Tag Archives: Galbraith

new pecora open letter

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The ‘finanical crisis’ is not an economic concern per se. Particularly as the financial sector contributes no value added to the real economy and for the most part serves no public purpose.

However, when aggregate demand falls short of politcal goals, as evidenced by the unemployment rate, capacity utilization, and other measures, government has the immediate option of a fiscal adjustment of any size necessary to meet those political output and employment goals.

What caused the sudden drop in aggregate demand last July is therefore less important than what it is that continues to delay an appropriate fiscal response to immediately restore output and employment.

The answer is that an unwarrented fear of Federal deficits per se has taken the readily available option of using a fiscal adjustment to fully restore employment and output completely off the table.

As our politcal leaders, opinion leaders, and leading economists struggle to determine how the economy can be ‘saved’ with the least possible amount of Federal deficit spending, and none challenge the President’s statement that the nation has ‘run out of money,’ the unemployment rate continues to rise and millions of Americans needlessly depreciate in the unemployment lines.

It’s really quite simple. Taxation functions to reduce aggregate demand. It does not function to give the Federal governent ‘something to spend.’ In fact, if you pay your taxes at the Fed with actual cash they take your money, give you a receipt, and then throw the bills in a shredder. If you pay by check they change the number in your bank account to a lower number. The government doesn’t actually get anything to spend.

When the Federal government spends, numbers in bank accounts get changed by government to higher numbers from lower numbers. As Chairman Bernanke told Congress in May, when asked where the funds come from that he’s giving the banks, the Fed simply changes numbers in the member bank’s account at the Fed.

Federal spending is obviously not operationally constrained by revenues. There is no such thing as the Federal government ‘running out of money.’ The only constraints on nominal spending are self imposed.

So what does the statement ‘higher deficits today mean higher taxes later’ actually state? The reason taxes would be higher ‘later’ would be if aggregate demand is deemed too high at the time- unemployment too low and capicity utilization too high- and a tax hike proposed to cool down an overheating economy.

So does that statement not mean that higher deficits today will cause aggregate demand to increase, unemployment come down, and capacity utilization go up, to the point a tax increase might be called for?

And how does the Federal government pay off it’s debt? When Treasury securities mature the Fed debits the holder’s security account at the Fed and credits his reserve account at the Fed. End of story.

The risks of deficit spending are inflation, not insolvency or even higher interest rates. Yet the public debate is paralyzed by fears of Federal insolvency, and ratings agencies only add to that fear with threats of downgrades.

This misinformation IS the problem, and it isn’t rocket science. There will always be something that causes a surprise drop in aggregate demand. And, in fact I have made numerous recommendations for banking and the financial sector over the last several years that would have prevented most of the subsequent problems, and drastically scaled back the entire financial sector to limit it to areas of direct public purpose.

The greater problem, however, is the inability of our political leaders to respond appropriately when aggregate demand does fall, for any reason.

Therefore I urge you to redirect this project to instead promote an understanding of how a currency actually functions, and the operational reality of monetary operations and reserve accounting.

Determining ‘what went wrong’ will do nothing to enlighten policy makers as to their available fiscal options that can immediately restore the American economy to desired levels of employment and output. In fact, the effort will only delay a favorable outcome as energies get diverted from the more urgent issue of restoring demand.

FYI – the Roosevelt Institute is launching a major new initiative around the new Pecora Commission – we have been posting significant commentary on www.newdeal20.org (thank you for the great overview launch piece Bill), we have a partnership with Huffington and have created a Big News page around it, have investigative reporters in the works to track the commission, are considering a shadow commission, etc. As part of that, we have written an open letter to the commission that we will launch publicly the minute it gets announced – the open letter pushes for the three criteria that Bill discusses. We have several prominent economists and historians signing it (Stiglitz, Galbraith, Robert Reich, Bill, etc). The goal is to have 50-100 major econ/historians and then push it publicly once the commission members are formally announced (possibly in a day or two according to my sources). You can see the open letter here www.whatcausedthecrisis.com – if you are willing to sign the open letter, please let me know – please send me your name and affiliation so I can list you appropriately. We are also planning a media push around it so if you can speak on it or want to blog, please let me know

Thank you –

And if you can sign the letter, please let me know soon – I think this is happening in a day or two.


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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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