"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Monday, February 28, 2011

Modern Monetary Theory Used For Evil

Reader Rajiv recently posted an interesting link in the comments section of this blog.  While Rajiv and I may differ on the success or merits of Modern Monetary Theory - which is also a political discussion - I think we both agree on the potential of its mismanagement.

As I have written about Modern Monetary Theory (MMT) in my post: Modern Monetary Theory , or How the US Monetary System Really Works, MMT, at its core,  really describes the operational system we have. But there are also proponents of the system or MMT'ers as they are often called, that understand the system's function, and want better government as a result. This I find admirable, and I also support the idea that people need to be educated about how our system actually works.

But back to the link Rajiv posted from the blog "The Traders Crucible." It involves Art Laffer, a member of President Reagan's Economic Policy Board's apparent understanding of MMT:

Out of the comments, Tom H had a gem: 
'Waren has pointed out that Art Laffer understands monetary ops perfectly. His whole game is cutting taxes, cutting spending on social programs, and increasing corporate subsidies. This is the source of Cheney’s famous, “Deficits don’t matter.”  
The problem is that “they” do get it and have been using it to advantage. Laffer’s current disciple is GOP “budget whiz” Rep. Paul Ryan. But now the fiscally conservative GOP wing is objecting to what Poppy Bush called “voodoo economics.” So we’ll have to see how this shakes out on the GOP side. So far the Lafferites are winning, with tax cuts blowing out the deficit, which is good from the MMT vantage at this point in time, with huge leakage from demand due to increased saving/delevering and an outsized CAD.'
I confess, I knew that Laffer knew monetary operations, and how it all worked. I just didn’t put together that someone could use the ideas of MMT in evil ways. Doh! How did I not see this?!? 
If Art Laffer really gets and believes MMT, then he must be a pretty heartless guy. As far as I can tell, he does not now and has never advocated a payroll tax reduction, even though those are the people that could boost demand the most. And he even goes out of his way to misrepresent the amount of taxes working people pay. 
'Let’s take a look at the bottom 75% of taxpayers over this same time period — the group current Democrats refer to as middle- and lower-income earners. From 1981 through 2005, the share of all income taxes paid by the bottom 75% of all income earners (as reported on the individual income tax returns) declined to 14.01% from 27.71%. As a share of GDP, total taxes paid by the bottom 75% fell to 1.05% from 2.50%. The bottom 75% of all taxpayers today pay less than 35% of all the taxes paid by the top 1% of all income earners.  
Over the last 25 years, the bottom 75% of all taxpayers’ tax payments fell and their tax rates fell. This is the group the Democrats are targeting for tax cuts.
 
Where is any mention of Social Security taxes? If he knows MMT – which according to Warren he does – then he cannot be ignorant of the impact on the lower classes of these taxes. Also, he must then realize that the greatest corporate tax break possible would be to reduce the employer side of Social Security taxes. But he doesn’t talk about this – even though it would be the most logical and large tax reduction we could have. 
I bring this up because all he really talks about is reducing taxes. So why not aim at the biggest tax pie out there?  
His life goals must involve some form of bringing back poor houses and trying to undermine the government.'

Here is the LINK - the comments sections has some more interesting points.

Keep in mind, what The Traders Crucible writes about is fiscal policy - the use of the power to tax and spend.  I have an additional concern which is monetary policy: the power to create and manage the monetary supply.  So in terms of monetary policy, there is an additional danger.  I recall Congressman Ron Paul addressing it in this regard, as I paraphrase:

Those that are closest to the creation of money by the Fed, benefit the most, and those that are farther away, bear the most cost.

So while Wall Street gets free money to cover up losses and to continue to speculate, the resultant inflation is passed down to the general public.  It is no surprise that the average American has been finding it harder to make ends meet, compared to a few decades ago.

Overall, I believe the MMT debate is one that merits broader public exposure.  People do need to know about our monetary system.  Maybe then, they'll better understand how they are being fleeced by a system that operates on stealth theft, and indirect, as well as direct taxation.

In the 2008 presidential campaign, there was the hot button issue of "redistributing wealth." Remember Joe the Plumber?  Well, it looks like the process of wealth redistribution has been going on for some time - often in the opposite direction of what most people believe.

5 comments:

boatman said...

having to sell your soul to get elected ensures it will always be used for evil.

then there is the other side of the coin--some greek guy said 2300 years ago---as soon as the non-producers in a democracy figure out all they have to do is legislate complete entitlements it spells the end of said democracy.

increasingly there are no 'good' solutions for problems.

Misthos said...

boatman,

I think we also lack strong leadership that can balance competing interests.

We could use a Teddy Roosevelt right now. But he was an accident of history. He was given the Vice Presidency under McKinley to get him out of the NY Governor's Office. He was a tough Governor that fought police corruption and ruffled many feathers. The party leaders wanted him out of the limelight, so they gave him the VP job. He was the original "hearbeat away from the Presidency" fear.

That fear was realized when President McKinley was assassinated and Teddy Roosevelt became President.

But he also was one of the greatest Presidents, in my opinion. He did what he thought needed to be done for his era.

The only other option I see is a strong third party emerging. I'll admit, I voted for Ross Perot in 1992. People back then said I wasted my vote by doing that. I believe the opposite happened. That was probably the only meaningful vote I ever cast in my life. Every other vote since has been a waste of time!

boatman said...

my votes have been the lesser of 2 evils for years.....the last one just sponsored a bill to put vitamin stores under the FDA!....maybe the worst fox in the henhouse administration going!

perot got mine too, ....if only ron paul was a black woman with a cane n a foriegn sounding name.

by the way, if you know anyone with hepatitus c i know the sure alternative cure....proven by hundreds of people.

revealing graph:

http://panzner.typepad.com/.a/6a00d83451591e69e2014e8667bf57970d-pi

Anonymous said...

Hi -this is TC!

I fully agree - MMT can result in mis management. IT is a huge long term concern of mine. mismanagement is not a concern of mine in the short term because we are so far away from a reasonable threat to prosperity from this channel.

I'd look at Laffers comments in the way that I say, but he is also being dishonest in another gigantic way: using taxes as a percentage of GDP as a standalone indicator.

Why? He says nothing about the share income as a percentage of GDP as the driving force of this vast increase.

Imagine two time periods with only two people. IN the first time period, one person makes 60% of the income, the other makes 40% of the income. The taxes paid by each person amount to 65% of the taxes paid and 35% of the taxes paid - in other words, the tax system is slightly progressive.

In time period two, I tell you that the richer person now pays 80% of the taxes, and the poorer person 20% of the taxes. Clearly, I am leaving out a very important piece of information - namely how much of the income each of these people make.

That's Art Laffer for you...

Misthos said...

Hey TC - thanks for the blog visit and comment!

You're right about the income disparity.

And that's how people like Laffer frame the discussion. By framing the debate as he does, and omitting other facts, he controls the discussion and successfully recruits much of the middle class to fight his cause!

It's very Orwellian.

Such examples of debate control are rampant in today's political discussions we see in Main Stream Media.