A Refutation of Mosler Economics and Mosler's 7DIF, Part II

The following is Part II in a seven part series, "A Refutation of Mosler Economics and Mosler's 7DIF", which seeks to critically examine the fiscal and monetary policy solutions offered by Warren Mosler [PDF], a former candidate for the US Senate in Connecticut in the 2010 election.

Warren Mosler:

Deadly Innocent Fraud #2:
With government deficits, we are leaving our debt burden to our children.

Fact:
Collectively, in real terms, there is no such burden possible. Debt or no debt, our children get to consume whatever they can produce.

Notice Mosler's condition of "collectively". His argument rests upon this conditionality.

Mosler:

In fact, the idea of our children being somehow
necessarily deprived of real goods and services in the future
because of what’s called the national debt is nothing less than
ridiculous.

Governmental debt has two effects on real wealth.

First, government expenditure is not productive but consumptive. The government does not earn any return on its expenditures which allow it to recover its original cost outlays along with a profit. It simply consumes real wealth now. Because that real wealth is spent now, it is not potentially available to be invested now by private individuals who would thereby create greater future wealth by means of their present investment.

So, to the extent that government spending consumes resources which can not be invested now to produce a greater abundance of real goods and services in the future, future generations will be deprived.

Second, government debt does change the distribution of wealth in the future. To pay its debts in the future, the government will have to either:
a.) issue new debt, whose purchase by private individuals will result in a shift of the distribution of real wealth from private to government hands
b.) acquire the necessary resources via taxation, which will result in a shift of resources from private to government hands
c.) issue new currency, which will result in a shift of resources from private to government hands by virtue of the non-neutrality of money

It is true that if some of the government debt is held by private individuals, the government's payments on principal and interest may simply result in a transfer from one individual (who is taxed or buys the new government debt) to another individual (who owns the previous government debt). But these distributions, while possibly the outcome of voluntary choices by two individuals to buy government debt (in the case where individual A is being repaid with money raised by the issuance of new debt to individual B) are overall not the outcome of an entirely voluntary, market process because the government's decision to raise debt in the first place is due to its unilateral discretion and has a market solely because buyers of the debt anticipate that the government will ultimately be able to extinguish its debt by taxing individual producers of wealth.

Mosler agrees:

Federal Government Taxing and Spending Does
Influence Distribution
Distribution is about who gets all the goods and services
that are produced. In fact, this is what politicians do every time
they pass legislation. They re-direct real goods and services
by decree, for better or worse. And the odds of doing it for
better are substantially decreased when they don’t understand
the Seven Deadly Innocent Frauds. Each year, for example,
Congress discusses tax policy, always with an eye to the
distribution of income and spending. Many seek to tax those
“who can most afford it” and direct federal spending to “those
in need.” And they also decide how to tax interest, capital
gains, estates, etc. as well as how to tax income. All of these
are distributional issues.

Mosler then states that recessions are caused by the government taxing away too much spending power:

Today (April 15, 2010), it’s clear that Congress is taking
more spending power away from us in taxes than is needed to
make room for their own spending. Even after we spend what
we want and the government does all of its massive spending,
there’s still a lot left unsold in that big department store called
the economy.
How do we know that? Easy! Count the bodies in the
unemployment lines. Look at the massive amount of excess
capacity in the economy. Look at what the Fed calls the
“output gap,” which is the difference between what we could
produce at full employment and what we are now producing.
It’s enormous.

This raises a question-- why would the individuals in the economy produce more than they have the means to purchase with their spending power left over after the government is finished taxing them?

And another question-- what prevents individuals from adjusting the prices they charge for these goods and services so that they will be able to purchase all of the leftover goods?

Mosler:

When I look at today’s economy, it’s screaming at me that the problem
is that people don’t have enough money to spend. It’s not
telling me they have too much spending power and are overspending.

Mosler seems to be relying on a particular economic theory of business cycles and spending here because it is not at all the case that the only conclusion to draw from observing a recession is that there is not enough money in the economy.

In Mosler's first chapter, he explains that when people pay their taxes, all that happens is that digits are changed downward in the checking account of the taxpayer, and changed upward in the accounts of the government. He provides an example of physical currency being destroyed if it is sent to the IRS, but such an occurrence doesn't change the total amount of money in the system, only the amount of money in the system which is currently in the form of paper currency. When people pay their taxes, it does not result in a shrinkage in the supply of money.

How then could the tax rates set by Congress be "too high" so that they have taken "too much" spending power from private individuals, thereby causing a recession? Congress spends all the money it acquires through taxation. The money doesn't leave the economy.

Where does the recession come from?

Mosler:

When we operate at less than our potential - at less
than full employment - then we are depriving our children
of the real goods and services we could be producing on
their behalf. Likewise, when we cut back on our support
of higher education, we are depriving our children of the
knowledge they’ll need to be the very best they can be in
their future. So also, when we cut back on basic research
and space exploration, we are depriving our children of all
the fruits of that labor that instead we are transferring to the
unemployment lines.

This is Mosler again making arguments based upon an unstated economic theory under which he is operating and interpreting his view of economic events.

Mosler makes pains to convince his readers that he FIRST looks at the economic facts as they are and SECOND draws conclusions from them, but it is unclear how he reaches these particular conclusions without a third step, predating the FIRST, which is to consider a particular economic theory. Mosler's theory, which he relies upon to reach his judgment after observing the facts, but which he does not state, appears to be "The government can improve future economic outcomes beyond their purely voluntary potential by redistributing real wealth from areas where private individuals would deploy it, to educational and research endeavors chosen by the government."

This is what Mosler seems to be implying by stating that when we "cut back" on spending on higher education, basic research and space exploration (three areas of the economy which are today nearly totally dominated by the government), the economy will operate at less than its potential in the future as a result. It is possible Mosler meant something other than this but it's unclear why he would state it like this if he did, knowing that government does dominate these areas and therefore a person making assumptions about what he is saying would likely be led to believe that Mosler is implying that more government spending in these areas at the expense of less private spending in other areas would be a net benefit to the economy.

Assuming this is what Mosler meant, an economic truth needs to be observed: the government has no means of calculating that its expenditures will produce superior economic outcomes from those chosen voluntarily by private individuals. The government does not operate on a profit and loss basis. It has no means to measure and compare the benefits or costs of its various expenditures because it doesn't engage in monetary calculation which is the common denominator of all other economic exchanges.

Because value is subjective, and all exchanges which occur voluntarily imply that each participant in the transaction subjectively determined he would benefit by making the exchange, and all exchanges which occur involuntarily (that is, via force or theft) imply that at least one participant in the transaction was harmed according to his value preferences, it can be inferred that no government expenditure (involuntary exchange) can potentially be superior in economic benefit to the voluntary exchange it displaced.

Mosler:

The lost output and depreciated human capital is
the real price we and our children are paying now that
diminishes both the present and the future. We make do
with less than what we can produce and sustain high levels
of unemployment (along with all the associated crime,
family problems and medical issues) while our children are
deprived of the real investments that would have been made
on their behalf if we knew how to keep our human resources
fully employed and productive.

This is Mosler's conclusion to the chapter. Again, what economic theory is Mosler operating off of when he makes these assertions about the potential creative/productive power of government spending?

I have made my own guess and declared this theory to be fallacious if it is indeed the one off of which he is operating.