Saturday, November 27, 2010

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

The following is Part III 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 #3:
Federal Government budget deficits take away
Federal Government budget deficits ADD to
Let's see how Mosler fleshes this out.

This third deadly innocent fraud is alive and well at the very
highest levels. So here’s how it really works, and it could not
be simpler: Any $U.S. government deficit exactly EQUALS
the total net increase in the holdings ($U.S. financial assets) of
the rest of us - businesses and households, residents and non
residents - what is called the “non government” sector.
In other words, government deficits equal increased “monetary
savings” for the rest of us, to the penny.
Simply put, government deficits ADD to our savings (to the
penny). This is an accounting fact, not theory or philosophy.
There is no dispute. It is basic national income accounting. For
example, if the government deficit last year was $1 trillion, it
means that the net increase in savings of financial assets for
everyone else combined was exactly, to the penny, $1 trillion. (For
those who took some economics courses, you might remember
that net savings of financial assets is held as some combination
of actual cash, Treasury securities and member bank deposits at
the Federal Reserve.) This is Economics 101 and first year money
banking. It is beyond dispute. It’s an accounting identity. Yet it’s
misrepresented continuously, and at the highest levels of political
authority. They are just plain wrong.
True: this is a financial accounting identity.

False: the belief (whether Mosler holds it or not) that increased financial savings necessarily represent increased real savings.

So far, Mosler has not stated whether he equates financial savings with real savings. Regardless, I will clarify that anyone who would state such a thing as "an increase in financial savings necessarily means an increase in real savings" would be wrong.

If the US government expands its budget deficit and thereby expands the total amount of financial savings as a result (because all debt is held by somebody outside of the government sector as savings, as per Mosler's statement of the accounting identity), it does not follow that the pool of real savings (anything which may serve as a capital good in the production of higher order goods, for example, machinery, food stocks, clothing stocks, commodity stockpiles, fuel supplies, etc.) is increased proportionally, as an identity.

In other words, it would be wrong to assume that, because larger government deficits represent larger financial savings, larger financial savings represent larger real savings and therefore larger government deficits mean larger real savings which means we are all wealthier and economically better off if the government expands its deficit.

Mosler proceeds to explain how government deficits add to (financial) savings:
1. Start with the government selling $100 billion
in Treasury securities. (Note: this sale is voluntary,
which means that the buyer buys the securities
because he wants to. Presumably, he believes that
he is better off buying them than not buying them.
No one is ever forced to buy government securities.
They get sold at auction to the highest bidder who is
willing to accept the lowest yield.)
It is important to point out a clarification regarding Mosler's note that these purchases are "voluntary." They are "voluntary" within the conditions predicated by a government which has enacted legal tender laws (threat to use force against anyone who does not settle debts in the legal tender) and which guarantees its own ability to make good on its debts by its ability to ultimately tax individuals either directly or indirectly (through issuance of new money) to raise the funds needed. Of course, none of this can at all be considered "voluntary" because it rests on government's monopoly of the use of coercion.

The government does not make productive expenditures which return to the government its original cost plus profit (which can be used to pay principal and interest), unlike the productive expenditures of private investment. Government expenditure is consumptive-- once the government spends, it receives nothing in return. The wealth is gone. If the government finances its expenditures through debt, it must steal (tax) at some other time to raise the funds necessary to pay off the debt.

Without it's ability to steal (tax) the funds it needs to pay off its debt, the government would be left with nothing to pay off its debt. No one would voluntarily lend to the government who was at all concerned with getting a return on their loan because they'd realize the government would not have the ability to make good on that debt. The only people left financing the government's expenditures would be those who found it to be a charitable activity to do so.

It is within this context of coercion and manipulation of people's opportunities to dispose of what remains of their wealth as they see fit that Mosler states that people "voluntarily" buy government debt. Yes, no one is ever forced to buy government securities, but some people are forced to provide the government with the resources it needs to pay off these securities at time of maturity.

Mosler describes a conversation with Al Gore.

Early in 2000, in a private home in Boca Raton, FL, I
was seated next to then-Presidential Candidate Al Gore at a
fundraiser/dinner to discuss the economy. The first thing he
asked was how I thought the next president should spend the
coming $5.6 trillion surplus that was forecasted for the next 10
years. I explained that there wasn’t going to be a $5.6 trillion
surplus, because that would mean a $5.6 trillion drop in nongovernment
savings of financial assets, which was a ridiculous
proposition. At the time, the private sector didn’t even have
that much in savings to be taxed away by the government, and
the latest surplus of several hundred billion dollars had already
removed more than enough private savings to turn the Clinton
boom into the soon-to-come bust.
I pointed out to Candidate Gore that the last six periods of
surplus in our more than two hundred-year history had been
followed by the only six depressions in our history. Also, I
mentioned that the coming bust would be due to allowing the
budget to go into surplus and drain our savings, resulting in a
recession that would not end until the deficit got high enough
to add back our lost income and savings and deliver the
aggregate demand needed to restore output and employment.
I suggested that the $5.6 trillion surplus which was forecasted for the next decade would more likely be a $5.6 trillion deficit,
as normal savings desires are likely to average 5% of GDP
over that period of time.
That is pretty much what happened. The economy fell
apart, and President Bush temporarily reversed it with his
massive deficit spending in 2003. But after that, and before
we had had enough deficit spending to replace the financial
assets lost to the Clinton surplus years (a budget surplus takes
away exactly that much savings from the rest of us), we let the
deficit get too small again. And after the sub-prime debt-driven
bubble burst, we again fell apart due to a deficit that was and
remains far too small for the circumstances.
Mosler again is employing an unstated economic theory that he is using to interpret the events of the 2000s to reach a conclusion about the cause of the recession.

He claims that the deficit was "too small". It is unclear if he means to imply this was the cause of the "sub-prime debt-driven bubble" bursting or if he means to state that this was a contributing factor to the recession that followed, along with the government deficit which was "too small."

Mosler does not state how he calculates whether the deficit is "too small" before a recession occurs. It is "clear" to him in retrospect that if a recession occurs, it means the deficit was not large enough. But if this is true after the fact it must also necessarily be true before the fact and therefore there must be some theory or pattern of reasoning one could use to predict that the deficit is not "big enough" to meet the needs of the economy.

Individuals can save in vehicles other than government securities. If the government does not run a deficit and thereby expand the supply of government securities which people can place their savings into, individuals can choose to either spend their wealth on personal consumption or private savings/investments, such as bank deposits or the purchase of corporate debts.

Mosler doesn't explain why savings held with the government (Treasuries purchased by the non-government sector) serve to ward off recessions, but savings held with private businesses lead to recessions.

Mosler concludes:
So what is the role of deficits in regard to policy? It’s
very simple. Whenever spending falls short of sustaining
our output and employment, when we don’t have enough
spending power to buy what’s for sale in that big department
store we call the economy, government can act to make
sure that our own output is sold by either cutting taxes or
increasing government spending.
Taxes function to regulate our spending power and the
economy in general. If the “right” level of taxation needed to
support output and employment happens to be a lot less than
government spending, that resulting budget deficit is nothing
to be afraid of regarding solvency, sustainability, or doing bad
by our children.
If people want to work and earn money but don’t want to
spend it, fine! Government can either keep cutting taxes until
we decide to spend and buy our own output, and/or buy the
output (award contracts for infrastructure repairs, national
security, medical research, and the like). The choices are
political. The right-sized deficit is the one that gets us to where
we want to be with regards to output and employment, as well
as the size of government we want, no matter how large or how
small a deficit that might be.
What matters is the real life - output and employment - not
the size of the deficit, which is an accounting statistic. In the
1940’s, an economist named Abba Lerner called this,
“Functional Finance,” and wrote a book by that name
(which is still very relevant today).
You can read all about Abba Lerner's "functional finance" on Wikipedia here. Here are the major principles:
  • The principal economic objective of the state should be to ensure a prosperous economy.
  • Money is a creature of the state; it has to be managed.
  • Fiscal policy should be directed in the light of its impact on the economy, and the budget should be managed accordingly, that is, 'balance' is not important in itself.
  • The amount and pace of government spending should be set in the light of the desired level of activity, and taxes should be levied for their economic impact, rather than to raise revenue.
  • Principles of 'sound finance' apply to individuals. They make sense for households and businesses, but do not apply to the governments of sovereign states, capable of issuing money.
Mosler states that "functional finance" is "still very relevant today." This appears to be approval of functional finance and therefore the principles of functional finance. We therefore have some insight into the economic theory Mosler is utilizing to reach his ultimate conclusions about how monetary policy should be employed to benefit the economy.

It would appear safe to say that Mosler does not understand the functioning of markets and that he is an advocate of Keynesian economics (Lerner is cited as the inspiration for the use of monetary and fiscal policy as the two tools of Keynesian economics) as the principles of functional finance are similar/in many cases the same as Keynesian economics.

Therefore, all criticisms and debunkings of Keynesian economic theory will likely similarly apply to Mosler economics. In attacking some of the premises and claims of Keynesian economics, the foundation of Mosler economics is similarly eroded.

Many authors have spent much time and effort debunking these claims independently. Here is one such effort on The Myth of Functional Finance. If you are interested in those efforts I suggest you search for them, principle by principle, on your own. I won't waste time by repeating them all here. Rather I will try, in the future as I have so far up to this point, to address these principles when Mosler seems to be inferring them or relying upon them in his analysis, even when he does not openly state that that is what he is doing.


  1. Hi,

    Thanks for reviewing my book.

    I agree nominal savings and real savings are two different things and I do address that in the book as well.

    You are in error with regards to legal tender laws.

    Taxes are necessarily coercive and not voluntary. Buying securities, however, is entirely voluntary.

    It looks like here you may be making the error of confusing nominal wealth with real wealth:

    "once the government spends, it receives nothing in return. The wealth is gone."

    And you miss a critical point of actual monetary operations (not theory) here:

    "If the government finances its expenditures through debt, it must steal (tax) at some other time to raise the funds necessary to pay off the debt."

    Govt. spends by crediting a member bank reserve account. 'Finance through debt' at the operational level is nothing more than the holder of that credit balance in a reserve account deciding to shift it to a securities accounts at the fed (buy Tsy secs). Paying off that debt- the balance in the securities account at the fed- is nothing more, operationally, than the fed debiting a securities account and crediting a reserve account. Taxes are not involved in this process.

    "Without it's ability to steal (tax) the funds it needs to pay off its debt, the government would be left with nothing to pay off its debt."

    Again, the debt is paid off simply by debiting a fed securities account and crediting a fed reserve accounts. Operationally, that's all there ever is to it.

    "No one would voluntarily lend to the government who was at all concerned with getting a return on their loan because they'd realize the government would not have the ability to make good on that debt."

    The govt always has the ability to debit a securities account and credit a reserve account as both are on its own books.

    the question may be the purchasing power of the currency, but never the govt's ability to repay a notional amount of a contract.

  2. Warren Mosler,

    I have not finished reviewing your book. As of this comment I have written posts for DIF 1-5. I still plan to complete posts on DIF 6 and 7.

    You are in error with regards to legal tender laws

    Please explain my specific error.

    Taxes are necessarily coercive and not voluntary. Buying securities, however, is entirely voluntary.

    I specifically explained that while buying securities is voluntary, the sole reason why some securities, such as government debt, have a market, is because of the coercive tax power of the government. The government is not a productive entity so without the ability to appropriate private wealth for its own it would be unable to pay debt (in real terms) and there would therefore be no market for it.

    This is not about observing "operational realities". It is about the significance of those realities

    Again, the debt is paid off simply by debiting a fed securities account and crediting a fed reserve accounts. Operationally, that's all there ever is to it.

    The govt always has the ability to debit a securities account and credit a reserve account as both are on its own books.

    the question may be the purchasing power of the currency, but never the govt's ability to repay a notional amount of a contract.

    This is precisely what I am critiquing, Warren. You and your various disciples who have dropped by so far have treated me as if I am some idiot who can't understand the simple "operational" observations you discuss in your book.

    To be clear, and I speak for myself here, not anyone else who takes issue with you and your economic ideas:

    You treat government finance as if it's an accounting problem, not an economic problem. I don't disagree with you on the "operational" aspects of how government finances itself. I don't disagree because I don't care. The government could physically extract resources from private citizens, it could establish legal tender laws and then use its monopoly on the ability to increase the money supply to finance itself or it could use any other scheme it could imagine to gain control over resources which do not belong to it-- it doesn't change the fact that those resources were not handed over via voluntary exchange and therefore the economic nature of such an exchange is completely different than what it would be if the exchange occurred voluntarily.

    You treat the problem as if someone like me is concerned the government is about to run out of paper, ink and megabytes of data storage on its hard drives and accounting matrix spreadsheet servers. I am not concerned by this.

    What I am concerned about is the coercive nature of government financing-- however it is accomplished!

    The point I seek to address in my entire series of refutations, which you only slowly and somewhat sneakily pay any heed to, is that government controls what economic resources it controls by theft. Because the government is stealing all the resources it utilizes for its various economic programs and schemes, it necessarily means that your entire program for getting the economy going again by policies adopted by the government boils down to the idea that some forms of theft are more noble than others and furthermore that these noble thefts can be of net economic benefit to society.

    In other words, you advocate a system whereby theft is to be the foundation of sustainable economic production.

    This is wrong. Theft redistributes existing resources, it is not responsible for producing new ones. If you're unclear on why it's wrong I'd be happy to discuss it with you at any time.

    Thank you for dropping by, please stay tuned for the final parts in this series.

  3. I fully agree and emphasize that taxation is coercive and that enforcement of taxes is essential.

    I don't call it theft because it is deemed legal by the electorate or at least by their elected representatives.

    And all I'm saying is that for our given size govt, we are currently grossly over taxed.

    And that my proposals for a full payroll tax suspension, revenue sharing for the states, an $8/hr job for anyone willing and able to work, will very rapidly get us back to full employment and much higher levels of private sector real output.

    So from your point of view I'm proposing reducing the 'theft' by a substantial amount, 'pushing funds back' to the states, and offering the unemployed a job as an alternative to collecting about the same amount for unemployment comp to help them transition back to the private sector.

    What don't you like about that???

  4. Warren Mosler,

    I am glad to know you agree that taxation is coercive redistribution of resources. It doesn't matter what the political system considers it in a legal sense-- it is still theft "in reality" and it has the same economic consequences as an act of private criminal theft. There is nothing "special" about a person committing theft in the name of the government which transforms that act into an economically beneficial act where it would've otherwise been economically destructive had it been committed by a private actor.

    I'm going to ignore your comment about being over-taxed for the current size of the government-- I fully agree that there is too much taxation (because any amount of taxation >0 is too much) but you do not have any way to objectively calculate what level of taxation is appropriate for a government of size Y.

    Aside from the fact that what you're proposing is still theft, albeit potentially a smaller one (I do not necessarily agree with your insistence that it would be), I have two other reservations about your proposals, which are:

    1.) You are basing your proposals off a flawed economic theory which assumes that production is production and so long as people are employed producing "stuff", this is economically beneficial. This is false. All "production" is not created equally. Production must match individual consumer demand in a qualitative sense or else it isn't useful and therefore it is not really economic.

    Your proposal is to pay people $8/hr (why $8/hr, Warren? Why not $5/hr, or $10/hr, or $100/hr? You don't explain how you calculate) to produce... what? How do you know what they produce is a.) worth $8/hr in wages and b.) is actually desired by the individual end-consumers?

    Without having a free market in production and labor (that is, the hiring of the workers and the determination of what they produce), you are groping in the dark. Public subsidy of "private" businesses to hire these people at $8/hr is no substitute for a free market, either.

    Your proposal will simply result in more malinvestment of resources and more economic distortion of production.

    2.) Your proposal is incredibly naive when viewed through the lens of history in assuming these measures will at all be temporary in nature, or that politicians and special interest groups will have the discipline and restraint to not seek ways to continue these subsidies post-crisis (assuming your proposal does anything to solve the economic situation, which it can't be definition). What you are proposing is to set up a dangerous precedent of further government involvement in the economy which, if it isn't a source of outright corruption and fraud from the get-go (how about people finding ways to scam the system to get paid to produce nothing?) will undoubtedly be a constant temptation for politicians and voters alike to abuse and manipulate for personal gain. In other words, what you are proposing is not "realistic" as it won't go down just as you hope it will-- there will be problems, and I have a sneaking suspicion the practical problems of implementing this political program will in time far outweigh what few benefits may accrue from it.

    To summarize, what I don't like about your proposal:
    1.) Unjust; based on theft. (You agree.)
    2.) Uneconomic; based on flawed economic theory and arbitrary calculations. (You have yet to address how this non-market program is going to manage to economically calculate when it has no ability to reference profit and loss.)
    3.) Unrealistic; based on a naive understanding of what actually happens to policy proposals once implemented in the special-interest laden environment of politics.

    I would hope even just one of those would provide you reason enough to pause and reconsider.

  5. Taylor, one error Warren cites but does not address is "legal tender laws (threat to use force against anyone who does not settle debts in the legal tender)"

    That just ain't what legal tender laws say. Legal tender laws are essentially meaningless in modern economies. They could be repealed tomorrow with no effect, and some nations don't or never had them.

    Another error, which you may wrongly associate with them is "The government could ... use its monopoly on the ability to increase the money supply . . ." The government does not have such a monopoly. Nobody believes that, not even people who believe in the money multiplier.

    What government has is a monopoly on the economy's net financial assets which are its own obligations. Everybody has the same monopoly on his own obligations, with the exception of tax liabilities imposed by the government. Taxation is essentially the only form of government financial coercion.

  6. Good thing Warren stopped arguing with you, there's no convincing an ideologue


  7. Which one were you referring to Anonymous?

  8. I understand Taylor Conant's hatred of the government. Other than that he lost this battle big time.
    You can call coercive taxation a theft but this is how democratic society works. Public purpose needs to be served. It is ironic that the one who calls taxing a theft wants more of It. :) (advocating higher net taxes and lower net spending by government).

    "You are in error with regards to legal tender laws

    Please explain my specific error."

    Legal tender laws are not needed in a modern fiat monetary regime. The reason they are in place is ignorance. You can use whatever form of money you like, but you cannot pay your taxes with whatever money you like. Government only accepts payment of taxes in Its own currency.

    It seems that the whole Austrian economic theory goes down the toilet. Bob Murphy also tried but failed. The problem with you Austrians is that you live in a fantasy world. The kind of world where people save in coconuts. The kind of world where private sector can collectivly increase their savings etc. Must be nice.

  9. Fascinating!

    As a student of evoluionary economics (see Kenneth Boulding), it strikes me that Mr Conant thinks in obsolete terms, ignoring the dynamics of technology advancing since the 19th century. Today there's no reason to take Von Mises seriously since he formulated his theory at a time when scarcity was a legitimate assumption behind such theorizing.

    If Mr Conant doesn't believe that history clearly demonstrates this latter point, many will be tempted to insult him.

    Not me, I don't believe it's idiotic to pose theory against "operational realities" in a challenge to MMT.

    But it's ridiculous IMO to argue that taxation is theft given that advances in the technology of infrastructure suppied by government obviously contributes to real wealth increase over time. That is, increasing net surplus (real value) via technological advances is not - dare I say it - operationally depeleted by taxation. This was Norbert Weiner's point when he challenged the economists of the thirties from the cybernetic point of view. (Paraphrasing:)How can we be in a depression when we have the means to produce weath that obviously people need? No theory of "consumer preferences" necessary.

    Did not the Panama Canal, the Space Program to land on the moon, the Manhattan Project and other developed technology to fight World War II contribute to abolishing the scarcity assumption? Do Austrians in a fit of ideology exclude economic history and cybernetics - systems analysis both top-down and bottom-up - from their particular brand of economics?

    Austrians call taxation theft but then say: Let's simply ignore or deny that a great fraud happened - which was in fact the greatest heist of all time by the too-big-to-fail banks.

    Do a thought experiment: no can one use the market theory of a Hayek to possibly comprehend the computerized nanosecond securities' trades of the cyber erea, what Norbert Weiner would have called the dark side of cybernetics. Obviously these trades are a "free market" black box if you will, but clearly not serving the economic interests of ordinary people.

    So the problem here is determining who lives in the fantasy world. Many believe in "austerity" or what some call neo-feudalism. That so many ordinary people have been persuaded to cut their own throats by voting for politicians who advocate such; e.g. Walker of Wisconsin, is one of the great riddles of our age.

    So alas, I have to disagree with Anonymous post of 10/7/11. Mr Conant's side, now in control of the Dems and White House, is clearly winning. :o(