Friday, 12 February 2016

Economics: "It’s Not About Scarcity. It's About Efficiency."

From Ellis Winningham's upcoming book on heterodox economics
Economics: It’s Not About Scarcity. It's About Efficiency. 

“Money” cannot be scarce for any sovereign currency issuing government. The question is never about money, ever. Mainstream economists, politicians, the media and ‘free market” advocates enjoy making economics a question of scarcity. A scarce supply of money right along with scarce resources. When it comes to money, we must first understand what we're talking about. When people in the US ask us if we have enough money to buy an apple, they're asking about US dollars. US dollars are a currency. 

A currency can be scarce for those who use it. You, me, Walmart, Wall Street, the individual fifty states are all users of the US government's currency and these private entities can run out of it. A user of currency can also be another nation. For instance, China is a user of US currency. China cannot issue US dollars, so if it wishes to have them, it must find a way to earn them. Also, the EMU nations are users of currency. Nations such as Spain, Italy and Greece are users of currency, because they do not issue the Euro. The European Central Bank issues the Euro for member nations to use. So, like Illinois and Ohio in the US, the EMU nations must tax or borrow. They must have an income to spend. Without a central fiscal authority (a federal government), the EMU nations can face very real debts and involuntary insolvency. 

However, currency is never a problem for a sovereign government like the US, UK, Japan, Turkey, Canada, Australia. These governments issue their own currency which are non-convertible numbers that float on an exchange. “Non-convertible” means that these governments will not give you anything in exchange for their currencies but their own currencies. “Float on an exchange” means that the value of these government’s currencies are determined by the supply of and demand for currency (market forces) on an exchange. They are not pegged to another currency or gold, which is called a fixed exchange regime. They are fiat, issued at will by these governments and their supply of their own currencies is always equal to infinity. 

I've said it before and will say it millions of times again until every man, woman and child in the US, UK, Australia, Canada, et al., understands this one, simple, basic reality: Currency is just a bunch of numbers. It’s not paper. Even cash is just a reference to a number. Those numbers are defined by a chosen “unit of account”. The national government which issues a particular currency chooses the unit of account. In the US, that unit of account is the US Dollar “$”. In the UK, it is the Pound “£”. You do not run out of numbers, ever. Think for a moment. Does an engineer stop construction of a bridge half-way because he’s run out of meters? No. Does he borrow meters from another engineering firm to enable him to finish the bridge? No. And the US government doesn't tax or borrow its own currency so that it can have enough of its own currency to spend either. 

Understand the simple fact that there's a number then a label to define that number:
10 meters10 feet100 yards1,000 miles20 light years
The same thing applies to currency:
200 US dollars = $200200 British pounds = £200
So, there is nothing special about these numbers that we call currency, except for the fact that these numbers can be used to buy goods and services.
200 US dollars worth of apples.500 British pounds worth of gold. 

“Worth of” apples or gold doesn’t limit the currency, rather, it's the thing that the currency can buy that’s limited. There are only so many apples. There's only so much gold. But for a sovereign currency issuing government, there's no such thing as “only so much money” and for a mathematician, there's no such thing as “only so many numbers”. Any restraint placed by Congress on the US government issuing currency is a voluntary restraint (“We will only allow” $2 trillion to be spent). 

Dollars, Pounds, Pesos; they’re all just numbers. The government chooses a unit of account to define those numbers and by doing so, creates a national currency. It creates “money”. Now if, say, the US Treasury opened Microsoft Word and typed “$200”, that act doesn't create currency. It is merely a reference to $200. But, when the US Treasury enters the banking system, goes into a bank account and types the number 200, that number becomes very real currency. It becomes US dollars. When the UK government goes into the banking system and types the number 200, it doesn't become $200. It becomes £200, because the unit of account in the UK is the pound. 

Let’s assume that I am in London England and I have a watch that I’m selling. A gentleman asks me, “How much for the watch?” I say, “two hundred” but nothing else. Now then, it's likely that since we're in London England, he will assume that I meant British pounds. But, since I didn't state the unit of account, meaning that since I didn't define the number two hundred, I could have easily meant two hundred US dollars, two hundred Australian dollars, or even two hundred Yen. Imagine his reaction if I said, “Two hundred Yen.” His eyebrows would scrunch down and he'd cast a puzzled look at me. The currency of the UK is pounds and here I’m asking for payment in Japanese currency. But you understand that since the unit of account has been defined, the number “200” is now clarified.
The watch costs two hundred.
Two hundred what?
Two hundred Japanese Yen. 

The reason why each nation’s currency is different from another's is because each nation’s government chooses what they will call their numbers. This currency is not a commodity dug out of the ground. Think for a moment: Canadian dollars are a rare commodity that is found buried in the Earth only within the boundaries of Canada? Really? At the formation of the Earth, how did this commodity know to place itself only where one day Canada would draw its borders? That’s a smart commodity. The same goes for the US dollar. At one time Alaska was part of Russia. So, I guess rubles are the only thing buried within Alaska’s borders. Or did those rubles magically transform into US dollars when the US purchased Alaska? Does the USGS know where we can mine for US dollars?

On the other hand, some people claim that US dollars come from the private sector or the rich. If so, where did they get them? The US Constitution clearly states in Article 1 Section 8 that only the US government is allowed to issue US dollars and that there is to be no counterfeiting. So why aren't the rich in jail? Why would the US government want to borrow or tax counterfeit US dollars so it could spend counterfeit US dollars?
Do you see how silly all of this talk about “there’s only so much money” really is? And by the way, this silliness extends to the US national debt.
“The US national debt is eighteen trillion.”
“Is that eighteen trillion Canadian dollars?”
“No. Eighteen trillion US dollars.”
“Ah, ok. I was going to say that if it were Canadian dollars, it would be an actual debt.”
Just let that reality sit there and burn in real good. The day that the US national debt is denominated in Canadian dollars and not in US dollars that the US government issues at will, then you can tell me all about how the US national debt is a real debt. Until then, the US national debt is all US dollars ever issued by the US government, from the founding of the nation until the present day, that it has not taxed away. It’s the national savings. 

Currency is just a bunch of numbers and because it is a bunch of numbers, these governments simply cannot run out of money. In fact, I will submit to you that no government that issues currency can run out of numbers. Even if that government pegs its currency to gold or to another currency, it cannot run out of its ability to issue its own numbers at will. Yes, doing so may violate a fixed exchange regime and cause problems. But, if the government vacates the fixed exchange, floating its currency and no longer agrees to convert its currency to something that it cannot issue, then that problem is eliminated and the government is free to do as it pleases. Further, any government can choose to destroy its economy if it wants to. Therefore, any government could continue to issue numbers even though it has far surpassed the real ability of its economy to produce. Why? Because as long as numbers are infinite, governments that issue their own free-floating, non-convertible currency can spend until they collapse the currency. The very existence of hyperinflation underscores the fact. It proves beyond all doubt that currency is just a bunch of numbers defined by the national government and those numbers can be spent far beyond any real output capacity. So, again, the governments of the US, UK, Japan, Australia, Canada cannot run out of “money”, ever. 

What they can run out of are resources. Labor, raw materials, water, food, land, etc., are all finite. The ability for the government’s currency to result in output is what’s at issue here, not money. What happens when an infinite currency runs up against finite resources? The possibility of demand-pull inflation. Demand-pull inflation occurs when spending is so great that it exceeds the real ability - not an imagined or assumed ability, but the very real ability - of its economy to produce goods and services. When government deficit spending has created a situation of total full employment where absolutely no more labor is available to hire and increase output, if it then continued to increase spending, the price level will begin to rise and inflation will occur. Using its taxing power, the government can then raise taxes, reducing spending power and stop the inflationary pressure. However, if it reduces the deficit too far by taxing too much, then unemployment will occur. Such a thing is inefficient. 

Refusal to allow labor to be productive and choosing to leave it idle, results in lost output and major social and individual problems over the long-term, such as:
- Crime- Domestic violence- Poor health- Mental illness- Racial tensions- Income inequality- Child poverty 

These issues are all the result of waste. Wasted time and output potential. Inefficiency, not scarcity, results in waste. Think about that. As the population increases, output can increase. In macroeconomics, maximum efficiency is created at full employment. When every last person that is willing and able to work is employed, then efficiency is maximized and waste is minimized.
As a side note, economic growth cannot increase perpetually unless we target our overall output to sustainability. For instance, how we grow depends on our natural resources. And no, I’m not saying that you must become a “hippy”. I’m asking you to think sensibly. Since our natural resources are finite and we do not wish to kill every tree, absorb every drop of water, or mine the last ounce of iron, then as we grow we must redirect some of our output to that which is renewable. Not all of it, but some of it. If you consider oil, there is only a finite supply. Demand for it is tremendous. Setting aside global warming or climate change, let's look at the economic reality. Transportation of goods and services depend on oil. Therefore, the overall price level can be dramatically affected by a shortage in supply of oil. When the supply of oil is reaching its end, the price will only increase. If we’ve no alternate in place, then the price of food, clothing, appliances – everything – will dramatically increase. That is why it is important that we begin to accept new technologies, such as electric cars and seek to make them more commonplace. As time progresses and the population increases, how we operate our economy must also progress towards even greater overall output directed at sustainability. 

Right now, whether you realize this fact or not, as Warren Mosler rightly points out, we are setting fire to the US food supply. How? The US government is paying farmers to grow crops, not for the population to eat, but rather, to make fuel for cars. Is this the best answer to dependence on oil – destroying the food supply? Is this efficient? No. The the most efficient solution available to us with the technology that we currently possess is to increase the food supply and build more electric cars and electric/solar powered public transportation. High speed rail and infrastructure work is also a necessity. As that technology advances, even better designs come about until one day, someone discovers a whole new method of transportation. Meanwhile, there's enough food. 

Because resources are finite is the exact reason why we cannot continue to depend on an 18th, 19th and 20th Century way of doing everything. The population increases and demands more of our natural resources. You cannot hope to grow an economy into the future living in the 20th Century. You have to move forward. We must, therefore, find new methods to become efficient with the resources available to us and maximize those new methods.
When you have an infinite supply of currency and finite resources to create goods and services with that currency, your concern is not scarcity, it is efficiency. 

That is economics.