Ken O’Brien
At the outset I want to apologize to those readersof The O’Zone who feel I am talking down to them.However, the reality is that there is a mountain ofmisinformation and lack of understanding about economics and economic policy.
It is a widely accepted truism that one must livewithin their means.
Households must budget based upon their income andtheir expenses.
Similarly, virtually all states are required bytheir constitutions to have a balanced budget.
However, the effort to take these as God-given truthsis misguided.
It results from the fact that households,corporations and states (to a significantly lesser degree) operate in a realm called “microeconomics”.
Within that realm, there is only one policydimension within which to operate – income and expenses.
In governmental terms, the decisions related to thisare termed “fiscal policy”.
For a state government fiscal policy is limited towhat you decide to do about taxes, whether those collected or exemptions thatare provided. Beyond those options, when expenses exceed income, the onlyoption is to borrow.
However,that is not true of a sovereign national government.
A sovereign national government operates in a realmtermed macro-economics.
As a result a sovereign national government has anadditional set of policy options.
Those options relate to the fact that a sovereignnational government has control over the supply of its currency – the moneysupply.
The resulting option is called monetary policy – a set of policyoptions that are not available to households, corporations or states.
It is not available to them because none of them canprint money. Only the Federal Government can do that.
And, in the United States, that authority isdelegated to the Federal Reserve Bank.
The Federal Reserve is independent of the politicalsystem except to the extent that its Chairman is appointed by the Presidentsubject to Congressional approval.
To most Americans who even are aware of this set offacts, their primary awareness is about the issue of how much money the Fed isprinting – the money supply.
To the vast majority of Americans if the Fed isprinting too much money, then they are setting the stage for inflation. Theyhave been taught to believe that the more money that’s out there, the less itis worth.
However, that is only half of the equation.
If I have almost all of the world’s gold, but I amlike Goldfinger in the James Bond movie, I want gold solely for its own sake. Iwill never spend it, I will never trade it. I will sit in my counting room,like a psychotic Midas, and admire my precious trove.
In the meantime, the remaining gold stock will betraded among its holders numerous times. Every time there is such a transactiongoods will be bought and sold. People will profit, Taxes will be paid. Therewill be a demand for more goods from those who now hold the gold and commercewill expand to seek that available gold so that its acquisition will allow theholder to purchase other goods they desire. And so on, and so on, and so on.
A similar phenomenon occurs in relation to monetarypolicy.
The other side of the equation in relation to money supply is called the velocity of money.
This is a very real economic fact. It is defined asthe rate at which money circulates, changes hands, or turns over in an economyin a given period. Higher velocity means the same quantity of money is used fora greater number of transactions and is related to the demand for money. It ismeasured as the ratio of GNP to the given stock of money.
Howdoes this relate to the fallacious economic policies that have been perpetuatedby conservatives since the 1980’s?
The economic theory perpetuated by conservatives istermed supply side economics.
The belief is that the reduction in taxes willresult in increased investment in the economy
The converse point of view, espoused by economistswho subscribe to the Keynesian school of economics is that increased demandwill encourage investment in order to generate income and thus profits. Inorder to achieve increased demand the government should transfer tax revenue toelements of society who will spend it and thus generate demand and encourageinvestment.
Supply side economics gained currency during theRepublican primaries of 1979-80 when espoused by Ronald Reagan. At the time hisprincipal opponent, George H.W. Bush coined the term “voodoo economics” tocharacterize the theory.
If supply side economics is a valid theory, then anincrease in the money supply retained by those paying less in taxes shouldresult in increased investment and production and increased societal wealth.
Here is a graph of the increase in the money supplysince 1930:
Here is a graph of the velocity of money over thesame period:
And here is what has happened to the disparitybetween rich and poor over the period since World War II.
In simplest terms what we have witnessed with theascendancy of the conservative theory of supply side economics, is a hoarding of wealth tothe detriment of most elements of society.
This is a direct result of a decline in demandbecause of the shrinking of disposable income for the bulk of citizens to the benefitof the wealthiest elements of society.
It is not an issue of makers and takers.
It is a matter of needers and bleeders.
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