Warren Moslers 7 Seven Deadly Frauds of Economic Policy #1

The term ‘innocent fraud’ was first coined by Professor John Kenneth Galbraith, in the last book he wrote before he died: ‘The Economics of Innocent Fraud’ The term was used to describe fraudulent concepts that were, and still are, claimed by many to be ‘conventional wisdom’.  There are many who may be innocent but equally there are many professional economists who really ought to know better and are probably guilty!

I propose to work through each one giving my take on the meaning of each. The 7 Deadly Innocent Frauds of Economic Policy: by Warren Mosler is available on line as a pdf.

Deadly Innocent Fraud #1:
The federal government must raise funds through taxation or borrowing in order to spend. In other words, government spending is limited by its ability to tax or borrow.

Mosler argues his case from an American perspective. So, the ‘federal government’ is the US Federal government based in Washington.  The funds in question are denominated in US $  Some would argue that the US$ , as the world’s reserve currency is a special case. However the same argument applies equally to any sovereign currency. Examples of sovereign currencies are the UK £, the Australian Dollar, and the Swiss Franc. It wouldn’t include the Euro which is something of a special case and which I’ll come back to in a later post.

Mosler states as an obvious fact that government spending is in no case
operationally constrained by revenues, meaning that there is no “solvency risk.” In other words,  government can always make any and all
payments in its own currency, providing it is sovereign  no matter how large the deficit is, or how few taxes it collects.

Note that he is NOT  saying that therefore governments should collect few taxes and he is NOT saying they can spend as much as they please.

He notes that taxing can be considered to be the equivalent of destroying money. Spending is the equivalent of creating new money.

IMO that is entirely consistent with the idea that money is a government IOU. If someone gives you one back you tear it up. If you need a new you just write it out on the spot.

He raises the issue of the often asked question of “How are you going to pay for it? ” This is the killer question.  The obvious answer is that if there are unused resources in the economy, if there are long dole queues then it is likely more things can be afforded. If there are unemployed teachers then smaller class sizes can be afforded. If there are unemployed builders then its better they should be working building houses than their time going to waste.

However if there is no spare capacity and there are signs of inflation maybe they can’t be afforded!  Does this sound like common sense?

The idea is that economics should be about a sensible allocation of available resources rather than a bean counting exercise.

Mosler  is NOT saying that everything can be afforded just because government cheques never bounce. It does NOT  mean that a small country like New Zealand, for example, can afford to put a man on the moon just because it has a sovereign currency.

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One response to “Warren Moslers 7 Seven Deadly Frauds of Economic Policy #1

  1. The Media and the Coalition are pushing the issue of the need to return to surplus as fast as possible and warning of an ALP Government failing to do this. If Mosler is correct, this would be very bad policy at this time. Why is no one pointing this out?

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