Frosty The Snowman Exemplifies Exogenous Money

Frosty the Snowman was on TV tonight.  So of course I watched it.   One of my favorite lines in this Christmas classic is in the following clip:

Frosty's logic is as follows:
1. I see the thermometer rising and getting red
2. That causes me to get all hot and sweaty
3  The thermometer is my demise

Similarly, neoclassical misconception of how money works goes something like this:
1. I see the Fed adding reserves to the banking system
2. That causes the economy to lend and borrow
3. The Fed is the economy's demise (or savior)

Obamacare: Biggest Issue is Monopoly Power

Obamacare:  I have no interest in the political rhetoric.   Yes, the website sucks now.  Yes, Obama either did not know or knowingly lied about the effect of millions of Americans losing their coverage.   Equally however, there are some obvious positives of the legislation which have little to do with the IT, and have much to do with millions more Americans that will now have access to care they never had access before.   At the end of the day, only time will tell if the policy is a success or failure.

My big concern is something that has been known since the beginning and that is, Obamacare does nothing to erode the existing monopolies of health insurance in many states.  The biggest issue with Obamacare in my view remains the fact that the so-called marketplace doesn't really create a true market.  The fact is, plans cannot be bought and sold across jurisdictional lines.  Obamacare may actually serve to simply consolidate monopoly or oligopoly power - which may in fact keep prices higher than they otherwise should be.   The ironic thing is that we probably would be better off if the government just created its own monopoly power and moved us to a single-payer system.   That way, the government could have more control over prices.  Under this private monopoly system though, that can't happen.  I, living in Marion, Co. Indiana cannot buy a plan from an insurer in Illinois that may offer cheap rates.   What choices do people like me in Indiana have:  not much of one.    "Would you like Anthem, Anthem, or Anthem?"

While We Are On The Subject of Stupid Theories

Rational Expectations 

Crowding Out And Its Relation To Bullshit

A topic I've been hearing from some of my conservative friends is a refrain often found in mainstream macroeconomic textbooks - crowding out.  Crowding out is the theoretical idea that there is a fixed pot of gold from which to finance investment, so if the government all of a sudden wants to draw from that pool, it must mean it has to take funds from the private sector (because there's only so much gold to go around).

So a few things are wrong with this idea:
1. We are not on the gold standard anymore.

2. In our economy there are funds that are just lying around because no one is using them.

3. Even if the economy was better and the private sector were not hoarding cash and if they were instead fully utilizing all resources, there is no fixed 'pot of gold'.   The amount of funds in circulation are completely driven by demand.  So, if the government wants to spend more money, they don't 'take it' from the private sector.   They just spend the money and US bonds are issued - with no effect on the amount of resources whatsoever.

But people don't seem to get this.  Especially conservatives.

But as I've been trying to convince people for years, the reason that conservatives don't get it is because mainstream economists don't get it, and they keep teaching bullshit... like crowding out.  I keep teaching bullshit like crowding out too, because I'm virtually forced to - but I also try my best to say in a very professional way, "this is bullshit".

And then the brainiacs at the Congressional Budget Office say things like this (from 2009):

"ARRA's [Obama stimulus] long-run impact on the economy will stem primarily from the resulting increase in government debt. To the extent that people hold their wealth in government securities rather than in a form that can be used to finance private investment, the increased debt tends to reduce the stock of productive private capital."

I have bolded that last sentence for you.  What it is saying is that crowding out will happen, but what it also implies is that crowding out will happen only under certain assumptions: "To the extent that people hold their wealth in government securities rather than in a form...." implies that there is an either/or situation.   The CBO is making this assumption, which I just told you is false - and that every central banker will tell you, is false.   There is not either/or situation between bonds or savings that businesses can use.   Businesses don't finance their investment from some fixed pool of money.   

Can you imagine if a business went to a bank for a loan, made the business case for the loan (which was a good one), but then the bank says, "Oh I'm so sorry sir, but we've plum run out of money.  I mean, we had some, but unfortunately the government sold so many treasury bonds that we now have none left."   I mean - seriously?   Has this ever happened? No, it hasn't.  Do you know why it hasn't?  Because loans are not made from some fixed pot of gold. Loans are made based on risk and return and the business case, and that's it.   Banks never 'run out of money'.   That's what the Federal Reserve does - ensures that banks have the money they need to do business.  

Having said all this, is it possible that in some cases government spending influences business incentives to a degree that might cause less private investment.   Yes, probably.  But, that's not what the mainstream theory says.  The mainstream theory is crowding out occurs because there is a fixed pot of gold so banks won't have resources to make loans, and interest rates will rise so businesses won't want to borrow, and taxes will rise in the future so that the average Joe will hoard his cash that would otherwise go to US businesses.    All of that theory was born at a time when we actually did have a fixed pot of gold.   But today, all of that, is bullshit.

The True US Debt Burden

In macroeconomics, it is often taught that that the US debt burden (ie., the metric we should gauge how concerned we should be about the national debt) is the amount of interest paid on said debt divided by the measure of GDP during the same time period.   This makes sense.   We can roll over the principal of our debt and we can just use some of our growing economy to 'pay for' the interest we owe and it's 100% sustainable forever with no real cost to anyone.   As long as the growth in the interest we have to pay to the bondholders does not exceed our economic growth (it would have to be decades for it to really matter that much), we are right as rain.

But then, many textbooks, including the one I use to teach my macro class go on to say the best 'rule of thumb' therefore is to try to keep a constant or shrinking debt to GDP ratio - not interest on the debt, just debt.  This I have a big problem with.

The problem with using that as a rule of thumb is that it is not very useful, mainly, because it assumes that interest rates paid on the debt remain constant.  But as we all know, interest rates are anything but constant and in fact real interest rates have drifted negative in the past few years in some cases to the point that the government actually can theoretically earn money by going in to debt.  Even if that is not the case right now, the fact remains that real interest rates have dropped dramatically (thanks to the Fed) in the past 6 years.   This means that any new government debt is dirt cheap.   IE., interest/GDP aka the debt burden cannot be nor should be approximated by using debt/GDP as a measure.   If what you care about is the debt burden, and as long as the government collects such information, why would you need another measure of approximation anyway?   I mean, unless you are trying to scare people:

The CBO, as an aside, believe the debt/GDP ratio will fall for the next decade or so before it starts rising again, but it's also important to note that the rise precludes any assumptions about the investments we are putting in to the economy today.   So, really, predicting this sort of thing a decade out is a fools errand anyway.

But, why scare people, when you can present reality:

The reality is we aren't paying anything more on interest to our debt really now than we were back pre-9-11.   IE., thanks to a recovering economy and falling interest rates, despite our increased debt values, the debt burden is actually falling and really has been since the 1990s if you take a longer-term view largely due to the tech boom, the end of the cold-war, etc., which despite the bust, still has aided our long-term economy to this day:

Say it with my tea-publicans:  the economy drives the debt burden, not the other way around.

How Classical Economics Misleads On "Government Debt"

The classical model is mandatory reading for most macroeconomics classes.  I teach it because I have to, but I teach it in a way that the caveats and assumptions are front and center.   It's apparent to me that the profession of economics perhaps has not drawn enough attention to those assumptions (or perhaps exacerbated the view that they are unimportant), since it seems a significant chunk of the American public is hyper-concerned about the debt, when perhaps such concern is not warranted compared to all our other problems du jour. 

The classical economic model is a ‘pot of gold’ model, where an economy has a certain fixed amount of resources by which it creates productive capacity.   The classical model assumes markets are perfect in the sense that there is 100% utilization of resources at market determined costs of those resources.  This means that at market given wage and interest rates, we have ‘full employment’ (not counting a certain amount of unemployment that may exist just due normal movements between jobs, etc.) of both labor and physical capital (buildings are staffed, machines are manned, etc.). 

So, now, in this classical world the government comes in to an economy that is already using 100% of the resources and says, “I want to spend $1B more and give everyone healthcare.”   In our classical world, there are no more resources to devote to this new policy so the government has to take it from the existing ‘pot of gold’.  In other words, they have to take resources that are currently being (presumably productively) used in the private sector (by businesses).   In this world, at a minimum, the healthcare spending does nothing for growing the economy and at worst it does one of two things (or some combination):  (1) severely harms economic growth by taking some of the existing ‘gold’ necessary for the private sector to do its thing – either by increasing taxes or some other mechanism, and/or (2) in the case where the government starts up the printing press and starts manually artificially creating more 'gold' to fund its spending, inflation will ensue.   Neither of these is pretty.    In either case, the classical model further assumes that when the government spends money, 0% helps economic growth, while, when businesses spend money, 100% of that spending helps economic growth. 

But, the real world doesn’t look anything like the above classical ‘pot of gold’ scenario.  In the real world, economies are subject to bouts of booms and busts for varying reasons: sometimes there’s an asset bubble that bursts (housing, stocks), sometimes there is an oil crisis that causes prices of all business activity to raise thereby stunting growth, and sometimes there is a large degree of uncertainty and other more ‘soft’ things that create pessimism in markets – reducing the revenues businesses need to operate and grow effectively. 

In the real world, therefore, economies often are not operating at ‘full employment’.  Perhaps a significant chunk of the labor force is out of work.   Perhaps perfectly usable buildings are sitting empty for months.   Perhaps banks aren’t lending and perhaps businesses are just sitting unproductively on their assets.   This seems like common sense reality, but it’s this common sense fact that changes the outcome of the government wanting to “spend $1B and give everyone healthcare.”   Now, the government can enter into a deficit situation not by taking from the private sector but simply by starting up the printing press and creating more funds.  They could do this in the classical world too but unlike the classical world this will not result in inflation because the increased spending/demand from the new government policy simply soaks up some of the already underutilized resources (it results in workers being hired to enact the policy and carry it out, and it results in certain capital being used that might otherwise be sitting idle).   In this kind of environment, there is enough 'supply' of productive capacity to fill the 'demand' for this new government program, and no inflation needs to occur.

But what if this healthcare policy were enacted in a ‘normal’ economic time – not on the tail-end of a recession?   Even if we assume that 'normal' means we have 100% full employment (which is itself debatable), classical economics falls apart.  The key here is the unfortunate assumption classical economics often makes about the difference between when the government spends and when businesses spend.   Recall from above, in the classical model, when the government spends money, 0% helps economic growth, while, when businesses spend money, 100% of that spending helps economic growth.   Most folks recognize that assumption to be patently false in the real world.   When BP invests millions of dollars in off-shore oil rigging that eventually causes multi-billion dollar environmental catastrophes, or when Chinese businesses invest money in making tires for export to the US that subsequent explode while us Americans are barreling down the road – not all of that sounds particularly productive: quite the contrary actually.  Conversely, when the government spends money on educational infrastructure, transportation and logistics infrastructure, or perhaps even providing some certainty for millions of Americans regarding their healthcare…. Some of that is likely very productive and adds to the economic capacity of the United States.   The point here is that some government spending actually increases the size of the pot.   And to the degree that the potential for that growth that might not normally occur in the private market is probable compared to the potential for the policy to cause inflation – even in ‘normal’ economic times that spending policy may be worth it.   In today's environment, the potential of Obamacare to increase economic growth is debatable.   But the potential for it to cause inflation is almost non-existent because (1) it is of relatively small cost in the grand scheme of our economy, and (2) if the markets thought significant inflation was on the horizon, interest rates on non-government backed securities would be pressured to increase as potential lenders would demand a higher rate of return to cover the higher future prices - but this is not happening at all today.

 

What this means for our present political debate over the government debt is that there is a fundamentally simplistic worldview that many Republicans have, that is largely based on the overly simple classical model of economics: the idea that when the government goes more into debt, it takes existing resources from the private sector and kills economic growth.  It ignores the reality that in fact, the debt is much more a by-product of economic growth and the cycles of booms and busts as supposed to the other way around.   And that in fact, sometimes, the government can have positive effects on economic growth albeit with a substantial upfront cost.   Most folks call that an 'investment' in the future. 

"Gender Gap"

The gap exists, but is it a problem?  Women make 20+% less than men depending on what study you point to.  Ok.  So what.   Just saying it, doesn't make it a problem.  Black men make less than white men.  People with college degrees make more than those with high school degrees only.  Do we need to 'fix' those issues too?

The Indianapolis Star obviously isn't interested in the actual research - just more interested in assuming the gap is something that needs 'fixing' (without of course explicitly stating how, though implicity suggesting employers just need to pay more to women).

The fact that the author dismisses the anger from those that think the wage gap is something that needs fixing is unfortunate.  There is anger because the wage gap, while not a myth itself, perpetuates the myth that by itself it is a problem that needs solving.

Economists have studied this for years and a main reason a gap exists is because women self-select into lower paying jobs than men.  Also, many of these gap studies only focus on basic wages and salaries and ignore the benefits side of the equation which for many employers is 30+% of labor cost.  Additionally, women tend to work fewer hours than men.  Due to child-rearing norms, women tend to have less workforce attachment than men.  Education levels, training, and work experience differences have also been found to be factors.    That is why they get paid less for the most part.  Is sexism part of it?  I'm sure it is, but to imply that the entire gap of 20+% is sexism that needs to be 'fixed' is ridiculous.

The anger comes from the fact that many people don't think that gap should be 'fixed' - because it's either not really that broken or the part that might need fixing itself is much lower that it is purported to be.   In other words, they are angry because they feel there are erroneous assumptions being made.  The St. Louis Federal Reserve estimates that the gap, just after adjusting for benefits and job characteristics, may be less than 5%.   This is not to mention any of the other points I mention above.  Or, if you do think it needs fixing, perhaps folks should focus on why these differences exist from a sociological perspective, as opposed to just looking at this as a quick fix that means 'employers need to pay women more'.   Should we pay women more if the reason they are getting a lower wage is due to their own job choice, or due to their education/training/job attachment, or due to the fact that they get more in benefits...?  If so perhaps we need to start paying blacks more.  Perhaps we need to start paying high school drop-outs more.   Perhaps we need to start paying the less experienced more.  I don't suggest the answer is one way or the other to any of these. But to ignore these deeper issues is to ignore the statistics.

Krugman - Still pacing the halls of his ignorant tower.

Rather that me attempting to write a long post about Paul Krugman's lack of understanding endogenous money, I'll let Naked Capitalism do it for me: http://www.nakedcapitalism.com/2013/08/james-tobin-versus-paul-krugman.html

"Price Gouging": Both Sides Get It Wrong

I was reading my facebook feed recently and someone mentioned something about how firms that price gouge (like gas stations) are shameful, etc. etc. etc.  This reminded me that the topic is one of my favorite microeconomics topics.  So I thought I'd write about it.  Price gouging is defined differently by the various State laws covering the term, but generally it is a situation in which a firm raises prices of a necessity good(s) (like gasoline) during a short-term shock (emergency - like a weather disaster) that is not easily justified by the cost of producing or exchanging said good.

To most conservatives or economists the very term "price gouging" is misleading and far from being a 'bad' thing, it is a necessary component to capitalism.   IE, it's just supply and demand.   When a hurricane hits, supply of gasoline falls, demand rises, so profit-maximizing firms raise their prices.   It's not outside of supply and demand - it IS supply and demand.  [the example/link given by the way is just an example and is not what I would technically define as a true price gouging situation unless you view bullets to be a necessity ;)]

Nevertheless, laws were put in place to protect consumers: to block price increases for situations when otherwise prices would increase based on reasons that cannot be explained by supply.  In other words - to prevent firms from increasing prices based on a demand spike (caused by people trying to flee a disaster).   The intentions are obvious and mostly on moral grounds.   The idea is that people are already suffering enough, it is not right to hit them financially during these times in life.

Consumerists have it correct that there is something morally amiss about jacking up prices during emergencies on necessity goods.  But their solutions are inelegant and target the wrong problem: unfairly targeting businesses.   Essentially they are telling profit-maximizing firms to temporarily stop profit-maximizing and to somehow only increase prices based on supply and not demand pressures, as if that is a simple napkin calculation during such times.   And if they don't comply, they could be fined.

Conservatives/Economists have it correct that it is all just supply and demand but they err in assuming that 'efficiency' (as defined in economics) is something society values or should value in time of emergency.   Consider an emergency where everyone is trying to fill up their tanks to leave the site.  The 'efficient' way to allocate resources is via the price mechanism - using supply and demand.   In other words 'price gouging' is efficient.  But the problem there (or at least a problem) is that only the well off are then able to flee, leaving the poorer members of society to suffer.   The rich full up their tanks and the top 5% flees while the 95% dies.  Whereas, in a disaster, sometimes it makes more sense to ration or do something less 'efficient' to ensure safety and fairness.   (So instead of the rich filling up, everyone fills up just enough to escape).  Demand, remember, is about the willingness AND ability to buy a good.   In other words, efficiency is not always welfare-enhancing or moral.

But here is why both groups, the conservatives/economists and the consumerists talk past each other.  In short, they both are correct, but missing the main problem.  The main problem is that we, as a society, don't like capitalism in all situations.  We particularly don't like it during emergencies.  (And many of us don't like it with regards to necessity goods in general - think health care).  But instead of altering our system to accommodate such emergencies (or even attempting to do so) we just pass these laws that essentially tell businesses to stop being themselves for some undefined amount of time.    In other words, price 'gouging' is not the problem, it is a necessary effect of capitalism.  The problem is that we chose to ignore that fact.

Part Time for Economics Reasons: Hardly Obamacare

The quacks are out in force suggesting that our economy is undergoing a transformation whereby we have less full-time workers and more people forced to work part-time.   That part is true.   The part that isn't true is the reason often given as the main cause:  Obamacare and the uncertainty of regulations. 

The truth is something different.  As you can see, the issue of part-time employment taking the place of full-time employment became an issue well before the health care legislation ever even become a law. 

In fact, since Obamacare was signed into law the overall number of part-time employed for economic reasons has fallen a bit, just as our unemployment rate overall has been slowly falling. 

Despite the obvious evidence that the phenomenon is almost solely attributable to the financial crisis and resulting recession, it hasn't stopped some economists and conservatives from blaming Obamacare (which by the way I don't disagree that Obamacare is being rolled out poorly, but to blame the entire employment situation on it is counter to the evidence):
here and here, for example.

Never-mind the fact that employment numbers have been revised upward and the unemployment rate continues to drop at a steady, albeit slow pace.   Consumer confidence continues to rise along with the stock markets.   The naysayers still insist that Obamacare is dragging everything down.

And it may yet be true that it might....but the data presently shows that it is the continuing effects of the crisis that are dragging us down.   Anyone who suggests otherwise is likely talking more out of politics than economics.  Yes, U-6 did tick up ever so slightly (unemployment rate including part-timers that would rather work full-time and discouraged workers) but as I've said before on this blog, you should never take one month's report and assume it is a new trend.   It is likely Obamacare will cause a slightly further shift to part time employment but only marginally, and for my money, we should be concerned about the mountain, not the mole hill.

Continuing Evidence: Mainstream Economists are Just Politicians in Disguise

On the right

and

On the left

The point of disagreement is disguised as being a disagreement over the Keynesian multiplier:  is it 1, is it less than 1, is it greater than 1 (recall the multiplier is simply the effect of a $1 cut or increase in spending on GDP)....

But really, economists' views on the multiplier have almost nothing to do with scientific inquiry and have almost everything to do with where they lie on the political spectrum.   Mankiw, being a Republican thinks the multiplier is small (big surprise) and that therefore the cuts won't hurt GDP or employment much.   Goolsbee (for example) being a Democrat thinks the multiplier is bigger - and that the cuts may in fact take a noticeable chunk out of GDP and employment.

The point is, all these economists pretend their differences are a matter of math and science, when they really are almost soley a  difference of politics.  

[Not to mention that both sides are ignoring that the Keynesian multiplier says nothing about employment - it only says what the effect of spending cuts on GDP is.   To the degree that GDP and employment are not 100% correlated (which of course they aren't), the multiplier itself says very little about employment.]

From Keynes' General Theory, Chapter 20:

"It follows from this that the assumption upon which we have worked hitherto, that changes in employment depend solely on changes in aggregate effective demand ... is no better than a first approximation, if we admit that there is more than one way in which an increase of income can be spent."

Dear NRA....

Economics Not the Problem in Egypt, Freedom Maybe

Many in the media make the claim that Egypt's original uprising and continued discontent has more to do with economics than anything else (poverty, income inequality, etc).

However, something I stress in my macro class, is that statistics don't seem to bare a lot of that out - particularly when you compare Egypt to the Untied States (where there is no US Spring).

Egypt has less income inequality as measured by GINI (the data is a decade or two old but I don't think that affects the analysis much):

The Egyptian economy, additionally, has grown by 25% as measured by GDP per capita from 2000-2008 - before the Arab Spring.   During this same time, the US has grown by a measly 9%.  

The unemployment rate in Egypt in 2009 leading up to the Arab Spring was 9%, which was actually less than the unemployment rate in the United States during the same time-frame.  Even looking at just youth unemployment - the rates in Egypt are not really that out of line compared to its neighbors or even the United States.

So, I for one simply don't buy into the fact that the Egypt uprising is economic.   It is far more likely that it is more about political freedoms than anything else.   I think that that is supported by the new uprisings taking place - which are stemming from the government failing to create legitimacy among the people.  

Either that or this begs the question - why aren't WE in uprising?

Average Joe Doesn't Understand Economics

The press flowing (and comments made from that press) from the 'new' idea of the US Treasury minting a new $1 Trillion coin has made me come to the unfortunate conclusion that the press and the average Joe commenter doesn't really understand economics.  This is despite the fact that I'm sure many of them took macroeconomics in school.  Actually, it's probably because of it.

Things that people don't understand:

First, in neoclassical macro texts, teachers tell students how there is a limited supply of funds and that if the government spends it must be taking real resources out of the private economy.  This ignores the fact of course that our 'funds' (ie. money) can be created at will by the US. government as the sovereign controller of its own fiat money.  Fiat meaning that the money is backed by faith, not by any commodity like gold, silver or platinum.  In the real world, the only reason the government borrows money at all is purely due to institutional constraints to the treasury and Fed.   Presently, when the government spends money, it needs to issue bonds.  So the treasury issues bonds, floats them on the private market, and 'borrows' from private citizens or other governments etc.  The US then has an obligation to pay interest on those bonds, but it can always do so, because again, the money can simply be created by the government   But the system need not be set up in such a confusing way.   Were it not for this constraint, there would be no reason the treasury can't just make the funds appear out of thin air, walk over to the Fed, and use that coin to pay for it's spending.   Public 'debt' can be wiped out with a click of a keyboard - no bonds needed.

Enter the $1 Trillion coin!

There is a loophole that says the treasury can mint and use platinum coinage at its discretion and there is no limit to the amount of dollars that coin can represent.  This is a kind of power that the treasury doesn't typically have.   Here comes thing #2 that people don't get about economics.  We are not on the gold standard anymore.   Our money doesn't have to be or be backed by equal value of a commodity.  One platinum trillion dollar coin does not have to be made by or backed by $1 trillion worth of platinum.  It can be a simple small coin the size of a dime, with $1 trillion etched on it - for the very same reason that our $100 bill is not made out of $100 worth of paper and ink.   So, shame on NBC.  And the sheep.  But particularly, all real blame goes to the economics profession for failing these people!

But won't that cause inflation?

Here is thing #3 people don't understand: money doesn't cause inflation.   Demand (spending) pressure exceeding supply pressure (production / productive capacity) causes inflation.   When demand exceeds supply, people start circulating more and more money around the system, but for a given level of real output, all that does is raise prices.  The misunderstanding here is that most neoclassical mainstream economic textbooks assume that the more money the government makes, the more borrowing and spending that happens.  But that is ridiculous.   One need only see the massive amount of money the government has put into the banks to see that banks don't loan more money just because it's there.   This is classic chicken / egg problem.   Textbooks say more money means more spending.  Reality says more spending means more money.   Spending over our means is a problem - but not one in our present depressed economic environment.

In any case, the $1 trillion coin could not possibly create inflation anyway, even under the textbooks' models, because it will never even reach the private banking industry.   The treasury would use it to pay it's debt, accounts would be credited and debited, and the coin could be melted down.  The coin is just a legal means to get the Fed to allow the treasury to pay down a portion of it's debt.   The actual end result is simply someone at a computer changing two sides of a ledger.

Why do we get taxed at all then if in reality the government can just make 'funds' out of nothing?  

Because in a modern market driven largely by complex financial business, market functionality is inherently unstable and prone to speculative bubbles and bursts.   One way these bubbles form is when people have access to too much liquidity via credit and go on a spending spree with their credit cards that they can't really afford.   This kind of thing often results in certain markets being significantly over-priced (like housing in the early 2000s) and then when a crash happens it can obviously wreak havoc on everything and everyone, around the globe, much as it did in 2008-2010.

Taxes, aren't really sources of 'revenue' for the federal government.   The only real purpose they serve is to regulate demand (spending pressure).  Higher taxes reduces spending pressure (particularly on investment) and reduces potential bubble creation.   This is thing #4 that people don't understand and it's probably the most counter-intuitive.  In most neoclassical macro texts, taxes are treated as a part of national savings - part of a pool of limited funds from which to draw from for spending.   But it really isn't.   Taxes aren't needed to fund federal spending, and therefore taxes are not revenue, and therefore taxes are not a 'pool of funds' used to pay for anything.  Their sole purpose is to regulate the economy and redistribute income  - to keep it from getting too hot or too cold - and to ensure that the inequality wealth gap does not get out of hand.     

The real culprits....

...are the mainstream economists who continue to tell outdated or just flatly wrong tales about how our economy actually functions.  In the sense that many politicians take their cue from these economists, it's actually economists that are then to blame for our political problems.  The $1 trillion platinum coin can solve our economic problem, but it can't solve the political problem that has been created.   That takes something more than money.

Government Should Borrow More, Not Tax More

Fiscal Cliff has been averted, at least for two more months where we will have an even bigger cliff to hurdle. Of course, I never liked the term 'fiscal cliff' since it implied there's some sort of inherent government insolvency issue even though that was never the issue.   It has been and will continue to be a political cliff - caused and created solely by inept politicians (congress).

Our present national public debt stands at around $12 trillion (76% of GDP roughly).  That number sounds big, but since the debt essentially represents money we owe ourselves, the number itself is relatively meaningless unless compared to other things.   This point is something radical (read: mainstream) Republicans don't seem to grasp.   The bill to avert the fiscal cliff for now passed but no thanks to 100+ of these mainstream radicals that are more concerned about this meaningless number than the ability of our fragile economy to continue to grow.

So, what should the number be compared to?  Well, if the government is racking up 'too much debt', interest rates will tend to rise and inflation will spiral out of control.   Interest rates, however, today, maintain themselves at all-time lows and inflation is tame and stable.   And, interestingly, if any real person in the market thought inflation posed a problem in the future, we'd see interest rates start to rise accordingly, but they aren't so that is why we know that neither are problems at all.   What about all that money the Fed pumped into the economy - won't that add to inflation?   No.   That money has been largely doing what it has been doing for the better part of 4 years - sitting there not being lent or borrowed as 'excess' bank reserves. Surely as the economy picks up, more of this money will be floated into the broader economy, but that's ok - because along with this money increase will be an increase in production and economic output - which will act to tame any inflation.

So, Republicans continue their airless rhetoric about 'imposing costs on future generations' and all that nonsense which has absolutely nothing to do with reality.

Democrats aren't much better - allowing significant back-breaking tax increases not just on the rich but on the average Joe.  We could have avoided not just the taxes on those making >$400K, but also the 2% social security payroll tax increase that hit most Americans' paychecks this week.  Both of these tax increases, it is estimated, may reduce the output of our fragile economy by nearly a whole 1% point of GDP in the coming year.  

The better alternative would just have been to continue to do what America does best: borrow.  There's never been a better time to do so in a market with record low interest rates after all!  Everyone wants our bonds as it is what with China continuing to be shaky and Europe still very much in a crisis.   Borrowing, at the end of the day is simply issuing US-denominated bonds for US currency, both of which can be converted into each other - hence the reason why government borrowing is like borrowing from oneself - the US controls its own currency after all.  There are certain technical political restrictions which make the intersection of our fiscal and monetary policy a bit convoluted at present, but there are those in congress and in academia advocating for a most realistic change to our system to accommodate the simple fact that 'debt' by the federal government is not really 'debt' at all.