The government of the largest economy has run short of money. At least that is what Mr. Obama sought to convey at his “jobs summit” yesterday. The President said he would entertain “every demonstrably good idea” for creating jobs, but he cautioned that “our resources are limited.“
What a confidence-inspiring notion. How can we possibly solve the problem of unemployment in these circumstances? The preposterousness of the statement is only matched by the paucity of economic understanding that it manifests.
For the millionth time, Mr. President, a government which issues its own sovereign currency cannot go broke. It cannot “run out of dollars”.
Does any other entity in the world issue US dollars? No. The national government does this under monopoly conditions. If you or I tried to do it, we would go to jail for counterfeiting. The government money monopoly was invented to mobilize resources to serve what government perceived to be the public purpose. Of course, it is only in a democracy that the public’s purpose and the government’s purpose have much chance of alignment, but this presupposes at least a working understanding of how a modern monetary system operates.
So here’s how it really works:
Any US dollar government deficit exactly EQUALS the total net increase in the holdings US dollar financial assets of the rest of us — businesses and households, residents and non residents — what’s called the ‘non government’ sector. In other words, government deficits = increased ‘monetary savings’ for the rest of us. It doesn’t matter if the financial assets are owned by American citizens or by Chinese manufacturers. The government spends money by electronically crediting bank accounts and those funds show up in the bank accounts held by the rest of us — the non-government sector.
This is accounting fact, not theory or philosophy. There is no dispute. It is basic national income accounting.
So, for example, if the government deficit was $1 trillion last year, it means the net increase in savings of financial assets for everyone else combined was exactly $1 trillion. We, as the non-government sector can then take that $1 trillion of financial assets and spend it on REAL assets, whether building a home, developing a business, shopping for a new car or laptop, or deciding to save the money by buying a Treasury bill. The expenditures on real assets create additional wealth in the economy, which in turn helps to reduce unemployment, and enhance incomes.
Think of this like a poker game at a casino. The “casino” (government) issues 100 chips, each representing $1.00. The chips are divided equally four ways. At the end of the evening, the distribution of those chips might well be different. 2 people might have lost everything, the third might have come about ahead by 15 chips and now has 40 and the fourth player might well have done even better, and gained a further 35 chips to give him 60. The aggregate amount of chips has not changed. There are still 100 chips, but they have been distributed differently.
The casino, however, being the government, is never short of chips. The casino can always create additional chips, much like an electronic scoreboard at a football game can “create” additional points at will on a scoreboard. To speak of “a shortage of resources” or an insufficiency of “public dollars to fill the hole of private dollars that was created as a consequence of the crisis” (as the President said yesterday), reflects a complete abdication of responsibility on the part of Obama. “The hole in private dollars”, which the President describes, is just the fall in private spending brought about by people wanting to save more money. That “hole” means that productive capacity will become unused and the jobs that could have been applied to that capacity are lost. This is why we have an unemployment rate that has almost trebled in the past 2 years.
The 15.7 million unemployed Americans are certainly not a limited resource — although they are a depleting resource the longer they stay unemployed. And unemployed they will remain in the absence of increased spending. So where does that spending come from?
At a recent symposium, Intel boss Paul Otellini, a contributor to both parties, expressed concern about the “amount of variability in the system” created by the state of policy flux in healthcare, energy and tax policy. “It is very difficult to make a hiring decision,” he said. General Electric chief executive Jeffery Immelt, added he would just like to “know what the rules are.” Fair enough. A business, unlike a government, does face external funding constraints. Get a decision wrong and the business cannot compensate by creating more currency. The problem is that income growth is dependent on aggregate demand (spending) growth. If spending growth falters, then output and income growth falters and the capacity to save by the private sector is compromised.
But the government doesn’t have to wait. A sovereign issuer of its own currency has all the capacity it needs. The budget deficits (net public spending) can maintain growth in demand to keep income growing and hence support private saving. Budget deficits should aim to fill in that “hole in private savings” and not allow aggregate demand to “fall through it”, which would lead to income and employment collapses. Government spending has to rise so as to ensure that firms are willing to maximize the use of their productive capacity, which in turn generates further employment. You don’t need a job summit to figure that one out, Mr. President.
The only “resource deficiency” here is one of political courage.
The Obama Administration continues to fantasize that it can get away with creating Potemkin prosperity of levitating asset prices via trillions of dollars of financial guarantees to Wall Street in lieu of deploying fiscal resources needed to lay the groundwork for the real thing.
If the President really believed that the government’s capacity was genuinely limited, then why bother holding a jobs summit at all? Or, at the very least, why not hold it in China, so that our Chinese “bankers”, who allegedly “fund” government expenditures, can vet each program and then decide whether they will continue to “finance” us. What’s next? Declaring wars only in times of national budget surpluses when we can “afford” to go to war?
You can see where the President’s incoherence leads. Our problem is a lack of jobs, not a lack of resources. The solution is more government spending. The only unemployment increase worth applauding would be the sacking of the President’s entire economics team, all of whom persistently regurgitate deficit myths that constrain output and employment and prevent us from recouping genuine prosperity.