What is the character flaw in Americans that we seem to revel in economic stagnation? Why don't Americans want to have a full employment economy? The most important thing stopping this country from significantly increasing our standards of living and economic well-being is the myth that the Govt's budget is the same as a household budget.
First, lets look at the proof that our economy is only mediocre using that icky stuff that conservatives hate so much, facts and data. The twin concepts of the unemployment rate and real median income form the foundation of our economic stagnation. They should be seen in a yin-yang format and not as one concept being necessarily more important than the other. They are inextricably linked.
We'll start with the unemployment rate:
You'll notice that since 1980, we've had only three short periods (totaling just over 7 years) of what anyone could honestly describe as even near full employment, <5% unemployment (still much too high IMHO). Thats 7 years out of 33, an embarrassing 21% of the time. Without knowing anything else, I would think this is more than enough evidence to know that we are doing something wrong. And now the 2nd concept, real median income. As you can see in the graph below, median incomes trend up when unemployment goes down. This much should be obvious, as the labor market tightens or the supply of the unemployed goes down, the price for labor goes up. Just like in any other market. And when median incomes go up, purchasing power and aggregate demand increase, which leads to opportunistic capitalists expanding production and investment in order to try and capture the increased revenue that comes from increased demand. And when capitalists expand production and investment, they have to hire more workers. And when they hire more workers, there are less unemployed, which leads to employers having to pay increased wages to buy the decreasing number of unemployed workers. Which leads to an increase in purchasing power and aggregate demand. And around and around we go upwards in a virtuous cycle.
So what is the key to sustaining real income growth for the middle and lower class, I bet you all know the answer by now, maintaining full employment. But how you might ask, we've never been able to maintain full employment? Follow me below the fold for the answer.
As productivity increases combine with globalization, the private sector simply doesn't need every American worker to produce the total amount of goods and services that Americans can afford to buy. This is natural in a market economy, if a business owner can produce more goods with less people, then he will. This is why its not productive for we progressives to complain about businesses not hiring people even with their record levels of corporate profits. Very few companies are going to expand their workforce just because it will help their fellow Americans, they only do so when increasing sales compel them to. This is a process that will not end, there is no going backwards in the world of technological and productivity advances. Therefore, we must re-conceptualize how to employ everyone that wants to work.
There is only one institution that has the financial capability to employ the unneeded labor, and that is We The People through our elected representatives. Keep in mind, that an expanded employment program funded by Congress is not meant to be a temporary stimulus measure, its meant to be a permanent fixture that is there to maintain full employment and production. But how can we afford it? This is the question that allows us to circle back to the myth that we started with at the top of the post, that our Govt's budget is limited in the exact same way as your household budget. This is actually an illogical position to hold. The US dollar is an invention, as all fiat money is. Just as irrational as it would be to claim that an NFL stadium can run out of tickets or the NY subway system can run out of its own transit tokens. Its impossible for any issuer of any fiat token to run out of that token.
So lets focus on how the amount of money impacts the economic activity of the economy. There are two main types of money in our monetary system, bank deposits and Govt dollars. Bank deposits are the main form of money that we transact with on a daily basis, unless you use cash. And the other is created by the US Govt, cash, reserves, and T-bonds. Bank deposits expand when private debt expands and Govt money expands when the Govt is spending more of its tokens than it collects back in taxes. Think about the way bank deposits are created, logically, no bank would ever credit your bank account for free. You either have to transfer your existing bank deposits from one bank to another, deposit Govt issued cash, or take out a loan. In exchange for the increased bank deposits when you take out a loan, you must also take on a corresponding liability (your promissory loan note). There are no freebies in the world of bank deposits and private money.
Now lets focus on Govt money, how its created. This is most easily understood through a rundown of the accounting that takes place when the Govt deficit spends = create money. So lets start with the Govt issuing a T-bond for $1000.
Person A buys a T-bond:
Person A's bank deposit -1000
Person A's Bank's Reserve account at the Fed -1000
Person A's Securities (T-bond) account at the Fed +1000
Treasury's General Reserve Account at the Fed +1000
All accountants balance.
Now the deficit spending (lets use a $1000 SS payment for example):
Treasury's General Reserve Account at the Fed -1000
SS Recipient B's Bank's reserve account at the Fed +1000
SS Recipient B's checking account +1000
Now the accounting doesn't balance, there is a net +1000 in the economy. When the Treasury spent their reserves and sent them to SS recipient B's account, Person A didn't get a debit for $1000. Person A's Federal Reserve accounting notation never changed. And this is the accounting mechanics of how deficit spending adds to the amount of money the private sector has. This is why if you don't do the accounting right, you can't get the macroeconomics right. This is how simple it is for the Govt to create its tokens, by crediting accounting notations at the Federal Reserve.
Now back to charts and graphs:
Here's the most important chart in the world. It shows the levels of private debt and Govt "debt", now remember that both these debts are equivalent to the amount of money available for exchange. This graph is scaled as a % of GDP
You can see that the only two periods of private sector debt deleveraging (which is equivalent to the money supply shrinking) coincide with Depressions (in 2009 the Govt stepped in with enough money creation to keep us from a full blown Depression like they are experiencing throughout the Eurozone). This is an example of correlation actually being causation. Lets look at the amount of total private debt=money in constant nominal dollar amounts to better understand the scale of money we are talking about here:
Yes, thats over $50 trillion worth of private debt=money created since 1980. And its no coincidence either that when the money supply goes up, economic activity or spending is able to go up as well. Remember also that this is in addition to the the money the US Govt has created during the same time period. T-bonds outstanding were $800 billion in 1980 and almost $16 trillion today. Here's the catch, when private debt goes up, so does the amount of money it takes to service that debt through interest costs. And when it goes down or even stays flat recessions and depressions are the result. The mid-80's experienced a private deb expansion with the S & L scandal and unemployment came down. Then private debt came down a little in the late 80's and early 90's and the unemployment rate went up. Then we experienced the dot-com private debt boom which gave us the Clinton surplus and unemployment under 4%, then a small blip in private debt expansion caused the recession that started W's Presidency. And finally, the housing private debt boom that once again caused unemployment to get into the 4% range. And when that private sector debt could not be sustained any longer, we now have full-on private debt reduction leading to the Great Recession or Stagnation. This is why the whole national debt debate is so comical, instead of focusing on the real problem which is the level of private debt, we are obsessing over the only debt that doesn't really matter, US T-bonds. If we want to have a more sustainable economy, we must endeavor to limit and stabilize the growth in private debt, and substitute risk-free Govt money in its place. At the end of the day, a growing economy with a growing population, must have a growing money supply in order to maintain the financial standard of living. Its just a matter of us getting comfortable with the concept of We The People growing the money supply debt-free or growing the money supply with private debt owed to bankers. I think the evidence is pretty clear which one of these methods has been tried and failed over the last 100 years. Maybe its time for us to accept a new economic paradigm.
A word on inflation:
You might ask, but how can all those trillions of dollars be created without inflation increasing. The answer lies in three places: productivity increases, the trade deficit (those US dollars are leaving the country, so they can't be used to bid up domestic prices), and savings (if you have $1 million, and you never spend any of it, there's no way for that money to bid up prices). After all, inflation is the ratio of money SPENT to goods and services for sale. Imagine an economy of two people that produces 10 apples a year. And there are $10 in the economy. The price level is 10 apples / $10. Now lets say that productivity increases allow these two to produce 20 apples. If the amount of money stays the same, we have deflation: 20 apples / $10. If the money supply grows in an equal amount with productivity, inflation is zero: 20 apples / $20. If the money supply grows faster than the production of goods and services, we get inflation: 20 apples / $25 dollars. So creating money does not by itself guarantee inflation, its a ratio. Furthermore, inflation doesn't care about whether its Govt making the money or the private sector making the money. So if we tamp down on unstable private sector debt = money creation, and substitute the stability of Govt money, we will all be better off. And inflation is not something to worry about solely because the money is coming from the Govt and not the private sector. It doesn't matter where the money comes from. I will have much more to say about inflation in future posts. Thanks for reading everyone.
And remember, MMT = Reality