Mosler’s Seven Deadly Misunderstandings

Warren Mosler’s book, Seven Deadly Innocent Frauds of Economic Policy, is unlike any text on economic policy you’re likely to read. It is Mosler’s contention that the United States cannot go bankrupt, that vast national indebtedness is not the highway to financial perdition portrayed by more conservative economic analysts. For Mosler, the unreal world of money is no more than a spreadsheet in which the government may spend or lend, borrow or fund at will. Thus, the “Seven Deadly Innocent Frauds” include the notion that “government must raise funds through taxation or borrowing in order to spend.” In reality, says Mosler, government spending is not so limited. For Mosler the government is the God of the economy and, it would seem, the true source of all bounty. The private economy, in Mosler’s view, almost seems to be some kind of parasite on the government. Thus it seems that Mosler’s position is the opposite of that taken up by Ludwig von Mises, the Austrian Economist.

Mosler’s theory is that “we need to first have U.S. dollars to be able to make payments.” And where do dollars come from? They come from “government spending (or government lending)….” In other words, all money comes from the government. Suppose you have a property tax, says Mosler. You cannot pay the tax unless the government starts spending. “Only after the government spends its new currency does the population have the funds to pay the tax.” In other words, money is created by government spending or by bank loans which create deposits.

According to Mosler, the government can prevent depressions by deficit spending. Mosler proposes that “the last six periods of [government] surplus in our more than two hundred-year history had been followed by the only six depressions in our history.” On this basis he predicted that the government surpluses anticipated in the latter years of the Clinton administration signified a coming bust. When advising then presidential candidate Al Gore in early 2000, Mosler predicted that “the coming bust would be due to allowing the budget to go into surplus and drain our savings, resulting in a recession that would not end until the deficit got high enough to add back our lost income and savings and deliver the aggregate demand needed to restore output and employment.”

Instead of bank loans being available because of pre-existing deposits Mosler suggests a reversal of the previously supposed cause-and-effect relationship. Instead of the government taking a portion of wealth from a productive economy, all money and the very concept of wealth appears – in Mosler’s view – to be a government creation. This may be difficult to wrap one’s head around. Suffice it to say, Mosler suggests that debt is an incentive (in the same sense that heroin addiction is an incentive). If one wishes to manage the overall economy it is necessary to actuate the right incentives, stimulate activity and produce growth.

But surely, a government that deficit spends is risking bankruptcy somewhere down the line. On this score Mosler is not worried because, in his view, a government that borrows in its own currency need never go bankrupt. The government defaults only when it decides to default, which would be suicide. Furthermore, public debt is not a burden on the future. He adds the following cautionary note that this, “however, does NOT mean that the government can spend all it wants without consequence. Over-spending can drive up prices and fuel inflation.” What it means, he says, “is that there is no solvency risk, which is to say that the federal government” cannot run out of money.

And how does Mosler avoid inflation?

If I understand him correctly, the government wisely places a check on inflation through the mechanism of taxation. “To prevent the government’s spending from causing [serious] inflation, the government must take away some of our spending power by taxing us, not to actually pay for anything, but so that their spending won’t cause inflation. An economist would say it this way: taxes function to regulate aggregate demand, not to raise revenue per se. In other words, the government taxes us, and takes away our money, to prevent inflation, not to actually get our money in order to spend it.”

According to Mosler, high deficits cannot impede economic growth or productivity in the future. He says, “Everything produced in the future will be consumed in the future. How much will be produced depends on how productive the economy is at that time. This has nothing to do with the public debt today; a higher public debt today does not reduce future production – and if it motivates wise use of resources today, it may increase the productivity of the economy in the future.”

Perhaps the most bizarre of Mosler’s “deadly innocent frauds” is fraud #6, which says that we “need savings to provide the funds for investment.” This is the fraud which Mosler says “undermines our entire economy, as it diverts real resources away from the real sectors to the financial sector, with results in real investment being directed in a manner totally divorced from public purpose.” Here we catch hold of Mosler’s philosophy. Only public purposes are legitimate, while we must assume that private purposes are “selfish” and therefore illegitimate. The state, as the representative of “public purposes,” should and must direct the economy and crush private wastefulness.

We need not read much more from Mosler to understand that he forthrightly believes in the primacy of the state as the organizer and guarantor of economic growth. The state is the alpha and omega of Mosler’s analysis. But as Ludwig von Mises once warned, “The state is essentially an apparatus of compulsion and coercion. The characteristic feature of its activities is to compel people through the application or threat of force to behave otherwise than they would like to behave.”

Under a free market we find that voluntary cooperation produces a vibrant economy. Not so for Mosler. For some strange reason Mosler thinks that the state embodies a public purpose which somehow stands higher than private purposes (though he does not say so directly). Perhaps his belief is so fundamental that he has never questioned it. For if one is a statist, and the state is the fountainhead of all, there can be no questioning of state purposes. The idea of a limited state, under a system of checks and balances, seems alien to Mosler’s account.

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