Thursday, September 29, 2011

Robert Reich — The Moral Question

...All this [cutting vital spending] would be bad enough if the economy were functioning normally. For these cuts to happen now is morally indefensible.

Yet Republicans won’t consider increasing taxes on the rich to pay for what’s needed – even though the wealthiest members of our society are richer than ever, taking home a bigger slice of total income and wealth than in seventy-five years, and paying the lowest tax rates in three decades.

The President’s modest proposals to raise taxes on the rich – limiting their tax deductions, ending the Bush tax cut for incomes over $250,000, and making sure the rich pay at the same rate as average Americans – don’t come close to paying for what American families need....

What Professor Reich does not mention is that the supposed need to balance the budget either in the short term or the long term is itself a moral argument and not economic one. According to MMT, there is no good economic reason for balancing the budget or hitting a debt target over any period, in relation to any other figure like GDP, or in absolute terms.

A government that is sovereign in its own non-convertible floating rate currency is constrained only by inflation, and monetary inflation does not occur in the presence of an output gap and less than full employment (although relative price differences can occur, e.g., from supply pressure).

The entire debate over the deficit and debt needs to be exposed for what it is — magical thinking and moralizing rather than sound economic reasoning based on theory and data. Deficit doves are simply aiding and abetting deficit hawks in their errors.

Taxes do not fund spending, and neither does borrowing. A government that is is the monopoly provider of a non-convertible floating rate currency is not financially constrained. The only constraint is the availability of real resources, and issuing currency in excess of the economy's ability to expand to meet ensuing effective demand will be inflationary. That is never an issue in a deep recession like this one.

In such times as these, government has a moral obligation to provide the amount of currency needed to increase effective demand in the direction of closing the output gap and restoring full employment.

No comments: