Economics 101 revisited.

Part II

Here is some economics 101 revisited from an honest economist. Stephanie Kelton is saying that if the Government spends at say a $10B deficit than somewhere in the economy there is $10B more money for people to spend. That is how the economy grows.

This is not only not a problem, it is absolutely vital to make the economy keep running. If the Government never spent more than it took in than the economy would collapse because of lack of money or a penny would be worth $1000. Either way, there are more people and more things to spend money on than their were in 1776, so there needs to be more money in the system then there was back then and this is one of the ways it gets there. If the Government was on the gold standard and couldn’t do that*, than the economy could not expand and everyone would have to share the same amount of money even though there are more people etc. i.e. $1000 pennies.

The only time this expansion by deficit spending becomes a problem is if the Government overestimates how fast the economy is growing. This over estimation occurs when every one is working and all the resources are being fully used. Then, the only thing adding money can do is increase the costs of the things that are being overused. When this starts happening to a majority of things, it is called inflation. At that point the deficit spending is taking away from today’s economy, not the economy of our Children as the Republicans love to tell us. Stephanie Kelton touches on this in the video when she cautiously says that the only part of the deficit put on the backs of future generations is the interest on the bonds!

Trade deficits are a little different, since it is money someone else can spend in our economy***. This is not nearly as bad as it seems however. For one, the value of a trade deficit decreases over time as the value of the money decreases under normal inflation (typically ~2% a year). Furthermore, if a country like China where to dump all the money they have on the US economy all at once, it would simply cause a spike in inflation because there would be a sudden infusion of cash. How this hurts depends on how the wage structure is organized. If minimum wages were tied to inflation as they should be, this would mostly cause a flattening of the economy and the rich would be less rich since their money would be constant and the extra supply would get distributed. If wages stay constant, then all that extra money supply would go to the rich and income stratification would increase**.

One thing I learned from this video that absolutely blew my mind is that the Bond Market is essentially a Government give-away to the rich. That was a mind-blowing epiphany for me!

Another huge topic she touches on is that the real purpose of taxes should not be to fund the Government, it should be to reduce inequality. The Government is really funded by appropriations. Taxation serves as a way to reduce inflation by recycling some of the money. Progressive taxation serves to reduce income inequality. How much needs to be recycled depends on how much the Government wants to spend vs how much the economy is expanding. Cities and States need to tax so they are less dependent on what the Federal Government gives them, so those taxes are really about local independence. Local taxes tie local budget to local economies which has its own set of pros and cons and it is the Federal Governments job to cause a net shift of funds away from the affluent regions to the less affluent regions so they don’t starve. That is why it is a good thing that California pays more in federal taxes than it receives. The irony is that States like Mississippi and Alabama, who are the primary beneficiaries of this net flow are also the biggest complainers when it comes to Federal taxation… That is another story altogether.

* Inflating the price of gold by $10B is similar to adding $10B via the Fed, only than you are also inflating the value of the gold held by people and countries who are not growing at the same rate, which is the problem with the gold standard that pro-gold standard books never mention. For the gold standard to work every country would need to set its own independent price for gold and trading it across borders and mining it would need to be illegal! This is of course an absurdity.
** This is one of the reasons we need to fight for a fair minimum wage and it needs to be tied to inflation.
*** The USA tries to balance these deficits in a very ugly and negative way by selling things to other countries that have no economic value, like weapons. Not because it makes us richer, but because it makes them relatively poorer. Long-term, making weapons is a pure waist of resources that could have been used to build things that help the economy. Also another blog post. (Why not put those people building tanks to work replacing lead pipes? That would actually help the economy by making our citizens more healthy!)


  1. This video is so PACKED full of information. At 10:00 she says, you could just stop subsidizing the rich with bond interest by not issuing bonds! Then at 10:20 she says if you are taxing less than you are spending while not issuing bonds, that just means that the Fed is paying for it rather than the Treasury! At 10:35 she explains the expansionary and contacting effect of running larger or smaller deficits. At 11:17 she completely takes down the Clinton economy and explains why everyone has so much debt now! (Credit card debts went through the roof during those years and I never tied that to the Clinton’s… another epiphany! Then at 12:20 she explains the fictitious nature of the policy pressures put on the American public by the deficit hawks. Absolutely mind blowing! Stephanie Kelton is my new hero!

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