American Monetary Institute

The Federal Budget Through The Looking Glass

Jules Brouillet

On February 13th Speaker of the House John Boehner addressed a letter to President Obama touting tax cuts, deregulation, and reduced government spending as solutions to reinvigorate the economy.  To it he attached a statement signed by 150 economists denouncing conventional use of fiscal policy during a recession, “To support real economic growth and support the creation of private-sector jobs, immediate action is needed to rein in federal spending.”  If federal spending creates both public-sector and private-sector jobs, how can federal austerity augment job creation?

It can’t.

John Boehner’s House plan for the federal budget includes spending cuts on low-income education and nutrition programs, food inspection services, clean energy development, Social Security disability payments, environmental protection, municipal fire department grants, Amtrak, the Clean Water Revolving Fund, the National Park Service, and the Corporation for Public Broadcasting.  According to the Economic Policy Institute, this budget would reduce the federal deficit by 4% at the price of 700,000 American jobs.  Boehner’s response to these employment projections was, “So be it.”

In contrast, President Obama’s budget prioritizes certain items including passenger rail development and federal student aid while axing others such as the Corps of Engineers civil works program and offshore drilling oversight and regulation.  His plan would reduce the federal deficit more compassionately than the House Republicans’ scorched earth policy.  Yet both budgets operate under the same flawed assumption: ultimately the government’s budget must be balanced like that of a business or a household.

The government’s faulty understanding of its powers can be traced to fundamental flaws in economic thinking.  A group of French economics students formed the Post-Autistic Economics Movement in 2000, rejecting the unscientific basis of mainstream economics.  Yet 11 years later the uncontested fundamental criticisms of their profession remain ignored in the United States.  The censorship of this central debate is a tragic disservice to America.

Domestic critics of economics include columnist Paul Krugman.  He writes, “As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth.”  Commenting on the ascendant philosophy of neoclassical economics, Krugman says “…if you start from the assumption that people are perfectly rational and markets are perfectly efficient, you have to conclude that unemployment is voluntary and recessions are desirable.”  A cult is defined as, “A system of religious veneration and devotion directed toward a particular object.”  Modern economics, dominated by a cult of market purists, was crowned as the naked emperor of the social sciences following its abject failure to merely predict the impending financial crisis of 2008.

Macroeconomic models take the present economic system as an indisputable given.  Their studies, their conclusions, their thoughts remain uncritical; the predominant attitude of the profession is that there is no credible alternative to our system of capitalism.  Dr. Charles Lindblom noted, “We uncritically accept what the market provides.  For American social science it is a scandal that it remains silent on so great an issue.”  Orthodox economic thinking stops Americans short of seriously reconsidering the merits of maintaining a system that has privatized their sovereign economic power.  Our economic liberty has been shackled to the privately owned Federal Reserve System.

Americans’ misunderstanding of the nature of the Federal Reserve leads to confusion over the arguments for federal austerity wielded in the debate over the 2012 federal budget.  If the federal government originates money, what keeps it from printing the money to pay off the national debt rather than strangle governmental spending?  Our government is limited to creating a minimal portion of our money supply as coinage.  It would be highly impractical to mint $14 trillion in coinage to pay off the national debt.  The rest of the money supply is loaned into existence by the privately controlled Federal Reserve and the private banking system.  As long as money originates as debt there will never be enough specie to pay off public and private debts.  This is the economic system economists have accepted without question; they have not produced any credible solutions for paying off the national debt.  Yet despite the economists’ confusion a credible solution has been proposed in Congress.

America is blessed to have a member of Congress championing a sound solution to the budget crisis in Washington. Representative Dennis Kucinich (D-OH) introduced HR 6550, the National Employment Emergency Defense (NEED) Act last December.  The bill will do the following:

  1. Nationalize the Federal Reserve.
  2. Create all new money through a democratic process.  The fractional reserve requirement for banks will be raised to 100%, eliminating their ability to create money.
  3. Spend new money into existence through a national infrastructure program.  By spending money on real items including roads, schools, and hospitals, we can reach full employment without suffering from inflation.

These important reforms will align the mechanics of the monetary system with the public’s understanding of it.  The Federal Reserve will become a public agency, the government will create money, and banks will keep our money in their vaults.  Our inflationary credit-created money will be replaced by a sound currency.  The federal debt will be paid off as it comes due.  It is change we can believe in.

Is this what the Federal Reserve recommends to America?  This February Chairman Ben Bernanke reported to the House, “To put the budget on a sustainable trajectory, policy actions—either reductions in spending, increases in revenues, or some combination of the two—will have to be taken to close these primary budget gaps.”  Closed economic thinking has captured our highest minds.  Our central bank will not produce a decent solution nor acknowledge Representative Kucinich’s enlightened reform.

Why has the 2012 budget debate been limited to preserving certain essential government services versus across-the-board budget cuts, excluding Dennis Kucinich’s sensible alternative?  Without insider Congressional information, one must look to history for circumstantial evidence.  In 1892 the US Bankers’ Magazine explained to its members, “The question of tariff reform must be urged through the organization known as the Democratic Party, and the question of protection with the reciprocity must be forced to view through the Republican Party…By thus dividing voters, we can get them to expend their energies in fighting over questions of no importance to us, except as teachers to the common herd.”  Has America been fooled again?

Working people operate and understand the economy better than economists.  Productive people do far more for economic growth than our banks.  Thinking people can govern their country far more intelligently than most of their Congresspersons.  The people must restore economic democracy through Representative Dennis Kucinich’s NEED Act.  Until Dennis’ solution becomes law a second Great Depression will forced upon ordinary people by a profoundly undemocratic economic system.