Galbraith/Wray/Mosler submission for February 25

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This is the paper being presented next week in DC.

Please distribute.

Comments welcome!

This is how it begins:

Comments on the FASB Exposure Drafts relating to “Comprehensive Long-term Projections for the U.S. Government (ED 1)” and to “Accounting for Social Insurance. (ED 2)”

Testimony Submitted by:

James K. Galbraith, Lloyd M. Bentsen, Jr., Chair in Government/Business Relations, Lyndon B. Johnson School of Public Affairs, The University of Texas at Austin, Austin
TX 78712 and Senior Scholar, Levy Economics Institute.

L. Randall Wray, Professor of Economics, the University of Missouri-Kansas City, and Senior Scholar, Levy Economics Institute.

Warren Mosler, Senior Associate Fellow, Cambridge Center for Economic and
Public Policy, Department of Land Economy, University of Cambridge, and Valance Co., St Croix, USVI.

Date: February 25, 2009

In this testimony we supplement our earlier letter, which responded to specific questions on the first exposure draft. Here we set out general principles of federal budget accounting, and then we offer specific comments on the proposed reporting procedures in both of the exposure drafts.

General Principles of Federal Budget Accounting

Even though some principles of accounting are universal, federal budget accounting has never followed and should not follow the exact procedures adopted by households or business firms. There are several reasons why this is true.

First, the government’s interest is the public interest. The government is there to provide for the general welfare, and there is no correlation between this interest and a position of surplus or deficit, nor of indebtedness, in the government’s books.

Second, the government is sovereign. This fact gives to government authority that households and firms do not have. In particular, government has the power to tax and to issue money. The power to tax means that government does not need to sell products, and the power to issue currency means that it can make purchases by emitting IOUs. No private firm can require that markets buy its products or its debt. Indeed taxation creates a demand for public spending, in order to make available the currency required to pay the taxes. No private firm can generate demand for its output in this way. Neither of these statements is controversial; both are matters of fact. Nor should they be construed to imply that government should raise taxes or spend without limit. However, they do imply that federal budgeting is different from private budgeting, and should be considered in its proper, public context.

While it is common to regard government tax revenue as income, this income is not comparable to that of firms or households. Government can choose to exact greater tax revenues by imposing new taxes or raising tax rates. No firm can do this; even firms with market power know that consumers will find substitutes if prices are raised too much. Moreover firms, households, and even state and local governments require income or borrowings in order to spend. The federal government’s spending is not constrained by revenues or borrowing. This is, again, a fact, completely non-controversial, but very poorly understood.

The federal government spends by cutting checks – or, what is functionally the same thing, by directly crediting private bank accounts. This is a matter of typing numbers into a machine. That is all federal spending is. Unlike private firms, the federal government maintains no stock of cash-on-hand and no credit balance at the bank. It doesn’t need to do so. There are surely limits of wisdom and prudence on federal spending, as well as numerous checks, balances, and self-imposed constraints, but there is no operational limit. The federal government can, and does, spend what it wants.

Tax receipts debit bank accounts. So does borrowing from the public. These are operationally distinct from spending. There is no operational procedure through which federal government “uses” tax receipts or borrowings for its spending. If, perchance, one chooses to pay taxes in cash, the Treasury simply issues a receipt and shreds the cash. It has no need for the income in order to spend. This is why it is a mistake to look at federal tax receipts as an equivalent concept to income of households or firms.

As we discuss below, federal government spending has exceeded tax revenues, with only brief exceptions, since the founding. There is no evidence, nor any economic theory, behind the proposition that federal government spending ever needs to match federal government tax receipts—over any period, short or long. The deficit per unit time is the difference between taxing and spending over that time. To repeat, the taxing on the one hand and the spending on the other are operationally independent. Any reasonable observer should conclude that federal government spending is not, and need not be, dependent on, constrained by (or even related to) tax revenues in the way that the spending of households or firms is related to their incomes.

The difference between microeconomic and macroeconomic accounting is also pertinent. An individual household or firm has a balance sheet that consists of its assets and liabilities. The spending of that household or firm is constrained, in a fairly concrete sense, by its income and by its balance sheet— by its ability to sell assets or to borrow against them. It is meaningful to say that its ability to deficit-spend is constrained: a household must get the approval of a bank before spending can exceed income, and therefore its borrowing is subject to banking norms. But if we take households or firms as a whole, the situation is different. The private sector’s ability to deficit-spend, to spend more than its income, depends on the willingness of another sector to spend less than its income. For one sector to run a deficit, another must run a surplus. This surplus is called saving – claims against the deficit sector. In principle, there is no reason why one sector cannot run perpetual deficits, so long as at least one other sector wants to run surpluses.


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39 Responses to Galbraith/Wray/Mosler submission for February 25

  1. Pingback: Myths, Scares, Lies, and Deadly Innocent Frauds: Part One

  2. barton says:

    I am posting this from Winterspeak. I think it’s good…it’s in plain English and it’s the kind of thing which needs to be disseminated more widely.

    Saturday, February 21, 2009

    “Obama: I will worsen the recession in the US by decreasing the deficit”

    If you want to see the end of the Obama administration, it’s on the front page of today’s NYTimes. Obama does not understand that the Federal deficit funds private savings, and if he refuses to let the Government fund private savings by running a larger deficit, the private sector will try to save by cutting back on spending and investment — also known as falling into a deeper and deeper recession.

    “Measured against the size of the economy, that would mean a reduction from a deficit equal to more than 10 percent of gross domestic product — larger than any deficit since World War II — to 3 percent, which is the level that economists generally consider sustainable.”

    Economists have to (sic) clue what they are talking about. The size of the deficit needs to be large enough to fund private saving, without triggering inflation. There is no “sustainable”.

    In his weekly radio and Internet address on Saturday, Mr. Obama said his first budget was “sober in its assessments, honest in its accounting, and lays out in detail my strategy for investing in what we need, cutting what we don’t, and restoring fiscal discipline.”

    “We can’t generate sustained growth without getting our deficits under control,” he added.

    Wrong on every count. The awful “stimulus” plan is useless pork and cronyism, with a lousy $400 that actually goes into people’s pockets. $400 will not help households save.

    Mr. Obama will also call for letting the Bush tax cuts on income, dividends and capital gains lapse after 2010 for individuals who make more than $250,000 a year. As a candidate, Mr. Obama called for immediately repealing those tax cuts; he decided instead to keep them in place through 2010, as scheduled, reflecting the widespread belief that raising taxes further depresses economic activity.

    It’s not a belief, it’s a fact. Taxes uncreate money, and uncreating money depresses economic activity. The economy will be in desperate need of activity in 2010 and 2011.

    As difficult as cutting the deficits will be, much of the reduction by the end of his term will simply reflect an end to spending from the two-year stimulus package and — assuming the economy recovers — higher tax revenues and lower expenditures for safety-net programs like unemployment compensation.

    This is true, but simply reflects how the only effective fiscal response is being driven by automatic stabilizers such as income taxation, and unemployment benefits. Obama’s “stimulus” is totally ineffective, and a transfer to the politically well connected.

    The impotence of Obama’s “stimulus” is clear when he talks about them:
    “Never before in our history has a tax cut taken effect faster or gone to so many hardworking Americans,” Obama said Saturday in his weekly radio and Internet address.

    The president said his signature two-year “Making Work Pay” tax break will affect 95 percent of working families, and, in six weeks’ time, a typical family will start taking home at least $65 more every month.
    $65/month is pathetic. I’m surprised he’s willing to say the number out loud. It should be more like $1000/mo. $1000/mo is stimulative. $65 is like leaving a 3 cent tip at a restaurant.

    And where does this level of fiscal incompetence lead? NYTimes let’s us know:When Consumers Cut Back: A Lesson From Japan

    “My husband is retiring in five years, and I’m very concerned,” says Ms. Masaki’s mother, Naoko, 52. She says it is no relief that her husband, a public servant, can expect a hefty retirement package; pension payments could fall, and she has two unmarried children to worry about.

    “I want him to find another job, and work as long as he’s able,” Mrs. Masaki says. “We must be ready to fend for ourselves.”

    The Japanese income tax rate is 40% on its highest earners, and they have a VAT of 5%. Given that the economy has been in deflation now for 25 years and counting, why does the Japanese government collect any tax at all? Mrs Masaki is correct — she has to be ready to fend for herself because the Government is actively depressing economic activity. Obama is doing exactly the same thing in the US. When he will announce a plan to raise taxes and decrease the deficit in the next few days, and the economy will take another big leg down. Economists will be baffled as to why this display of fiscal “responsibility” makes things worse.

    Sorry if this has already been posted on another thread.


    jcmccutcheon Reply:

    Robert Reich is calling him out on it. Maybe he’s reading this


    winterspeak Reply:

    Aye aye aye

    With friends like Robert Reich, who needs enemies? The only thing he got right in the article was the need for a larger deficit. Sadly, that puts him above most other commenters.


    jcmccutcheon Reply:

    That is progress. A baby step.

  3. Matt Franko says:

    Some observations on topic:
    Since the other side uses business like paradigm for Govt Finance, and looks at Public Debt as sort of “Acounts Payable”, why not look at pre-tax, deferred retirement type accounts as “Accounts Receivable”?
    These accounts currently contain, from the Feds. latest Z.1 Flow of Funds Report:
    Fed. Retirement Accounts: $1.2T
    State & Local Govt retirement Accounts: $2.7T
    Private Pensions (Def. Benefit + Def Contrib.): $5.2T
    IRAs: $4.75T
    Total: $13.85T (Ive probably left some out Annuity, etc)
    Assume 25% marginal tax bracket: $3.46T payable to Fed Govt or;
    Assume 30% marginal tax bracket: $4.16T payable to Fed Govt.
    These amounts have never been taxed, but have been earned. Are Defined (1040 Reportable). Under current law must be taken at age 70.5 or at death (either condition certain!). Hence a certain asset.
    When compared to current public debt, the lower (25% tax) amount “payable” net of the “receivables” would be about $2T, or 14% of 14T annual GDP. Point would be that if they are going to use private accounting principles, could they use both sides of the balance sheet please?
    Warren I hope this may help in DC.


  4. GeorgeR says:

    Hi Guys….my thoughts….The government’s policy options are created within the context that it views the budget, monetary, fiscal policy, etc. Soft Currency Economics creates a different context which yields other, greater policy options. Indeed, a leader, versed in Soft Currency Economics, could create a vision, “World Prosperity”, in which many could be enrolled!
    But a tipping point of understanding and respect for Soft Currency Economics would first have to be reached. SCE ideas have been around for quite some time without reaching that tipping point. How do we move from where we are today to that tipping point of understanding and respect, and beyond? Continuing to communicate the concepts of SCE as they have, would not seem to be an option. The world deserves the best ideas, NOW. What sort of communication and action program must be put into place? What must be done to achieve “World Prosperity”?


  5. warren mosler says:

    mostly goes without saying, mate


  6. Dave Begotka says:

    Warren, you dirty birdie, the guy with the cash has many critics!

    Mike JOIN THE CLUB! MOTOCYCO aftermarket motorcycle parts is sucking sand too! Seems tricking out your ride comes after eating?

    Use some of your spair time to research the stuff I am posting, I have forgotten more about building sh*t than most dudes will ever know and I am telling you 911 is a lie!


  7. manny valesco says:

    “hour’s worth of electricity”

    Warren is too high up in his ivory tower perhaps? He doesn’t connect with the slaves on the ground. He pays 4% tax rate – what are you paying Mike? All that wealth and he won’t share a dollar with you, how is that different than all the corrupt people in washington now? The cost of one superboat or one supercar and he could probably really help you out.

    The bible said beware false prophets. Phil Grande said even if a good warren goes to washington, once he gets there he will be turned to the darkside.


  8. manny valesco says:

    Mike I would recommend contacting – they also tried and succeeded in getting him pulled from the air (specifically certain firms bought advertising and asked for his show to be removed)

    but he fought and got back on, perhaps he can offer some suggestions or aid you. You can always do a webcast for cheap – the guys at wallstreetexaminer(dot)com may even pay you.


    Mike Norman Reply:


    Thanks, I’ll check it out.



    Barton Reply:

    Dear Mike..
    This is a disaster!
    Why don’t you try to get on Bloomberg? At the very least maybe you could become a contributing journalist/columnist. Or perhaps even better you get get on Bloomberg TV or Bloomberg radio. You would make a great counterweight to the people and points of view they have there.
    We need you in the media…you’re just now hitting your stride!
    Best Regards
    B Mauldin


    Mike Norman Reply:


    Discussions are underway with various media outlets at this time, however, I am not at liberty to disclose anything. If something comes of it, believe me, I will announce it with great fanfare on this blog!


  9. manny valesco says:

    Mike I would recommend contacting – they also tried and succeeded in getting him pulled from the air (specifically certain firms bought advertising and asked for his show to be removed)

    but he fought and got back on, perhaps he can offer some suggestions or aid you. You can always do a webcast for cheap – the guys at may even pay you.


  10. manny valesco says:

    “government has the power to tax”

    Do you remember the boston tea party?

    “even firms with market power know that consumers will find substitutes if prices are raised too much.”

    Just like the founding fathers, you have fled the US mainland Warren, and all her taxes, and you give me and others the incentive to do so too. How does a government continue when everyone leaves??


    warren mosler Reply:

    when the limits of taxation are reached the limits of the currency have been reached as a tool for that government.

    and it’s the govt that is trying to get people here by enticing them with lower tax rates. tax incentives are a way to use the tax structure to further (implied) public purpose.


  11. Mike Norman says:

    Matt, Scott, thanks for the kind words.


  12. Mike Norman says:



    Scott Fullwiler Reply:

    Hi Mike

    Very sorry to hear that. Your show was one of the few media outlets where the flex fx paradigm could get a fair hearing. I’d even been playing it in class during the breaks lately.


    jcmccutcheon Reply:

    Very disappointing mike. What is next?


  13. anon says:

    “Unlike private firms, the federal government maintains no stock of cash-on-hand and no credit balance at the bank.”

    I think the difference between government and private firms as far as this is concerned is one of degree, not of substance. Private firms also have lines of credit with their banks. The government has the equivalent of a line of credit with its central bank. Private firms can cover daylight overdrafts with operating receipts or short term borrowing. Governments do the same. Private firms are subject to constraints on this operational potential, such as the size of the line of credit. Governments are subject to the same, at least in terms of the requirement to cover the overdraft. Credit creates money in both cases, and money then extinguishes credit when the daylight overdraft is covered in both cases. I see no huge operational difference in the causation from government credit/spending to money versus private credit/spending to money.

    Of course, taxation is a big operational difference in the sense that it is in theory less of a constraint, but that’s separate.

    Also, I see nothing unique in taxes as an operational debit to bank accounts. So is revenue to the firm – the buyer’s bank account is debited.

    The main difference is in the use of the central bank rather than the private banking system. But this is still only an operational detail. There is no uniqueness in the asset-liability relationship of the various credit or deposit mechanics, and the retirement of currency is just a special case of using a bank reserve account.

    I think you’re using some banking operational characteristics that are universal to banking, public and private, but identifying them as unique in the case of government.



    Congress-‘the government’ in this case- makes the rules between its creations it calls the Treasury and the Fed. Congress has the ability to cause it’s agents to clear any size check it wishes to write.

    The non govt. sectors are revenue constrained, the government, which runs the spread sheet called the $US, is not.


    anon Reply:

    I can see the government not being revenue constrained in the sense that it has the operational feasibility of creating an unlimited overdraft at the Fed, with a corresponding unlimited capacity for bank reserve expansion.

    But I thought one of your points was that the government was policy constrained in the sense that would cover such a potential operational overdraft either by taxes or borrowing?

    (My interpretation of the reason for such overdraft policy is that it is necessary in order for the Fed to maintain independence for the decision on how much debt to monetize and what sort of effect it has on monetary policy. Otherwise, the government could implement indiscriminate monetization via overdraft.)

    And isn’t the fed itself also subject to such policy constraints as well – in the sense that it has the operational feasibility of monetizing an unlimited amount of government debt by expanding bank reserves, but it is policy constrained in that it won’t engage in such unlimited expansion if it has the potential to interfere with monetary policy?

    Also, a point that I think you’ve made but not many do is that the Fed does not have the discretionary means of deciding how much to monetize via currency – because that is determined by public demand for currency.

    So I guess I’m saying that the various policy constraints do make the situation loosely comparable to a private sector operator with a credit facility and credit limit. The fact that a private sector operator doesn’t have an unlimited capacity to create money via borrowing simply reflects the common sense fact that he is subject to a credit limit. In a similar way, the government and the fed are subject to soft limits in the sense of the overdraft rule, the constraint of monetary policy consistency, and the demand constraint wrt monetization via currency issuance.


    winterspeak Reply:

    All of these constraints are policy constraints, and can be changed at will. This does not fit any definition of “constraint” that I know.

    For example, FDIC was “constrained” to bank deposits, and only until $100K. Both out the window.

    The Fed was “constrained” to banks. That’s out the window.

    GM was “constrained” to the private sector. No longer. And this is Chrysler’s second time as an extension of the Government.

    If you want to predict how the Government will act, then you are better off thinking about their intellectual constraints–which are very real–and not current policy “constraints” which are continually changed at a stroke of a pen, and sometimes they don’t even bother with the pen.

    Your point about public demand for currency is a good one. There are real constraints out there, just not the “policy” ones most people think of. But even this demand preference simply determines how inflationary the Government action will be — it’s drives the consequence of the policy but does not limit the scope of action.

    anon Reply:

    That’s a silly argument. The fact that a policy limit can be changed means there is no policy and there is no judgement? Then why doesn’t the Fed just monetize everything and allow unlimited government overdrafts?

    winterspeak Reply:

    There is a policy and judgement, it just isn’t a “constraint” as it doesn’t preclude any action.

    The Fed could monetize everything and allow unlimited Government overdrafts. If the Government ran too large an overdraft, you would get inflation. If the Government ran too small overdrafts, you would get deflation.

    This would make the connection between fiscal policy, deficits, saving, and inflation very clear to everyone.

    anon Reply:

    “it just isn’t a “constraint” as it doesn’t preclude any action.”

    You haven’t done your mandatory readings:

    “Operationally, government spending consists of crediting a member’s bank account at the government’s central bank, or paying with actual cash. Therefore, unlike currency users, and counter to popular conception, the issuer of a currency is not revenue-constrained when it spends. The only constraints are self-imposed (these include no overdraft provisions, debt ceiling limitations, etc.).”

  14. Mike Norman says:

    Just found out today that my radio show has been cancelled, effective next Friday. BizRadio saying it’s due to financial difficulties.


    Paul Reply:


    Very sorry to hear that sad news.



    vipul Reply:

    I’m very sorry to hear that.




    Matt Franko Reply:

    1. You get the Pulitzer from me for your work wrt Speculation over the last year or so.
    2. Please keep us informed about your future media endeavors.
    3. This is a big loss for me.




    Not good!

    How much could your show possibly cost? An hours worth of electicity???


    Mike Norman Reply:

    Quite a bit more, actually. Why? Are you interested in sponsoring?


    Mike Norman Reply:


    Your commment was almost kind of insulting. You’ve got groups like Peterson and others spending millions of dollars to push their propaganda and you think spending an “hour’s worth of electricity” is all we need to do to get our message out?

    BizRadio was a small organization, but they supported my show for four years even though it was not really a good fit for their business and believe me, it cost a lot more than an hour’s worth of electricity.

    We can all sit around here on this site and discuss all the high-minded concepts we want, but at the end of the day it’s not worth a hill of beans unless the resources are there to disseminate these ideas more broadly.



    warren mosler Reply:

    ok, sorry. thought it was one of those penny wise pound foolish decisions organizations make from time to time.

    can you say what the marginal cost per hour of your show is? I can try to find a sponsor?

  15. warren mosler says:

    “Sounds great! However you sound like you still believe that we have a constitution or honest people running the show.”




  16. Dave Begotka says:

    Sounds great! However you sound like you still believe that we have a constitution or honest people running the show.

    Respectfully speaking, if you research what is actually going on in Washington this is totally delusional. With out writing a book on this you just need to look up:

    Conspiracy of silence.

    Richard Gage.

    Iraq for sale.

    Cynthia McKinney.

    North American Union.

    We are “F”ed beyond belief and if we do not wake up soon it will be too late if it is not already!

    BTW I came across this last night remember Illinois Governor Rod Blagojevich rail roaded from office? After you look up Conspiracy of Silence Check out this article, I knew that whole story did not add up, now it does.


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