Warren Mosler's 7DIF begins with the first of the "Seven Deadly Innocent Frauds":
Deadly Innocent Fraud #1:From these "facts" (Mosler's face-value observation of what physically occurs when the government finances one of its own expenditures) Mosler proceeds to spin a web of confusion. He starts by pointing out that all government financing today takes place on a series of digital spreadsheets maintained by commercial banks and government agencies. When taxes are paid, a taxpayer's spreadsheet balanced is lowered and a government spreadsheet balance is raised. Similarly, when the government spends, one of the government's spreadsheet balances is lowered and the spreadsheet balance of the recipient of that transfer (a contractor, welfare recipient, bribed foreign dignitary, etc.) is raised.
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.
Federal government spending is in no case operationally constrained by revenues, meaning that there is no “solvency risk.” In other words, the federal government can always make any and all payments in its own currency, no matter how large the deficit is, or how few taxes it collects.
Based on this observed mechanic, Mosler assumes that government finance is similar in arbitrariness to score keeping in a bowling alley or on a football field:
Your team kicks a field goal and on the scoreboard, the score changes from, say, 7This is the first of many of Mosler's confusions about the cosmetic appearance of reality and the actual state of reality underneath it. The analogy he draws is flawed.
points to 10 points. Does anyone wonder where the stadium got those three points? Of course not! Or you knock down 5 pins at the bowling alley and your score goes from 10 to 15. Do you worry about where the bowling alley got those points? Do you think all bowling alleys and football stadiums should have a ‘reserve of points’ in a “lock box” to make sure you can get the points you have scored? Of course not!
In a game of sport, the point system is a mathematical abstraction used to keep track of rank amongst the players within the context of the game. Though it is awkward to even contemplate such a possibility, participants in a game such as football or bowling could conceivably recognize that one or another participant or team is "ahead" or "behind" without giving out and assigning numerical scores to each. Similarly, aside from whatever time limits might be imposed on the players according to the rules of the game, the potential score that can be achieved by anyone is infinite-- there is no reserve of points that can be used up, nor is there a need for there to be one. The score does not represent scarcity or ownership over any resource, it merely records relative progress and rank.
This is entirely different from the purpose and operations of a monetary system, even one which is entirely fiat and mostly exists in virtual reality amongst a matrix of spreadsheets, as most modern monetary systems exist in their present form. In a monetary system, the money itself represents potential claims to real, existent goods and services. All else being equal (ie, the money supply is not increasing or decreasing), the amount of money each person has does not represent how they are ranked against other money holders but rather how much actual purchasing power they might lay claim to.
If I have $20 and you have $10, I am not "winning." Money balances are not a score keeping system. They're simply a means of storing real value and they provide a means for facilitating exchange between real goods and services. The abject failure of Mosler's analogy should be obvious when you consider the following:
The government does not produce any real wealth for itself; all wealth the government controls must first be produced by private individuals and then taxed into the control of the government. When the government creates new money, it does not create new wealth. That is to say, if the government desires to purchase a $20,000 pick-up truck for a government agency, it must tax $20,000 worth of value from the public, at which point it can exchange that value for an actual pick-up truck. If the government decides to finance this expenditure through the issuance of $20,000 of new money (digital or paper currency), the creation of the new money does not itself summon a new pickup truck into existence. The government still must spend that new money on the truck, and the reason the new money has the value of $20,000 is because it siphoned a fraction of that total value from the previously existing stock of money. Because this transfer of wealth was involuntary and carried out by the government in the name of the public interest, it qualifies as a tax.
Mosler misses this because he never stops to examine where the wealth that the government comes to control by creating new money actually came from in the first place. It's odd that he misses it because his next (flawed) analogy implicitly acknowledges it, even if Mosler does not:
What they all seem to miss is the difference between spending your own currency that only you create, and spending a currency someone else creates. To properly use this common federal government/household analogy in a meaningful way,Mosler has the last question exactly backwards. The proper question to examine in a study of monetary economics is not, "How do real goods and services obtain their monetary value?" but rather, "How does money obtain its value in terms of real goods and services?" Notice, again, the simple creation of the coupons in this example does not result in the generation of completed chores. It is the effort of the children themselves in doing the chores which the parents force the children to bid away for coupons lest they pay a penalty, which the parents are ultimately taxing with their coupon scheme. Without the children producing chores, the parents would not have the chores completed and they would be forced to produce chores themselves.
we next look at an example of a “currency” created by a household.
The story begins with parents creating coupons they then use to pay their children for doing various household chores. Additionally, to “drive the model,” the parents require the children to pay them a tax of 10 coupons a week to avoid punishment. This closely replicates taxation in the real economy, where we have to pay our taxes or face penalties.
The coupons are now the new household currency. Think of the parents as “spending” these coupons to purchase “services” (chores) from their children. With this new household currency, the parents, like the federal government, are now the issuer of their own currency. And now you can see how a household with its own currency is indeed very much like a government with its own currency.
Let’s begin by asking some questions about how this new household currency works. Do the parents have to somehow get coupons from their children before they can pay their coupons to their children to do chores? Of course not! In fact, the parents must first spend their coupons by paying their children to do household chores, to be able to collect the payment of 10 coupons a week from their children. How else can the children get the coupons they owe to their parents?
Consider Mosler's example another way: say that the parents created for themselves thousands of coupons, so many more coupons that the children could not produce the related "value" in chores if they were to slave away 24 hours a day, 7 days a week. Would the simple fact that the parents created so many coupons mean that they had successfully acquired the real chore wealth that the coupons themselves are supposed to represent? Would their house, say, suddenly sprout a second or third story, or a remodeled kitchen?
No, it would not, because that value had not yet been produced by the children for the parents to tax away from them.
In summary so far, the government does need to tax real wealth away from the public if it desires to use real wealth in pursuit of its own ends. Furthermore, the creation of new money (inflation), is one way in which the government chooses to accomplish this and, though today it is as simple as changing digits on spreadsheets, it is nonetheless still a tax.
In this light, we can see that Mosler's next example about the origin of money and the purpose of government spending is also confused and misleading:
Now let’s build a national currency from scratch. Imagine a new country with a newly announced currency. No one has any. Then the government proclaims, for example, that there will be a property tax. Well, how can it be paid? It can’t, until after the government starts spending. Only after the government spends its new currency does the population have the funds to pay the tax.An important distinction should be made here-- the new national currency being formulated by Mosler and spent into existence by the example government is a fiat currency, that is to say, it's value is derived solely from the issuing government's ability to use coercion to change the attitudes of the country's various citizens toward the currency.
To repeat: the funds to pay taxes, from inception, come from government spending (or lending). Where else can they come from?
Yes, that means that the government has to spend first, to ultimately provide us with the funds we need to pay our taxes.
Without a legal tender law backed by government force, individual market participants would be free to choose other commodities as their preferred medium of exchange. And without taxation, which is a coercive expropriation of private property by the government in order for it to finance itself, no market participant would have any incentive to accept the new fiat currency as payment. Without a tax liability payable only in the new government currency, no one would have any need or desire to utilize the new bills.
Mosler asks, "How else can it be paid?" In the absence of legal tender laws and government fiat currency, decreed taxes could be paid through direct levy of actual goods and services (that is, real wealth). In other words, rather than taxing "a tank's worth" of currency from National Tank Company, the government could simply force National Tank Company to provide it with one tank as payment of its specific tax liability. Similarly, rather than taxing "a few hours salary of an accountant" from an accountant, the government could impress the accountant into service to do accountancy for the government as payment of the accountant's specific tax liability. The fact that Mosler was unable to imagine or articulate these alternatives leads one to believe he meant to imply the conditions of legal tender laws.
The trick here, the confusion in Mosler's thinking, is the conflation of real wealth with taxable funds, for example:
We need the federal government’s spending to get the funds we need to pay our taxes.The implication (in case it is not obvious, though it will become more so as we further explore Mosler's logic) is that we need government fiat currency to pay our taxes; we need government spending to acquire the fiat currency; therefore we need government spending to drive the economy.
Again, this logic puts the cart before the horse. Without the production of real wealth by individuals in the first place, government would have no resources which it could spend its currency on. One problem of many with Mosler Economics is that his monetary model begins in the middle of itself, so to speak. It utilizes for explanation of how a phenomenon occurs a set of conditions that could only exist if the phenomenon in question had already occurred. In this specific case, Mosler tries to explain how a new currency comes into use by claiming that the government spends it into existence, as if this is an "originating" act. The truth of the matter is that a previously existing market economy, complete with a functioning market currency, needed to already exist in order for their to be any goods and services on which the government could spend its newly created currency.
Yes, without the spending of the government itself (backed up by threats of force by those who refuse to accept the currency) people would be bereft of a mechanism to acquire the legal tender solely permissible to use in paying their taxes. But that does not mean that it is government spending which drives the productive process itself underlying this mechanism which allows the government to thereby acquire real wealth for its own consumption.
Government spending does not create that which government ultimately seeks to spend (consume)! Let's continue:
The fact that government spending is in no case operationally constrained by revenues means there is no “solvency risk.” In other words, the federal government can always make any and all payments in its own currency, no matter how large the deficit is, or how few taxes it collects.Mosler again hangs his hat on a technicality. The objective of government finance is to provide the government the means to acquire and expend claims to real goods and services within the economy. The objective of government finance is not to impress people with its digital accountancy tricks. The acquisition and expenditure of fiat currency by the government is not the end goal, but rather a means to the end goal of controlling the distribution of a proportion of a society's real wealth.
This, however, does NOT mean that the government can spend all it wants without consequence. Over-spending can drive up prices and fuel inflation.
What it does mean is that there is no solvency risk, which is to say that the federal government can’t go broke, and there is no such thing as our government “running out of money to spend,” as President Obama has incorrectly stated repeatedly.
Mosler's explanation is true only if the term "solvency" is defined as "able to make good all liabilities in terms of a fiat currency with infinite potential supply" rather than the way the term is normally used to mean "able to make good all liabilities in terms of real goods and services promised."
The government creates entitlements for various people which are in turn liabilities for the government. In effect, the government pledges to various interest groups their ability to receive from the government definite amounts of real goods and services.
Let's say that one of those promised entitlements is that everyone gets a free prime ribeye steak each week. The capital markets, seeing that this is a frivolous use of wealth and noticing also that the government has already pledged to everyone an entitlement in a free car, a free home, a free motorboat and a free college education, decides to refuse to subscribe to the government's issuance of debt to pay for the steaks and so the government is left with no choice but to print up more of its currency to float its own debt. This increase in currency brings with it a rise in prices, including prime ribeye steak prices, resulting in a shortfall in the government's steak-purchase account.
At this juncture, the government faces two options: it can refuse to make good on all outstanding entitlements by only issuing prime ribeye steaks to a fraction of those it originally promised them to, or it can economize on the entitlement by issuing everyone a pound of 85% lean ground beef.
In this example, the government may have maintained its "solvency" by matching the money-value of its own liabilities with sufficient issuance of its own money, but it did not simultaneously manage to avoid defaulting on its obligations either in the form of outright failure to produce part of the obligation or by reducing the quality of the obligation made. The point is that Mosler is correct in a technical sense, but not in a meaningful sense, the consequences of which contain real implications for a society's material well-being.
The fact is: government deficits can never cause a government to miss any size of payment. There is no solvency issue. There is no such thing as running out of money when spending is just changing numbers upwards in bank accounts at its own Federal Reserve Bank.There is no "solvency" issue, but there is always a solvency issue in the sense that the government's ability to make good in real terms on its various liabilities is not infinite.
Still operating under the flawed assumption that he has disproved the government's need to finance itself via taxation, Mosler then produces an example to explain why the government taxes in the first place:
The following is not merely a theoretical concept. It’s exactly what happened in Africa in the 1800’s, when the British established colonies there to grow crops. The British offered jobs to the local population, but none of them were interested in earning British coins. So the British placed a “hut tax” on all of their dwellings, payable only in British coins. Suddenly, the area was “monetized,” as everyone now needed British coins, and the local population started offering things for sale, as well as their labor, to get the needed coins. The British could then hire them and pay them in British coins to work the fields and grow their crops.In other words, individuals laboring for fiat currencies are in fact the slaves of those currency regimes. Consider what Mosler is really illustrating with his example from Africa-- none of the natives had any interest in voluntarily working the British fields. Only by threatening to seize their dwellings if they did not pay a tax liability priced in British currency did the British manage to force the native Africans into labor for them.
This is exactly what the parents did to get labor hours from their children to get the chores done. And that’s exactly how what are called “non convertible currencies” work (no more gold standards and very few fixed exchange rates are left), like the U.S. dollar, Japanese yen, and British pound.
The relationship of an individual with a tax liability in US dollars to the US government is the same. It is forced labor. It does not matter how one might justify such a relationship, perhaps with appeals to the Greater Good or the commonwealth or to serving society. The inescapable fact, which Mosler stumbles upon rather non-controversially, is that fiat currency regimes are forced labor regimes. At this point, the libertarians and the cynics amongst us might feel it appropriate to question just who it is that is serving who in these schemes.
If you're not convinced that this is what Mosler is hinting at, albeit it unawares, consider his explanation of how an economy should be organized to allow for the proper proportion of private and public expenditure:
Therefore, the way I see it, we first set the size of government at the “right” level of public infrastructure, based on real benefits and real costs, and not the “financial” considerations. The monetary system is then the tool we use to achieve our real economic and political objectives, and not the source of information as to what those objectives are. Then, after deciding what we need to spend to have the right-sized government, we adjust taxes so that we all have enough spending power to buy what’s still for sale in the “store” after the government is done with its shopping.This is the model for a command economy, not a free market economy. A command economy serves the interests and objectives of the politicians and other government agents who control it. A free market economy serves the interests and objectives of the many producer/consumers who compose it. In a command economy, the monetary system is manipulated (albeit never successfully over the long run) to direct the productive activities toward the goal of central planners. In a free market economy, the prices freely arrived at by the voluntary exchanging of goods provide signals and incentives for various producers to meet the needs and wants of various consumers in the most cost-effective way possible.
Once again, Mosler has it exactly backward, if the goal of Mosler Economics is to promote the satisfaction of individual consumers and not the satisfaction of political agents. "Financial" considerations are the consideration of real costs and real benefits. Attempts to suppress or manipulate the free outcomes of a monetary system to promote the political goals of a government are the denial of the considerations of real costs and real benefits. They are the swapping of real costs and real benefits for arbitrarily distributed costs and imagined, whimsical benefits.
Furthermore, it is impossible to plan the "right" size of public infrastructure to achieve a desired set of real benefits without first knowing what those desired real benefits are and which of them are ascertainable within the context of real costs. If public infrastructure seeks to assist with the production of economic goods and services it must itself be a part of the economic process, it can not stand outside of it. As Mosler himself says one paragraph earlier:
The real “costs” of running the government are the real goods and services it consumes - all the labor hours, fuel, electricity, steel, carbon fiber, hard drives, etc. that would otherwise be available for the private sector.Public infrastructure has real costs. One can not take as an economic starting point their provision being a "given" and then go from there. An economic actor says, "I need to transport my cargo from A to B, therefore, I will build a road." The purpose for the road's construction predates the road itself. Mosler Economics proposes that one can first build the road and then discover or create the purpose of the road being built after the fact.
Taken literally and at face value, this form of economic "planning" is absurd. It would amount to all manner of things and goods being constructed and fabricated in what could only be described as a truly random fashion-- a dam built across a dried up riverbed, a canal dug through the middle of a land-locked city, a road built where nobody would drive upon it. Later, after they are built, the economy would be tasked with somehow finding a use for them.
Of course, this is not how public infrastructure is actually planned. For any of these projects to be rationalized there would first need to be a purpose, and because these projects are not being initiated and funded by the voluntary, private marketplace but rather by the coercive public apparatus of government, the rationalization of these projects can only be to satisfy the demands of special interest groups or the fantastic dreams and ambitions of politicians and government agents. These projects would not be guided by the ultimate demands of the end consumers through price signals of the market, which take into account the real costs of their realization but rather by the demands and declarations of government representatives who can't be troubled by nuisances like "financial" considerations, as Mosler puts it.
Mosler's "shopping spree" analogy is similarly flawed. Tax levels can not be arbitrarily raised or lowered in order to clear the market of what goods and services remain after the government has picked it over, thereby arming consumers with "enough" spending power. Consumers demand real goods and real services of specific quantities, qualities and types according to their individual preferences. If the government comes in and buys all the green sweaters in the economy, for instance, it doesn't matter how much spending power people have-- they will go without their desired green sweaters and thus suffer unnecessary economic hardship, their wants unsatisfied.
In other words, the government taxes us, and takes away our money, to prevent inflation, not to actually get our money in order to spend it.Mosler's ultimate conclusion is false. As explained above, inflation is a tax. Government levies taxes to acquire control over real resources. The government's tax level does not regulate the issuance of new currency (inflation) or the potential rise in prices which is an outcome of that currency issuance.
Mosler has not succeeded in refuting the first of his so-called "Seven Deadly Innocent Frauds" but has instead introduced his own Deadly Fraud, the innocence of which is questionable and the ignorance of which is undeniable.