Response to Dem debate

I arrived in Connecticut to begin a ‘listening tour’ before making the decision to run in the Democratic primary for United States Senate. Tonight I listened carefully to the Democratic candidates as they put forth their agendas for restoring the US economy and both fell far short of the mark. Neither had a credible economic agenda, and what they did propose- tax increases- would only make matters worse.

Making sure that people working for a living are paid enough to be able to buy the goods and services they produce has long been a core economic value of the Democratic party. And what drives the lion’s share of business, both large and small, is the competition to attract the consumer’s dollars by producing the goods and services working people want. Unfortunately, the current situation is clearly one where people working for a living are not taking home enough money to buy what business is desperately trying to sell. Consequently, business has been contracting and laying people off, which makes matters even worse.

The Republican response has traditionally been to give tax cuts and other monetary incentives to business rather than to the people doing the work. That does not result in new hires for the businesses, as business only hire when orders and sales pick up. Instead, it results in higher profits with the hope that those profiting will hire more domestic help and more gardeners, and produce a few jobs that way, which is known as trickle-down economics.

So while, in addition to tax hikes, both Democratic candidates for US Senate proposed tax relief, it was for small businesses- the traditional Republican approach, and indeed, the approach of the Obama administration. Note that last week’s jobs bill featured a $5,000 payroll tax reduction for businesses, and not for employees. In contrast, I have long been proposing a full ‘payroll tax holiday’ where a couple earning a combined $100,000 per year would see their take home pay rise by over $650 per month. That would be enough to fix the economy as people could then make their mortgage payments and car payments, and even do a little shopping. This is the Democratic approach which also gives businesses what they really need- people with enough money to spend to buy their products. It’s people with money to spend that creates the backlog of orders which then quickly results in the millions of new jobs we need to restore our economy to full employment levels and prosperity. The payroll tax holiday also reduces costs for business. In a competitive environment this translates into a combination of both lower prices and better cash flow for business that can be used for the new investment the recession has long delayed.

The reason the Democrats don’t propose this kind of tax cut is because they can’t answer the question of ‘how are you to replace the lost revenues.’ And, in fact the Obama administration has currently put Medicare and social security cuts on the table to ‘pay for’ what they’ve already spent. What both Democratic candidates are displaying is a failure to understand the difference between the function of Federal taxation and State and local government taxation. I grew up on the money desk at Banker’s Trust on Wall St. in the 1970’s, ran my own investment funds and securities dealer for 15 years, currently own a small Florida bank, and visit the Fed (Federal Reserve Bank) regularly to discuss monetary policy and monetary operations. I know how the payment system works, as does the Fed’s operations staff.

What we all know is that when Federal taxes are paid, all the Fed does is change the numbers down in our bank accounts. For example, if you have $5,000 in your bank account, and you pay a Federal tax of $1,000, all the Fed does is change the 5 on your bank statement to a 4, so you then have only $4,000 in your account. With online banking you can watch exactly that happen on your computer screen. The Fed doesn’t ‘get’ anything. It just changes the numbers in your account. And when the Federal government spends, it just changes numbers up in our bank accounts. It doesn’t ‘use up’ anything. In fact, the Federal government (unlike State and local governments and the rest of us who do need money in our accounts to be able to spend) never has nor doesn’t have dollars. Think if it as the score keeper for the dollar. When a touchdown is scored and 6 points go up on the scoreboard, does anyone ask where he stadium got those 6 points? Can the stadium run out of points to post on the score board? Of course not!

So why then does the Federal government tax, when it doesn’t get actual revenue (it just changes numbers down in our accounts) and it does not use up anything when it spends (it just changes numbers up in our accounts)? The fact is, taxes function to regulate the economy by controlling our take home pay. If taxes are too low, the result is excessive spending and the strong upward pressure on prices we call inflation. If we are over taxed, as we are today, and the Federal government is taking too much out of our paychecks, the result is a drop off in sales by businesses, and rising unemployment. Federal taxes are like the thermostat. If the economy is too hot (something I have never seen in my 37 years in the financial markets), they can be raised to cool it down. And when the economy goes ice cold, like it is now, my full payroll tax holiday is in order. The Federal government’s job is to keep the economy just right by keeping taxes low enough so people working for a living can afford to buy the goods and services they are capable of producing.

That’s what fiscal responsibility is all about. But until our politicians understand the difference between State finances and Federal finances, the will continue to fail to make sure our take home pay is high enough to sustain the high levels of output and employment that are the hallmarks of American prosperity.

Let me conclude with a word about China. It was stated in the Democratic debates and not disputed that the US was borrowing $4 billion from China to pay for the war in Afghanistan. However, close examination of monetary operations shows this is not at all as it seems. China has what amounts to a checking account at the Federal Reserve Bank. China gets its dollars by selling goods and services to the US, and those dollars are paid into that checking account at the Fed. And US Treasury securities are nothing more than fancy names for savings accounts at the Fed. So when China buys US Treasury securities, all the Fed does is shift China’s dollars from its checking account at the Fed to a savings account at the Fed. And when those Treasury securities become due and payable, all the Fed does is shift the dollars in the savings accounts (plus interest) back to China’s checking account at the Fed. That’s it. Debt paid. And it happens exactly this way every week as billions of Treasury securities are purchased and mature. And this process has no connection to Federal government spending for the war or anything else. Spending is always nothing more than the Fed changing numbers up in people’s bank accounts, no matter what China might be doing with their Fed accounts. That’s why the ‘national debt,’ which is nothing more than dollars in savings accounts at the Fed, has never created a financial problem, and never will, either for us or for our children. Yet the administration, the media, and the two Democratic candidates for US Senate from Connecticut have the story completely wrong as well, which results in proposals which are bad for Connecticut and bad for America.

America is grossly overtaxed and needs a full payroll tax holiday NOW to stop the bleeding and restore the American dream. The only thing standing in the way of economic prosperity is a lack of understanding of our monetary system.

Warren Mosler

This entry was posted in China, Deficit, Government Spending, Inflation, Politics, Treasury and tagged . Bookmark the permalink.

95 Responses to Response to Dem debate

  1. NYSTOCKGURU says:

    I read the New Haven newspapers and I saw your name listed as Independent for the Governor of Connecticut. Nice try!



    Independent Party candidate for US Senate.

    Got about 1%


    Ankur Patel Reply:

    @WARREN MOSLER, I am a high school student trying to wrap my head around this. This is what i understand:
    When the government sells bonds, it takes money out of the private sector.
    When the government buys bonds from the private sector, it is injecting money into the private sector.
    I understand what a reserve requirement is by a central bank, and the discount and support rates.
    I understand the basics behind Keynesianism- that demand determines supply, and that that govt spending and tax cuts can bring up demand in economic downturns.
    I have tried to read New Economic Perspectives, and i understand what a floating and sovereign currency is, but i don’t know what they mean by non-convertible.
    We are no longer on the gold standard.
    Here are my questions/concerns:
    Why are we not operationally constrained by revenue? If China or people in our country buy bonds so the government can get money, then wouldn’t there be a point where we would have to repay the principals on the bonds (with interest)? Why is it better to have short term bonds instead of long-term ones? Doesn’t growing the national debt devalue the dollar (and i understand that having a very strong or very weak currency can be bad, but is there reason to be worried because a weaker dollar will cause more expensive imports?) I have often heard people like Ron Paul say that when the Fed prints money, we raise the price of imported oil- is it true? I read that MMT challenges the traditional view on imports and exports by favoring imports and claiming that exports are bad-why? I have been leaning towards Keynesian and Post-Keynesian ideas because i have grown frustrated with the current austerity rhetoric, and MMT seems appealing, but i can’t grasp the concepts. Could you or someone else knowledgeable in MMT help me?


    Ankur Patel Reply:

    @Ankur Patel, Also, im being critical, im just confused about what you, L.Randall Wray, and others have been proposing

    Ankur Patel Reply:

    @Ankur Patel, *not being critical

    John O'Connell Reply:

    @Ankur Patel,

    Ankur, read Warren’s “mandatory readings”. Most of the answers to your questions are there.

  2. NYSTOCKGURU says:

    So what happened with the Conn. election?




    Got about 1% as the Independent Party Candidate


    strawberry picker Reply:

    Failure is good for you Warren, it is a learning experience. How many bad loans do you have at your palm beach bank?

    Mother Jones just released an article how it is beneficial for the banksters and corporations to buy State Judges to corrupt our judicial process – and to add to that here is an article talking about how FDIC lawsuits can be influenced by state law.

    many industry professionals say this only represents the tip of the iceberg of possible damage claims from Federal Deposit Insurance Corp. against directors and officers of failed banks.

    “Many directors still don’t understand the extent of their liability or that the FDIC can and will pursue them in the event of a bank failure,” says Jonathan Hullick, a former senior policy specialist for the FDIC.

    But as the receiver for failed banks and thrifts, the FDIC has three years to file tort claims and six years for breach-of-contract claims unless the failed institution’s home state has a longer statute of limitations.

    So if you bankster dude’s can just deflect attention for 3 years you are off da hook? But Roman Polanski has hillary clinton chasing him 30 years later because he got some sex? Are you FREAKING KIDDING ME?!?!?



    I think we still have the highest capital ratio around at about 14%.

    The problem is the bad loans ate up the last couple of year’s earnings

    I’ve been a personal contributor to the recent deficits with no earnings which means paying a lot less in taxes.

    ESM Reply:

    “So if you bankster dude’s can just deflect attention for 3 years you are off da hook? But Roman Polanski has hillary clinton chasing him 30 years later because he got some sex? Are you FREAKING KIDDING ME?!?!?”


    You appear to misunderstand the logic behind statutes of limitation. They have not been promulgated according to some weird system of justice where the severity of a crime fades with time, or in which a criminal is rewarded for his skill or luck in evading prosecution or capture. The primary reason for such statutes is that the evidence degrades with time, in particular the evidence that a defendant might be able to muster in his defense. Documents get lost, memories fade, eyewitnesses die, etc. A secondary reason is that even the threat or risk of prosecution can be damaging, especially to somebody engaged in business. A potential defendant essentially has a right to demand that the authorities either move ahead with a case or clear the record. The same kind of logic drives the requirement that charges be brought in a timely manner against somebody who has been arrested.

    In the case of Roman Polanski, the trial was over. He simply became a fugitive when he got wind of the fact that the judge would sentence him to jail time. There is obviously no statute of limitation which would or should apply.


    With the FDIC playing wolf looking for weakest sheep in the flock… What chance do you think Citigroup has?

    The SPIC hasn’t even blinked.

    In my opinion, the systemic risks associated with Citigroup now trading under $5 / share and Trevis analysts valuing C at $4.17 / share are grave if earnings don’t materialize.

    The breakup value of this company is higher than its current market-cap anyway right?

  3. Phillip says:

    It would probably help the public’s perception of the Federal Reserve Banks as being privately owned if they didn’t pay dividends to member banks.

    From an email to me:

    Also, here’s the statement from our annual report on the capital stock requirement:

    Capital Paid-in

    The Federal Reserve Act requires that each member bank subscribe to the capital stock of the Reserve Bank in
    an amount equal to 6 percent of the capital and surplus of the member bank. These shares are nonvoting with a
    par value of $100 and may not be transferred or hypothecated. As a member bank’s capital and surplus changes,
    its holdings of Reserve Bank stock must be adjusted. Currently, only one-half of the subscription is paid-in and
    the remainder is subject to call. A member bank is liable for Reserve Bank liabilities up to twice the par value
    of stock subscribed by it.

    By law, each Reserve Bank is required to pay each member bank an annual dividend of 6 percent on the paid-in
    capital stock. This cumulative dividend is paid semiannually. To reflect the Federal Reserve Act requirement
    that annual dividends be deducted from net earnings, dividends are presented as a distribution of comprehensive
    income in the Statements of Income and Comprehensive Income.

    I hope this is useful to you.


    Tim DeWolf
    Manager, Research Library
    Federal Reserve Bank of San Francisco


  4. zanon says:

    I salute you for taking effort to 1) actually try to add real numbers, and 2) post link correctly (something with evades Tom Hickey).

    Unfortunately, you would be better off in this instance dropping your crude calculations and simple doing search on this topic which is very old and very well researched.

    Tom Hickey paper is garbage but has the data. Go look at that.
    Or look at either of these. (US only)

    Measuring Labor’s Share of Income by Paul Gomme and Peter Rupert (methodology)


    Sergei Reply:

    the fact that you try to substitute terms does not change anything.

    Each year 100% GDP belongs to the people of the country. So I really appreciate your approach and would even claim that 100% of GDP is income of its people. Good luck!


  5. Sergei says:

    Zanon, labor share of income is wages. It has been consistently trending down from mid 50s in the 70s to mid 40s now.

    I do not know where you got your 70% number from. It is not true


    zanon Reply:


    Please read my previous comments. Then please look up word “benefits”. Then please learn to add. Compensation is flat. More of it now comes in form of benefits than wages. I have been very clear about difference between “compensation”, “wage”, and “benefit”.

    And you can see my 70% from the very link that Tom Hickey put up LOL! If you can get the link to work, which is exactly what I expect from government union lover. And, the irony is delicious, labor in US gets MORE % of income than it does in the blue-eyed Nordic paradises the Tom Hickeys of this world keep promising us are just one Government Program away. This is very well documented phenomenon just on search away if you use the wonderful Google. Although it is interesting it never gets any play in New York Times.

    I consider my case closed on this topic.


    Sergei Reply:

    Zanon, it is definitely not closed. You should go and check the data before you start teaching how to add. You can start here

    then go to GDP numbers and compare to compensation of employees. If you look at wages and salary then you will arrive at 43%. If you look at total compensation you will get 54%.


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