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basso, that video makes two unfortunate assumptions. 1. All types of government spending is equal You know as well as I do that this isn't true. Obama's $800+ billion stimulus landed in the hands of the private sector. Bush's war on terror was a $800+ billion sunk cost. Which is more preferable to you? 2. Level of spending during a presidential term equates to spending that results from policies the president signed into law It'd be great if someone did some analysis on how much spending resulted from policies signed into law by Bush vs. those signed into law by Obama. For example, most of the TARP spending happened during Obama's presidency, but it was actually passed during Bush's. I'd be interested to see what those numbers are... Moreover, I'll get on my soapbox once again. The numerical size of the national debt has been a virtually meaningless since 1971, and even more so since the Primary Dealers Act passed in 1988. The government funds itself through reserve drains by the Fed, not taxes. The quality of the spending (i.e. the level of productive output it induces in the economy) is key issue. If you're going to advocate fiscal responsibility, where the money goes is more important than how much money is spent.
You've already asked that question, and I've already given you my opinion, but I guess you didn't read it.
i did read it, then and again now. if what you say at the beginning is true (and i'm not suggesting it's not), taxes really serve little practical purpose. i'd also note, that you didn't speak to the situation we find ourselves in now, where congress has taken the logical next step, and not even bothered to pass a budget.
My mistake then... The first part would only be false if the the Primary Dealers Act were passed purely for the purpose of pulling wool over everyone's eyes, and the Fed and the Treasury Department are outright lying about the nature of bond auctions. I suppose anything's possible though. Taxes may serve little practical purpose for funding, but they do help control the money supply...an extremely valuable tool to have when used properly. I can't necessarily say any administration has utilized this power to its full potential (but that's just my opinion). I suppose there would be a huge psychological impact as well if the government were to say, "No, we don't need your taxes anymore. We'll just create the money out of thin air." Best case scenario, there'd be high inflation. Worst case scenario, we'd all reject the currency outright. I don't really have much to say about it. Congress has spent the past year arguing over the wrong issue, and the fact that both sides seem intent on stonewalling the other isn't helping. Everyone's preoccupied with tax-raising/spending-cuts to reduce the national debt and ignoring the fact reducing the debt requires removing financial assets from an already over-leveraged private sector. I wish they'd remove the heads from their nether regions long enough to recognize it.
I think your suggestion was just to print money ad nauseam...which is lolrific because (and I'll take a page out of the right-wing playbook this time), expectations change, and therefore even if there is a trade-off between inflation/expanding money supply and aggregate economic output, it steadily gets eroded by changing market expectations, such that even if money is non-neutral in the short run, it is neutral in the long run. In other words, research the Lucas critique and the classical dichotomy. Much as I think these ideas are flawed in some aspects, they are more comfortable for someone with a right-wing persuasion, and help explain why your idea would be bad there. I personally have a problem in that I think printing money as a source of funding destroys the credibility of a monetary authority as an independent agency, and is one of the surest paths to hyperinflation, but that's more on the center. Of course, you are also free to join me in post-Keynesian, social democrat land, and embrace monetary circuit theory. Money is non-neutral. It's still a bad idea though because of my cited reason, but that's not as big of a deal as saying that eventually, printing money leads nowhere. On the plus side, you'll be able to justify your big printing plan. On the downside, you'll lose all conservative credibility.
I can't help but wonder if the Fed and Treasury's relationship with each other and the primary dealers is intentionally kept quiet to preserve the illusion of the Fed's "independence." It's kind of funny considering Bernanke and Geitner hardly ever do anything without consulting each other. Moreover, the Fed turns over close to 96% of its profits over to the Treasury. "Independent" entity indeed... Monetary circuit theory is a great description of the level of power entrusted to banks in a capitalistic economy (although in the U.S. I believe the Fed plays a huge role as the supplier of reserves). It's precisely for this reason that I think the financial industry is the one sector that needs to be regulated carefully. Banks are necessary to provide financial backing to help spur innovation and productivity...but do not themselves create the innovations that improve our quality of life. I'd go so far as to say the only thing bank "innovations" have done the past several years (in the form of loan securitization, derivatives, naked CDSs) is to simply part the middle class with their savings and line their own pockets.
It might not be "independent" per say, but the facade has to be played up, otherwise people start to wonder if your monetary policy is credible. I do agree with you that the Fed is very interlinked with the government, but if it was as overt as the Fed being the sole source of financing for the government, well, then most people would notice.
If memory serves, Kyrodis, you like the chartalist school so I'll add the clause that taxes are useful to establish fiat money as currency, since taxes are private debts that can only be paid by the fiat currency, thus backstopping it with some inherent value. basso, are your questions answered?
The modern chartalist (or MMT) explanation of the banking system makes a heck of lot of sense to me. I don't know if you've read some of Warren Mosler or Bill Mitchell's blogs Northside, but I think they're pretty enlightening. What makes me scratch my head (and others as well...Post-Keynesians like yourself or the guys who founded the Monetary Realism chartalist offshoot) is Knapp's state theory of money and the whole idea that taxation is ultimately what gives fiat currency it's value. While I agree taxes certainly bolster demand for currency, I'm not fully convinced it's the end-all-be-all that traditional chartalists make it out to be.
No, we also have to tax any activities they conduct that are out of equilibrium (such as cheap carbon) so as to equal their private costs and social costs, allow them to pursue any sin they want with the taxman's blessing, regulate their financial activities so they do not plunge us into another recession, make sure that their estates are not so large so as to impugn the work ethic of their (no doubt talented) offspring, and we need to ensure that it is their ideas that drive electoral power, and not their money.
I'll check out Mosler and Mitchell. My economic blog-reading has been very mainstream lately (Mankiw/Krugman). Interesting from the outset. I always do like economic blogs that are not within the realm of economic orthodoxy, but are not filled with "invisible hand" rhetoric. On the last point, I agree with you, though from my understanding, there are not any hardcore traditional chartalists left...certainly I haven't met one. I think it's just an idea that looked good in the past, but doesn't look too good upon the advances we have made and the new data we have collected. Kinda like how the Malthusian growth model (must limit population growth for sustained output growth) looked terrible once we got the Solow growth model worked out (and that isn't looking too hot these days either.)