t because they don’t have money to lend. Lending is constrained only by bank capital and the creditworthiness of willing borrowers, not by gold or any other concept of bank reserves. That’s why quantitative easing – i.e. the Fed printing money to buy securities – has no effect on bank lending.
Interest rate cuts transfer income from savers to banks, reducing overall spending. So while interest on savings dropped from over 5% to near 0%, borrower’s rates fell little if any. The wide yield spread means banks’ profit margins widened.
New Keynesian thought is also flawed, because it too presumes gold standard constraints. Today government never actually has nor doesn’t have dollars, and spends, taxes, and borrows simply by changing numbers in bank accounts at the Fed.
When it comes to the dollar, the US government is the scorekeeper. Unlike the gold standard days, the government can’t run out of money. Nor is it dependent on China to fund spending.
Under the old gold standard, taxes and borrowing did fund spending. Today taxes function only to regulate aggregate demand and to control prices. The federal deficit is merely the difference between the numbers changed upward when the government spends, and the numbers changed downward when it taxes. Taxes therefore function to regulate aggregate demand, not to raise revenue, per se. Tax cuts increase our spending power, tax hikes lower it. This is indisputable operational fact, not theory or philosophy.
Jim’s general warning is that too much spending or monetary stimulus might lead us to cross a “critical threshold where diverse actors reject dollars in a cascading collapse.” But this only applies to fixed exchange rate regimes such as the gold standard, where a weak currency results in gold outflows.
Today the dollar is a non-convertible currency. The exchange rate continually adjusts, always representing indifference levels with no gain or loss of gold reserves. I would note too that the U.S. is actively seeking to weaken the dollar vis-à-vis the Chinese yuan. Would Jim want the reverse?
Jim’s arguments are as good as gold. However, we are not on a gold standard, so they don’t apply. Today’s monetary arrangements call for my solutions to restore output, employment, and price stability.