The following is in response to Bob Veres’ article, Why Deficits Don't Matter, which appeared on October 29:
Dear Editor,
Since this has become one of your most popular articles I thought I'd reach out to you with some comments.
The debate as to whether deficits matter has persisted for decades, but has certainly gained more interest over the past few years due to a variety of reasons.
I believe the author, Bob Veres, should have spent more time connecting the dots when trying to support the ideas of Stephanie Kelton, Ph.D.
I find many of the points raised and supported in this article to be very troubling.
Early on, Kelton stated, "As a society, we don't understand government finance."
Later, Kelton points out that "The United States government has something that households don't have. It has the power to create the currency that we all live by." And Veres stated that Kelton quoted the Constitution, "saying that the U.S. government grants itself the sole authority to create the currency."
While section 8 of the U.S. Constitution did in fact grant Congress the power "to coin money," what was not mentioned by Veres or Kelton was that the U.S. government no longer has that sole authority, having transferred that power to the Federal Reserve Bank through the Federal Reserve Act of 1913.
If we, as a society, are to understand government finance, would it not be prudent for Veres and Kelton to tell the whole story?
Reading this article one might get the impression that the U.S. government has the sole power to create currency, which only adds to the lack of understanding of government financing.
Veres asked, "What do Japan and the U.S. have in common that Europe doesn't have? They control their own currency; that is, neither country has to sell goods and services to obtain dollars or yen." In other words, neither Japan nor the U.S. has to actually produce anything to generate currency.
Two paragraphs later, Veres wrote,"Kelton points to a 2012 report by the Cato Institute – a conservative-leaning think tank – which examined 56 outbreaks of hyperinflation around the world and across history.” Not a single one of those 56 cases were caused by a central bank that ran amok," according to Kelton. "In virtually every case, the inflation was not caused by too much money, but by too few goods."
It seems obvious to me that Kelton's observation contradicts Veres' earlier comment about two of the largest economies in the world having the ability to obtain currency without having to produce anything. Perhaps Veres should have consulted with Kelton before writing his statement. Kelton might have seen the correlation between production, currency and hyperinflation. The reason why there were "too few goods" could easily be supported by Veres’ statement that certain countries can generate money without producing goods or services.
I find it interesting the Kelton is working on a project with mathematicians to put limits on government fiscal policy. It reminds me of Long Term Capital Management's decision to develop mathematical formulas to reduce risk to allow it to going to corner the market. How did that work out?
Money and numbers are not 100% correlated. The human factor is what makes money and economics challenging. Having a dollar in extra discretionary cash in Manhattan, New York will have a different result of a dollar of discretionary cash in Manhattan, Kansas. Too many academics and politicians ignore the human factor, which results in misguided polices and decisions (not to mention ignoring the consequences of too many dollars in the economy).
The problem with many of the solutions offered in this article is that they are not sustainable, particularly when relying upon the government to print or keystroke money to support the economy or fund the infrastructure projects to which Kelton referred.
Where are the workers who are performing the infrastructure improvements going to spend their earnings and money? Does is not make sense that this would result in the same environment as those in the 2012 Cato Institute report, where too many dollars are chasing too few goods?
The article closed with Kelton offering an historical example: "There has only been one time in our country's history where – under Andrew Jackson – we actually paid off the national debt completely," Kelton said. "And we had a terrible depression immediately following that. We have never done it again."
What is not mentioned is that Jackson was able to pay off the debt after terminating the Charter of the Second Bank of the United States. In other words, he did it without a central bank, a printing press or keyboard.
Also not mentioned was that fact that, throughout the history of the U.S., there have been recessions, depressions and panics. (Perhaps it is just the normal course of an economic cycle.) Yet the greatest of all depressions and the longest of all recessions has occurred under the watchful eye of the Federal Reserve Bank. And these are the folks we are going to rely upon to print or keyboard trillions of dollars on our way to prosperity!
Perhaps it comes down to Veres and Kelton's definition of prosperity. As Veres wrote, "Wouldn't you vote for the presidential candidate who told you that he or she would keystroke a million additional dollars into your bank account the day after moving into the White House?" If we were all millionaires would we be rich? While the day before moving into the White House a million dollars might be worth something, it would not have the same "value" after move-in day when everyone has a million dollars.
If, as an academic, Kelton wishes to improve our understanding of government finance, I, for one, would like to see a more thorough presentation of the pros and cons, the yin and yang of what she is supporting, unless, of course, she wants to be on the list of possible Federal Reserve governors or chairpersons.
Kelton could better her understanding of why, in her words, "as a society, we don't understand government finance" by realizing there is a correlation between the finances of a household and that of a government. Or at least there should be. People cannot understand how the government can keep on spending when they themselves have to make ends meet. People go to the gas station and see the price of gas is down (deflation) and feel good about that. Then have the media and Bernanke/The Fed tell us deflation is bad.
There would be a trade off in our standard of living if the government stopped pumping money into the economy in an attempt to increase aggregate demand. When looking at the direction of our economy and our society, our current course is not sustainable and it is only a matter of time before the next bust hits. (The arrival of that bust will happen sooner if the Fed ever starts tapering which I personally and professionally see no reason why they will.)
If governments have "the power to create the currency that we all live by" and deficits don't matter why not eliminate all taxes, or at least all payroll taxes?
Doing so would:
- Give every working American an immediate increase in their take-home pay without costing the employer anything. This would give the economy the consumption push and increase in aggregate demand so many of Kelton's kind loves. (It would also defer, for the time being, the discussion of raising the minimum wage.)
- Benefit employers reducing expenses because they no longer have to match the Social Security and Medicare tax withholding. This would allow them to lower the prices of their goods or services and allow them to expand their market because more people could afford what they offer. (Of course, this would be deflationary and counter to what The Fed wants or needs.)
- Increase corporate profits, though lower costs and increased revenue, which would increase tax revenue.
There are many other benefits from this scenario, but all-in-all not a bad situation to live under, especially for the U.S. households.
In closing, as an "owl," Kelton, I believe, and to an extent Veres, spends too much time in the dark.
Russ Bragg
Distinctive Financial Services
Jamison, PA
Robert Huebscher responds:
Professor Kelton confirmed that Bob Veres accurately presented her views. But there was one mistake, which I made. I incorrectly titled the article, “Why Deficits Don’t Matter.” The title should have been, “Deficits Matter, But Not the Way Most People Think.”
The following is in response to Robert Huebscher’s article, Reflections on a Week in Cuba, which appeared on November 12:
Dear Editor,
The Cuban expatriates in Florida that lost their property in the revolution are similar to all the Jews who lost their property to the Nazis. Many of them have not and never will get compensation, except perhaps for some of the art that was recovered and proved to belong to them.
If the U.S. would or could compensate the expatriates (assuming they could document their losses), then the next president wouldn't have to worry about losing Florida if he or she lifted the embargo.
Those expatriates would be helping their relatives that still live in Cuba by lifting the embargo, making it be a win-win for all Cubans!
It’s the expatriates who are causing their own kinsman to suffer, holding up any kind of progress in normalizing relations with Cuba.
I don’t know how much it would take to compensate the expatriates, but look how much we have spent rebuilding Vietnam (our former enemy).
The embargo is a total failure; it has only made the people of Cuba suffer for 53 Years.
Jim Petropulos
Los Angeles, CA
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