Tag: economic development

As the wealthy sip the stilled wine, the poor gulp the driving rain.

Last week, we took axe to several pillars of economic orthodoxy. These assumptions are wrong but so powerfully constructed that they make the truth seem to be the rickety, disheveled edifice. Most people believe these false tenets without critically thinking about them.

For example, when an alleged expert pontificates that government deficit spending inevitably leads to government bankruptcy, most people nod in sheepish unison, commending the learned fellow for his fiscal sobriety and abstemious wisdom. Fearing to appear dumb or inane, no one stands to ask the fundamental question: Why does a government with unlimited authority to issue currency borrow that very currency and pay interest on this artificial debt? The true answer startles. It is a massive form of financial sector welfare that dwarfs anything government ever contemplated for the weak and poor.

More people should stand to ask piercing questions if only because the caretakers of the political economy pray that you not do so. Time is overdue that we examine the integrity of the pillars upon which our economic fate rests. What we thought was sturdy and true is but tumbling sand.

I don’t expect this exposition to dispel the economic fables that parade as wisdom and truth. Most readers have embraced orthodoxy so long that they resist the ideals and things that resist their compounding impoverishment. Knowledge is never completely an intellectual enterprise nor are people entirely rational. We become emotionally attached to what we believe we know.

The more a belief is repeated the more it becomes engrained in our minds. The more engrained an idea, the harder its removal becomes, its lack of veracity notwithstanding. Even when reality refutes a notion, many still cling to it out of custom. The unknown, uncertain truth is more frightening than the accepted lie.

Thus, I suffer no illusion this essay can debride the conventional ideas that make our economic lot worse than it should be. Of those who read this piece, many will recoil, feeling nothing but deep consternation that it can’t be true. They will say the custodians of the global political economy are not so venal and cold as to perpetuate such dire, massive fraud against the welfare of so many people for so long. Yet, slavery existed for several millennia as major cog of the world economy. As it subsided, feudalism, indentured servitude and other forms of compulsory, low-wage labor took its place. The elite has suppressed the bulk of humanity for most of history, why should the present be excepted?

My hope is that some will read this with openness of mind and spirit. Don’t reject what is written but objectively compare these ideas to those mainstream economics promotes. If faithful to this exercise, you will question conventions you have been led to accept. You will begin to see that economics is less an objective science and more an ideological wrestling match between competing interests.

The common man has almost always lost the match because he never understood he was in a contest. He trusted the elite to engineer things for the best of everyone when all the elite does is sculpt things to its advantage. Inordinate greed now makes the elite so sloppy that it consumes too much even for its own good. The cat is now out of the bag and it has turned out to be a rather feral, untamed one.

If the people want an economy that works for them, they better get about the task of redefining economic processes in a way that promotes their interests. To wait for the elite to do them justice is to sit with cup in hand beside a closed spigot. If people want economy justice, they must craft the ideas and draw the diagram on how they will reach this objective and force the elite to oblige.

One of the first things people must revise is a concept of money. Generally, we think of money as wealth. This is a vestige of the gold-standard when paper money actually represented a nation’s gold holding. During that prior era, a person could theoretically demand to exchange the paper money he held for actual gold. This is no longer the case.

Paper money now has its value not because of gold but simple because government, by sovereign fiat, says it has value. We exist in an era of fiat money as opposed to money tied to gold or silver. This change is a massive, liberating one, opening the door to growth and prosperity impossible under the restrictive gold standard. Ironically, the world has the maligned President Richard Nixon of Watergate notoriety to thank for this benign aperture.

When Nixon took America off the gold standard, he did not realize the future he might create. His action was born of short-term economic imperative. Due to heavy war and domestic programs expenditures as well as America’s position as the world’s reserve currency, the nation was exporting more money than its intake. America’s gold holdings were decimating as a result. To halt the diminution before the cupboards went bare, Nixon divorced the world’s largest economy from the gold standard. As is often the case, in the face of a dire emergency, logic comes to triumph over tradition. The rest of the world could do nothing but follow America’s lead in the new economic world.

Many people, including mainstream economists, lamented this would end modern civilization. They were as wrong as they were unduly melodramatic. They had deceived themselves that gold was inherently money. Although experts, they seemed to have ignored recent as well as ancient monetary history. During World War I as well as the Great Depression, the major nations suspended the gold standard and resorted to fiat money as an emergency measure. They did this to avert catastrophic deflation and allow themselves the leeway to increase government expenditures to levels needed to address the dire circumstance that stalked them.

The gold standard was a manacle to the global economy. It did not produce “sound and stable’ money as its adherents professed. Depressions and crippling deflation were more frequent under the gold standard than after it. Moreover, there is nothing inherent about gold that makes it the best form of money. Gold is not found in the ground in pretty ingots. To the untrained eye, un-mined gold looks like dirt. Mankind did not use gold as money until we acquired the technological ability to mine and refine it. Prior to that, many things from animal skins to cowry shells functioned as money in different places at different times.

As such, terminating the gold standard was not so much a radical departure from tradition but a return to an older truth. Money itself is not wealth. You cannot eat, wear or drive money. As such, it is merely a representation of wealth and value. Essentially, money is but the idea that value can be reduced to socially accepted units of uniform proportion then transported across time and space. Currency is but the physical symbol used to represent this valuable concept.

Those who seek a new economics must avoid mistaking money for wealth. They must come to see it as a means of assigning economic value to people, assets and resources in a way that helps us create additional wealth. In this new mindset, wealth consists of those things we use, eat, consume, wear, make, give, hear and see that make life more pleasant and worth living.

This changed mind-set is of paramount importance. Under the gold standard, governments were compelled to save money in order to maintain their caches of the precious metal. Freed from this artifice, governments no longer are slave to hoarding metal in order to maintain their economic place. The major objective of government economic policy is no longer to stash money (gold). The prime objective now should be maximizing national wealth by integrating as many heretofore idle and inactive people, assets and resources into the productive economic mix.

This should be the objective of economic policy of a just government and society. An unemployed person earns no wages. He has no economic value because he has no money assigned to him since he has produced nothing of value. Yet, morally and economically no person is worthless. Everyone has value. The extent that we have reduced people to having no economic value is an indictment of the political economy more so than of the unemployed person. To the extent an economy becomes efficient at employing its people and resources, then that economy can be said to be developing in an enlightened fashion.

Here, government becomes the fulcrum of development. During the American economy’s formative period when it became the world’s largest, the American government ran budget deficits. These deficits fueled the construction of the greatest infrastructural network the world had then witnessed. This feat was performed under the strictures of the gold standard. A century later, China would learn from this example by setting a similar course for its national development. Due to its larger size and being liberated from the chokehold of the gold standard, China launched a period of economic growth unprecedented in modern history. A key feature of this grand strategy was government spending on infrastructural development that brought theretofore idle people and resources into productive gait.

In modern times, any large nation that seeks to develop must do two essential things. First, government must dare engage in deficit spending toward the creation of modern, efficient infrastructural architecture and place that network at the service of the rest of the economy. This not only employs multitudes. A national economy cannot expand beyond the limits of its infrastructure’s ability to provide cheap, efficient transportation, energy and water. By enlarging the infrastructural base, government catalyzes further private-sector economic growth. Second, government must promote industry and manufacturing that employ additional people and resources. This requires a formal or informal national industrial policy.

These activities rest on government fiscal policy. Sadly, the current global trend is to emphasize monetary policy and downplay fiscal activism. This is no surprise. Monetary policy is the province of the rich and powerful whereas fiscal policy can be tailored toward more egalitarian ends. Consequently, the moneyed elite would rather leave fiscal policy behind the locked door.

America’s central bank has engaged in a policy called quantitative easing (QE) for several years. Through this policy, it purchased trillions of dollars of financial paper from the financial sector. Ostensibly, the policy is meant to jumpstart the whole economy. In reality, the program has only inflated and enriched the financial sector. Stock market prices and bank profits have expanded; but the rest of the economy stagnates. The American economy is now growing but the expansion is misleading. Growth is basically limited to the investor class. The vast majority of people tread the deep black water or slowly sink into it.

Conventional economics says monetary policy, through interest rate changes or market transactions like the extraordinary QE, sends funds into the financial sector. The financial sector then will distribute the funds to the real sector. This may have been the case before. Not anymore. The financial sector has become bloated with too many speculative opportunities promising yields unknown to real sector investment. Consequently, the receipts of monetary policy first enter the financial sector and stay there. This accords with the general principle that the economic sector to which money initially flows is usually the greatest beneficiary of the government policy that generated the monetary flow.

Monetary policy benefits the financial sector more than any other. In other words, not enough money really gets transmitted to the real sector. The money repeatedly cycles within the financial sector, inflating assets prices, causing the investor class to increase its nominal wealth. However, there is no equal increase in real wealth or production. There is no increase in employment. Relative to the annealed financier class, the rest of the economy has slightly lessened.

This phenomenon repeats itself in Japan. That nation has embarked on a program more egregious than America’s QE. The central bank buys almost all types of financial paper, including stocks. Since the purchases are made at the nominal and not lower market value of the financial paper, these government purchases subsidize investor mistakes. The Japanese government, not the investor, now bears the loss in the real value of the purchased instrument. Predictably, the stock market has soared but the outlook for growth in the real sector remains bleak. The financial class has benefited at the expense of the rest of the economy.

At its worse, monetary policy sinks us all. At its best, it more directly benefits the financial sector than any other. Fiscal policy represents the only chance for the average person. Fiscal policy can direct government expenditures to certain groups of people. Jobs programs provide money directly to the unemployed, Social Security to the elderly poor, tax relief or production subsidies to certain farms or industries as the case may be. In these instances, fiscal policy inures no direct gain to the financial sector because fiscal policy can completely bypass that sector. The financial sector only incidentally benefits from fiscal policy. For the financial sector, this is too little gain to be worthwhile. Thus, the financial sector abhors fiscal activism and we must remember that the financial sector now defines conventional economics.

No surprise that orthodox economics downplays the utility of fiscal policy and eschews budgetary deficits as a bête noire. The aim of conventional economics is to keep the humble and poor as they are while allowing the affluent to multiply their affluence.

In the end, the people struggle for their economic lives and fate. They lose more often than they win in this war because they look to economists and the financial elite as their generals. But the economists and elite head the opposing army. To follow them is for the people to tag themselves to the certain defeat of their economic aspirations.

Unless people agitate for fiscal policy that stirs the economy toward greater productivity and shared prosperity, the financial elite will have their fill while most others will know only a depleted condition. The more champagne the elite buys and drinks, the less water the poor will be able to afford. While the financial elite will bask in nearly perpetual enrichment, economic night will cast darkness over the majority of people even at the height of the daytime sun.

 

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Economics is the elite’s attempt to masquerade greed as rational science.

At a carnival, the performers using numbers to predict human behavior or fate are known as fortune tellers. In the corridors of government and higher education, they are called economists. Laymen give them wide berth because their elucidations are so arcane and contorted that few of the uninitiated have the courage or dexterity to offer challenge. Over the decades, the pontifications of the economists have been elevated to the status of secular canon; governments slavishly tie themselves to their utterances without due assessment of the utility of what is proposed.

Standard economics reduces the world of complex, ambivalent humans to sterile mathematic formula. While the constructs of brilliant minds, these equations have but a tenuous relationship to the way the world turns or to how the cavalcade known as the human race proceeds. The very smart can be as wrong as the very slow; however, we have been cowed into believing complex thought begets correctness. Sometimes complexity begets nothing other than a sophisticated mess.

Believing a field of knowledge that explains a world which does not exist is as grave an error as trying to plow a cloud or winnow the wind. In searching for prosperity and a better life on this precious ellipsoid of limited resources known as earth, man cannot long afford dreams of flirting with mermaids or dining with unicorns. The construct of our political economy should be based on something more solid than highly intelligent fancy. It should be built on humanitarian vision and theories based on empirical fact and tempered by mental rigor.

Instead, the policy boundaries of the global political economy have been delineated by an ideology based on theories largely discredited by practical experience. Yet, this ideology persists in pushing itself on us, unfairly holding center stage like an inebriated extravert at the reunion of an otherwise shy family.

This column periodically turns to the theme of a national government’s ministration of the political economy. We conduct this refrain because the quality and type of economic governance pursued will determine whether a nation develops or diminishes. We make this occasional revisit so that you will not accept the bromides of economic orthodoxy and thus shackle yourself to an artfully constructed edifice of lies. If an untrue tongue is about, we cannot prevent ourselves from hearing its falsehoods. However, we can insulate ourselves from adopting the lies as our truth. We have been told the current system is the only way to structure a society that it might prosper. We are told this so that our minds and heart might seize with foreboding at the slightest hint of significant reform, freezing us from seeking redress when redress is the only humane, noble reply to the injustice faced.

Instead we are encouraged to soldier on, through mud and thicket, into the quicksand if we must; if there is fault in our economic position, we caused it. By the reasoning of classical economics, we are both victim and perpetrator of our weakening economic condition. This is a lie built upon falsehood cloaked in deception.

The current economy order is no more insuperable than the feudalism and enforced servitude of past epochs. The political economy is not rendered to us by divine appointment. It is both mankind’s tool and manacle. The operation of the political economy is how the benefits and costs of human activity are produced then distributed among the people. Order society one way, a certain constituency or class benefits and others suffer relatively to the input they make. Order society in a materially different manner, the identities of its beneficiaries and of the disgruntled also will change in a material way.

In today’s world, those who control the large financial houses earn more than they contribute to actual production of wealth. Meanwhile, the average worker gains much less than he contributes. The overall net result is that society prospers. When that net gain is critically examined, a voracious elite gulps most of the addition. The majority of the people are left as they were. To remain in place as time conducts its inexorable march is to digress. In other words, the political economy is designed that most people work hard to fall behind.

Their lone reward is the pitiable assurance that their sweat and labor have served to enrich those who are already flush. Average people are allowed to vicariously enjoy the life of the wealthy from afar or in the cheap comfort of their humble parlors via television reality shows. The poor and modest are coaxed into aspiring to be rich and, more importantly, to be like the rich. Once you aspire to be as someone, you worship them. The rich become protected from the people they exploit by the exploited people themselves. This is a smug composition for those it profits for it is a smart, smooth sleight-of-hand played on the unwitting majority. To me, it is an unjust arrangement. Should one summon the curiosity to peer through this miasma, it shall not be clarity he finds. All he will discover is denser smoke and fog.

Here, I register no pretense to be a neutral or objective observer for I never knowingly embark on the impossible. No person can be completely neutral or objective in adjudging how best to order the political economy. Assessing the political economy is not comparable to measuring the world of physical objects where operation of forces such as gravity, electricity and magnetism do no favors, evoke no biases and are inviolate. Such is the world of inanimate things. But the things of man are different for his world is populated by the uncertainties caused by the imperfection and frailty of his conduct.

Not everything man says is a lie but nothing he says is the full truth. His ideas may work but never perfectly. What he builds may be beautiful but it is never complete. Thus, he continually strives. To be alive is to trek towards endless journey. This is our plight and greatest triumph. For every human victory, there is also a vanquishing. Within the combination of the two, the architecture of our political economy is devised. Unlike an electron which is nigh indistinguishable from its fellow, a man is distinct from his fellow.

More to the point of this writing, some of us are rich. Many are poor. Most are neither. The story of our political economy is the story of why the distribution of wealth is as it is. Nothing is cast in stone save the stone itself. The workings of man and his society are mostly matters of conscious choice. Yet, man’s conscience is often smothered by a thick batter of ignorant belief congealed with fortuitous chance. We tend to do what we think but do not always think cleverly about what we do.

Now, we come to the proverbial fork in the fated road. We can persist in the current direction or go a different route. Justice recommends we seek a more equitable world where poverty retreats and prosperity is more broadly shared so that society’s humble, modest and broken receive more than now they do for their efforts. Let the currency of wealth be recalibrated so that more worth is attached to a person’s actual labor than to the machinations brought about by the masked yet real dictatorship of financial paper over our economic lives. If we seek such a new world, we must adhere to the new path.

Hewing the better path requires the defeat of several economic misperceptions. First, we must understand the nature of modern money. What we have been taught about the function of money are outdated notions based on the idea that the value of a nation’s currency is tied to the amount of that nation’s holdings in gold, i.e., the gold standard. The gold standard has been obsolete over forty years. Yet, so enamored by their intricate theories, mainstream economists hold to them though the nature of money has radically changed. This is like teaching a person to drive a car by asking them to walk about with a steering wheel in their hand.

No longer is a currency’s value based on gold. Value now is determined by a nation’s importance and function in the global economy. Because currency is divorced from gold, the amount of currency a nation can produce is no longer limited by the country’s gold holdings. No longer fettered by these gold standard strictures, a nation can issue an unlimited supply of its currency. To the extent a nation’s monetary obligations are denominated in its currency, the nation cannot fall insolvent. This observation does not lend free rein to issuing currency mindlessly. Currency issuance that outpaces the increase in the actual productive capacity of the nation is almost as wrongheaded as causing economic contraction due to lack of money in circulation. In other words, to issue currency without connecting it to productive endeavor will debase the currency and hurtle the nation toward the tilted lance of inflation.

We come now to another cardinal falsehood. The economic mainstream postulates that a national government must behave and balance its books like an individual or a private business. It must save money by seeking budgetary surplus. At the very least, it must balance the budget. This theorem is more hog than wash and it has caused undue harm in many nations for too many years. This position, which most people accept as an article of faith, is nothing less than a compound fallacy. First, every person and entity cannot have net savings at the same time. It is outside the realm of possibility and of legitimate accounting principles. For someone to run a surplus, another has to incur a deficit. This is an inescapable reality but the lords of economics will not allow you this fundamental truth because it points in a direction they loathe.

A governmental surplus requires a proportionate private sector deficit. In other words, for government to enjoy a surplus requires the private sector to tender to government more than it receives from government. This deflates the private sector. Where the private sector has become febrile and inflation has mounted its stalking horse, such a tactic makes sense to keep the economy from hyperventilating. But where a society suffers from significant idle capacity and unemployment such a tactic amounts to national masochism in its purest form. It destines an already asthenic economy and its people to a worsened fate.

For growth to exist, a surplus must exist. We are left to determine whether it is better that government or the private sector enjoys the surplus and the other runs the deficit.

If the private sector experiences the deficit, the private sector must deflate of necessity. Unemployment will mount as economic activity shrinks. Firms will lose and eventually go out of business. Bankruptcy courts will see brisk activity and things will indeed appear dismal for most people. The private sector cannot cure this deficit position by and for itself. The financial industry cannot come to the rescue. In most nations, private banks do issue new money when they make loans. However, a loan, by definition, is a debt or deficit for the loan recipient. Thus, the new money created is effectively cancelled out by the new debt the new money gestates. This means that private- sector creation of money is a neutral transaction that cannot serve to reduce a net private-sector deficit.

Why then are the advocates of free market capitalism so enamored by government fiscal restraint if it produces such dire results? The blunt truth is that the mainstream financial elite benefits from the misery of others. The funds that come into the private sector in the above deficit scenario first go to the financial houses. There are net gainers within the sector even in a situation where the private sector as a whole suffers a deficit. Big Money will gain and always cover itself. Once it takes its unfair share, there will be even less to go around for the average and poor.

The deflationary influence of a private-sector deficit means that the smaller amount of money will be worth more. In that this lesser amount is first gripped by the well moneyed, the elite profits handsomely from economic contraction. They can buy property and firms at distress prices and hire people at suppressed wages that steadily reduce the average person to the modern equivalent of a debt-ridden sharecropper. While the financial elite benefits, the rest of the private sector suffers a dual deficit — the one between the private sector and government, then another imposed on them by the private sector’s own financial elite.

This reveals an obvious but overlooked fact: the sector that experiences surplus will grow. Given this reality, it makes greater sense for the private sector to enjoy the surplus since the private sector, by itself, cannot cure the deflationary effect of an internal deficit. Because of its currency issuance power, government will not crumple should it run a deficit. Government’s ability to issue currency means it can always keep insolvency at bay provided its debts are written in its own currency.

Deficits do not bankrupt government as they do private sector entities. Thus, the default position of government should not be a balanced or surplus budget as either would stagnate or collapse the non-financial side of the private sector in the long term. If government wants to promote private sector expansion, it must engage in long-term deficit spending. Only when inflation kicks should government tame that beast by pulling in more money sector than it gives to the private sector. As such, balanced or surplus budgets are not objectives in themselves; they are merely tactics and tools to be deployed toward a greater purpose – the prosperity of a broad spectrum of the people.

Here, Money Power and its hired minstrels will scream “dangerous inflation” and decry government “printing of money.” Ignoring historic fact, they claim government deficit spending is inutile and always inflationary. They are wrong. They are also hypocritical. If made aghast by government deficit spending, they should be paralyzed by fear at the track record of private-sector money creation. Private-sector money creation and the debt inherent to it caused the global 2008 recession and mostly all financial crises since the very advent of money. If government deficit spending is inept, then private-bank money creation is both hircine and minatory.

By creating an interest-bearing debt obligation, private-bank money creation can be riskier than government money creation. Because it carries an interest bearing debt requiring a payoff larger than the principal lent, money created by a private bank is worth incrementally less than the same nominal amount of government-issued money because that publicly- issued money is not attached to an interest-bearing debt. In simpler terms, government deficit money is intrinsically no more inflationary than private bank money. If government deficit funds are used to generate productive activities at par with the value of the deficit incurred, then inflation will be held in check. If government spending is on frivolous activity or enterprises, then inflation will loom. Yet, this is no different than if money created by private banks is profligately deployed as the recent 2008 financial bubble and bust can attest. At bottom, the dispositive element is not the existence of deficit spending. Government deficit spending is necessary to long-term private sector expansion. What determines whether a government deficit will be beneficial is the productive quality of the endeavor for which the deficit funds are used.

Government deficit spending shall be consonant with economic growth and development as long as the funds are prudently deployed.

This article has been a bit thick on economic concepts and principle. Hopefully it has been digestible by those intrepid enough to wade through it. This theoretic underpinning is important because it forms the basis for the second part of this exercise. In that piece, we shall explore the vast differences between the fiscal activism I propose and the fiscal conservatism of mainstream economics. One way leads to a more equitable distribution of economic benefits that will improve the lives of the stooped, the struggling and the poor. The other leads to greater disparity where society creates more wealth for too few and more penury for too many. I know the road I prefer. Until next week…

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