Why Don’t People Want Full Employment?

Michal Kalecki’s Essay on Politics and Ideology

First published in Political Quarterly in 1943

http://neweconomicperspectives.org (August 01 2012)


I


1. A solid majority of economists is now of the opinion that, even in a capitalist system, full employment may be secured by a government spending programme, provided there is in existence adequate plan to employ all existing labour power, and provided adequate supplies of necessary foreign raw-materials may be obtained in exchange for exports.

If the government undertakes public investment (for example, builds schools, hospitals, and highways) or subsidizes mass consumption (by family allowances, reduction of indirect taxation, or subsidies to keep down the prices of necessities), and if, moreover, this expenditure is financed by borrowing and not by taxation (which could affect adversely private investment and consumption), the effective demand for goods and services may be increased up to a point where full employment is achieved. Such government expenditure increases employment, be it noted, not only directly but indirectly as well since the higher incomes caused by it result in a secondary increase in demand for consumer and investment goods.

2. It may be asked where the public will get the money to lend to the government if they do not curtail their investment and consumption. To understand this process it is best, I think, to imagine for a moment that the government pays its suppliers in government securities. The suppliers will, in general, not retain these securities but put them into circulation while buying other goods and services, and so on, until finally, these securities will reach persons or firms which retain them as interest-yielding assets. In any period of time, the total increase in government securities in the possession (transitory or final) of persons and firms will be equal to the goods and services sold to the government. Thus what the economy lends to the government are goods and services whose production is “financed” by government securities. In reality, the government pays for the services, not in securities, but in cash, but it simultaneously issues securities and so drains the cash off, and this is equivalent to the imaginary process described above.

What happens, however, if the public is unwilling to absorb all the increase in government securities? It will offer them finally to banks to get cash (notes or deposits) in exchange. If the banks accept these offers, the rate of interest will be maintained. If not, the prices of securities will fall, which means a rise in the rate of interest, and this will encourage the public to hold more securities in relation to deposits. It follows that the rate of interest depends on banking policy, in particular on that of the central bank. If this policy aims at maintaining the rate of interest at a certain level, that may be easily achieved, however large the amount of government borrowing. Such was and is the position in the present war. In spite of astronomical budget deficits, the rate of interest has shown no rise since the beginning of 1940.

3. It may be objected that government expenditure financed by borrowing will cause inflation. To this, it may be replied that the effective demand created by the government acts like any other increase in demand. If labour, plants, and foreign raw materials are in ample supply, the increase in demand is met by an increase in production. But if the point of full employment of resources is reached and effective demand continues to increase, prices will rise so as to equilibrate the demand for and the supply of goods and services. (In the state of over-employment of resources such as we witness at present in the war economy, an inflationary rise in prices has been avoided only to the extent to which effective demand for consumer goods has been curtailed by rationing and direct taxation.) It follows that if the government intervention aims at achieving full employment but stops short of increasing effective demand over the full employment mark, there is no need to be afraid of inflation. {2}

II

1. The above is a very crude and incomplete statement of the economic doctrine of full employment. But it is, I think, sufficient to acquaint the reader with the essence of the doctrine and so enable him to follow the subsequent discussion of the political problems involved in the achievement of full employment.

In should be first stated that, although most economists are now agreed that full employment may be achieved by government spending, this was by no means the case even in the recent past. Among the opposers of this doctrine there were (and still are) prominent so-called “economic experts” closely connected with banking and industry. This suggests that there is a political background in the opposition to the full employment doctrine, even though the arguments advanced are economic. That is not to say that people who advance them do not believe in their economics, poor though this is. But obstinate ignorance is usually a manifestation of underlying political motives.

There are, however, even more direct indications that a first-class political issue is at stake here. In the great depression in the 1930s, big business consistently opposed experiments for increasing employment by government spending in all countries, except Nazi Germany. This was to be clearly seen in the USA (opposition to the New Deal), in France (the Blum experiment), and in Germany before Hitler. The attitude is not easy to explain. Clearly, higher output and employment benefit not only workers but entrepreneurs as well, because the latter’s profits rise. And the policy of full employment outlined above does not encroach upon profits because it does not involve any additional taxation. The entrepreneurs in the slump are longing for a boom; why do they not gladly accept the synthetic boom which the government is able to offer them? It is this difficult and fascinating question with which we intend to deal in this article.

The reasons for the opposition of the “industrial leaders” to full employment achieved by government spending may be subdivided into three categories:

(i) dislike of government interference in the problem of employment as such;

(ii) dislike of the direction of government spending (public investment and subsidizing consumption);

(iii) dislike of the social and political changes resulting from the maintenance of full employment.

We shall examine each of these three categories of objections to the government expansion policy in detail.

2. We shall deal first with the reluctance of the “captains of industry” to accept government intervention in the matter of employment. Every widening of state activity is looked upon by business with suspicion, but the creation of employment by government spending has a special aspect which makes the opposition particularly intense. Under a laissez-faire system, the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment). This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis. But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness. Hence budget deficits necessary to carry out government intervention must be regarded as perilous. The social function of the doctrine of “sound finance” is to make the level of employment dependent on the state of confidence.

3. The dislike of business leaders for a government spending policy grows even more acute when they come to consider the objects on which the money would be spent: public investment and subsidizing mass consumption.

The economic principles of government intervention require that public investment should be confined to objects which do not compete with the equipment of private business (for example, hospitals, schools, highways). Otherwise, the profitability of private investment might be impaired, and the positive effect of public investment upon employment offset, by the negative effect of the decline in private investment. This conception suits the businessmen very well. But the scope for public investment of this type is rather narrow, and there is a danger that the government, in pursuing this policy, may eventually be tempted to nationalize transport or public utilities so as to gain a new sphere for investment. {3}

One might, therefore, expect business leaders and their experts to be more in favour of subsidising mass consumption (by means of family allowances, subsidies to keep down the prices of necessities, et cetera) than of public investment; for by subsidizing consumption, the government would not be embarking on any sort of enterprise. In practice, however, this is not the case. Indeed, subsidizing mass consumption is much more violently opposed by these experts than public investment. For here a moral principle of the highest importance is at stake. The fundamentals of capitalist ethics require that “you shall earn your bread in sweat” – unless you happen to have private means.

4. We have considered the political reasons for the opposition to the policy of creating employment by government spending. But even if this opposition were overcome – as it may well be under the pressure of the masses – the maintenance of full employment would cause social and political changes which would give a new impetus to the opposition of the business leaders. Indeed, under a regime of permanent full employment, the “sack” would cease to play its role as a “disciplinary measure”. The social position of the boss would be undermined, and the self-assurance and class-consciousness of the working class would grow. Strikes for wage increases and improvements in conditions of work would create political tension. It is true that profits would be higher under a regime of full employment than they are on the average under laissez-faire, and even the rise in wage rates resulting from the stronger bargaining power of the workers is less likely to reduce profits than to increase prices, and thus adversely affects only the rentier interests. But “discipline in the factories” and “political stability” are more appreciated than profits by business leaders. Their class instinct tells them that lasting full employment is unsound from their point of view, and that unemployment is an integral part of the “normal” capitalist system.

III

1. One of the important functions of fascism, as typified by the Nazi system, was to remove capitalist objections to full employment.

The dislike of government spending policy as such is overcome under fascism by the fact that the state machinery is under the direct control of a partnership of big business with fascism. The necessity for the myth of “sound finance”, which served to prevent the government from offsetting a confidence crisis by spending, is removed. In a democracy, one does not know what the next government will be like. Under fascism, there is no next government.

The dislike of government spending, whether on public investment or consumption, is overcome by concentrating government expenditure on armaments. Finally, “discipline in the factories” and “political stability” under full employment are maintained by the “new order”, which ranges from suppression of the trade unions to the concentration camp. Political pressure replaces the economic pressure of unemployment.

2. The fact that armaments are the backbone of the policy of fascist full employment has a profound influence upon that policy’s economic character. Large-scale armaments are inseparable from the expansion of the armed forces and the preparation of plans for a war of conquest. They also induce competitive rearmament of other countries. This causes the main aim of spending to shift gradually from full employment to securing the maximum effect of rearmament. As a result, employment becomes “over-full”. Not only is unemployment abolished, but an acute scarcity of labour prevails. Bottlenecks arise in every sphere, and these must be dealt with by the creation of a number of controls. Such an economy has many features of a planned economy and is sometimes compared, rather ignorantly, with socialism. However, this type of planning is bound to appear whenever an economy sets itself a certain high target of production in a particular sphere, when it becomes a target economy of which the armament economy is a special case. An armament economy involves, in particular, the curtailment of consumption as compared with that which it could have been under full employment.

The fascist system starts from the overcoming of unemployment, develops into an armament economy of scarcity, and ends inevitably in war.

IV

1. What will be the practical outcome of the opposition to a policy of full employment by government spending in a capitalist democracy? We shall try to answer this question on the basis of the analysis of the reasons for this opposition given in section II. We argued there that we may expect the opposition of the leaders of industry on three planes: (i) opposition on principle to government spending based on a budget deficit; (ii) opposition to this spending being directed either towards public investment – which may foreshadow the intrusion of the state into the new spheres of economic activity – or towards subsidizing mass consumption; (iii) opposition to maintaining full employment and not merely preventing deep and prolonged slumps.

Now it must be recognized that the stage at which “business leaders” could afford to be opposed to any kind of government intervention to alleviate a slump is more or less past. Three factors have contributed to this:

(i) very full employment during the present war;

(ii) development of the economic doctrine of full employment;

(iii) partly as a result of these two factors, the slogan “Unemployment never again” is now deeply rooted in the consciousness of the masses. This position is reflected in the recent pronouncements of the”‘captains of industry” and their experts. The necessity that “something must be done in the slump” is agreed; but the fight continues, firstly, as to what should be done in the slump (that is, what should be the direction of government intervention) and secondly, that it should be done only in the slump (that is, merely to alleviate slumps rather than to secure permanent full employment).

2. In current discussions of these problems there emerges time and again the conception of counteracting the slump by stimulating private investment. This may be done by lowering the rate of interest, by the reduction of income tax, or by subsidizing private investment directly in this or another form. That such a scheme should be attractive to business is not surprising. The entrepreneur remains the medium through which the intervention is conducted. If he does not feel confident in the political situation, he will not be bribed into investment. And the intervention does not involve the government either in “playing with” (public) investment or “wasting money” on subsidizing consumption.

It may be shown, however, that the stimulation of private investment does not provide an adequate method for preventing mass unemployment. There are two alternatives to be considered here.

(i) The rate of interest or income tax (or both) is reduced sharply in the slump and increased in the boom. In this case, both the period and the amplitude of the business cycle will be reduced, but employment not only in the slump but even in the boom may be far from full, that is, the average unemployment may be considerable, although its fluctuations will be less marked.

(ii) The rate of interest or income tax is reduced in a slump but not increased in the subsequent boom. In this case, the boom will last longer, but it must end in a new slump: one reduction in the rate of interest or income tax does not, of course, eliminate the forces which cause cyclical fluctuations in a capitalist economy. In the new slump, it will be necessary to reduce the rate of interest or income tax again and so on. Thus in the not too remote future, the rate of interest would have to be negative and income tax would have to be replaced by an income subsidy. The same would arise if it were attempted to maintain full employment by stimulating private investment: the rate of interest and income tax would have to be reduced continuously. {4}

In addition to this fundamental weakness of combating unemployment by stimulating private investment, there is a practical difficulty. The reaction of the entrepreneurs to the measures described is uncertain. If the downswing is sharp, they may take a very pessimistic view of the future, and the reduction of the rate of interest or income tax may then for a long time have little or no effect upon investment, and thus upon the level of output and employment.

3. Even those who advocate stimulating private investment to counteract the slump frequently do not rely on it exclusively, but envisage that it should be associated with public investment. It looks at present as if business leaders and their experts (at least some of them) would tend to accept as a pis aller public investment financed by borrowing as a means of alleviating slumps. They seem, however, still to be consistently opposed to creating employment by subsidizing consumption and to maintaining full employment.

This state of affairs is perhaps symptomatic of the future economic regime of capitalist democracies. In the slump, either under the pressure of the masses, or even without it, public investment financed by borrowing will be undertaken to prevent large-scale unemployment. But if attempts are made to apply this method in order to maintain the high level of employment reached in the subsequent boom, strong opposition by business leaders is likely to be encountered. As has already been argued, lasting full employment is not at all to their liking. The workers would “get out of hand” and the “captains of industry” would be anxious to “teach them a lesson”. Moreover, the price increase in the upswing is to the disadvantage of small and big rentiers, and makes them “boom-tired”.

In this situation, a powerful alliance is likely to be formed between big business and rentier interests, and they would probably find more than one economist to declare that the situation was manifestly unsound. The pressure of all these forces, and in particular of big business – as a rule influential in government departments – would most probably induce the government to return to the orthodox policy of cutting down the budget deficit. A slump would follow in which government spending policy would again come into its own.

This pattern of a political business cycle is not entirely conjectural; something very similar happened in the USA in 1937-1938. The breakdown of the boom in the second half of 1937 was actually due to the drastic reduction of the budget deficit. On the other hand, in the acute slump that followed the government promptly reverted to a spending policy.

The regime of the political business cycle would be an artificial restoration of the position as it existed in nineteenth-century capitalism. Full employment would be reached only at the top of the boom, but slumps would be relatively mild and short-lived.

V

1. Should a progressive be satisfied with a regime of the political business cycle as described in the preceding section? I think he should oppose it on two grounds:

(i) that it does not assure lasting full employment;

(ii) that government intervention is tied to public investment and does not embrace subsidizing consumption.

What the masses now ask for is not the mitigation of slumps but their total abolition. Nor should the resulting fuller utilization of resources be applied to unwanted public investment merely in order to provide work. The government spending programme should be devoted to public investment only to the extent to which such investment is actually needed. The rest of government spending necessary to maintain full employment should be used to subsidize consumption (through family allowances, old-age pensions, reduction in indirect taxation, and subsidizing necessities). Opponents of such government spending say that the government will then have nothing to show for their money. The reply is that the counterpart of this spending will be the higher standard of living of the masses. Is not this the purpose of all economic activity?

2. “Full employment capitalism” will, of course, have to develop new social and political institutions which will reflect the increased power of the working class. If capitalism can adjust itself to full employment, a fundamental reform will have been incorporated in it. If not, it will show itself an outmoded system which must be scrapped.

But perhaps the fight for full employment may lead to fascism? Perhaps capitalism will adjust itself to full employment in this way? This seems extremely unlikely. Fascism sprang up in Germany against a background of tremendous unemployment and maintained itself in power through securing full employment while capitalist democracy failed to do so. The fight of the progressive forces for all employment is at the same time a way of preventing the recurrence of fascism.

_____

{1} This article corresponds roughly to a lecture given to the Marshall Society in Cambridge in the spring of 1942.

{2} Another problem of a more technical nature is that of the national debt. If full employment is maintained by government spending financed by borrowing, the national debt will continuously increase. This need not, however, involve any disturbances in output and employment, if interest on the debt is financed by an annual capital tax. The current income, after payment of capital tax, of some capitalists will be lower and of some higher than if the national debt had not increased, but their aggregate income will remain unaltered and their aggregate consumption will not be likely to change significantly. Further, the inducement to invest in fixed capital is not affected by a capital tax because it is paid on any type of wealth. Whether an amount is held in cash or government securities or invested in building a factory, the same capital tax is paid on it and thus the comparative advantage is unchanged. And if investment is financed by loans it is clearly not affected by a capital tax because it does not mean an increase in wealth of the investing entrepreneur. Thus neither capitalist consumption nor investment is affected by the rise in the national debt if interest on it is financed by an annual capital tax. [See “A Theory of Commodity, Income, and Capital Taxation”]

{3} It should be noted here that investment in a nationalized industry can contribute to the solution of the problem of unemployment only if it is undertaken on principles different return than private enterprise, or it must deliberately time its investment so as to mitigate from those of private enterprise. The government must be satisfied with a lower net rate of slumps.

{4} A rigorous demonstration of this is given in my article to be published in Oxford Economic Papers. [See “Full Employment by Stimulating Private Investment?”]

Michal Kalecki (22 June 1899 ~ 18 April 1970) was a Polish Marxist economist. This essay was first published in Political Quarterly in 1943; it is reproduced here for non-profit educational purposes. A shorter version of this essay was published in “The Last Phase in the Transformation of Capitalism” (Monthly Review Press, 1972).

http://neweconomicperspectives.org/2012/08/political-aspects-of-full-employment.html

Government Officials Steal Man’s Home Over $8.41 In Unpaid Taxes

The unconstitutional practice of home equity theft has allowed individuals to be stripped of their property without fair compensation.

by Brittany Hunter

The Foundation for Economic Education (July 24 2019)

Zero Hedge (July 28 2019)

For three years, the pair scrimped and saved in order to fix up the four-unit property. On the weekends, Ramouldo would spend his days off making the eleven-hour drive from New Jersey to Michigan to work on the house, making the much-needed repairs himself. In addition to the small complex, the family had purchased a small home next door. The plan was to renovate and rent out each unit and then use that money to help Ramouldo retire and move his family to the small home in Michigan, where the rest of their extended family resides.

Erica, who had seen her father work long hours and sacrifice to provide for her family over the years, was happy to help her father buy the property. She was eager to begin building her own financial legacy and saw the property as an excellent investment opportunity.

These plans were derailed, however, when their property was seized by Wayne County, Michigan, in 2017 and sold to a private buyer.

All because they unknowingly underpaid their tax bill – by $144.

 

Disproportionate Punishment

 

While the father and daughter had been paying their property taxes diligently for each year they owned the property, in 2014, they unintentionally underpaid by $144. Neither knew about this miscalculation or the situation could have quickly been remedied. And without knowledge of this outstanding debt, the small amount grew as the county tacked on interest charges to the tune of $359.

To be sure, when interest was accounted for, the Perez family did owe roughly $500 in unpaid taxes to the county. County officials used this as justification to seize, sell, and then keep the $108,000 revenue earned from the sale of said property.

In the American legal system, there is a maxim: the punishment must fit the crime. But when considering the small amount by which the Perez family underpaid their property taxes, this seems like a disproportionate punishment to receive.

The government is allowed to seize property in order to settle a debt owed by an individual. However, it isn’t allowed to take more than it is owed. And in the instance of the Perez family property, Wayne County kept every penny it earned from the sale of their property – a practice known as home equity theft.

Fortunately, Pacific Legal Foundation (PLF) has stepped in and on July 9th, announced that it had filed suit on behalf of the Perez family against Wayne County and County Treasurer Eric Sabree.

 

Home Equity Theft

 

Many of us have accidentally underpaid a bill before. Whether we were distracted, busy, or simply not paying enough attention to the total amount due, accidents happen to everyone. Eager to get the full amount owed, most companies will send strongly worded letters or call incessantly until you cough up the remaining amount due. It’s completely understandable as to why an entity would do this: they want what is owed.

However, if they tried to take your car away over the miscalculation of a few dollars, most people would be angry – and justifiably so.

When it comes to property taxes, if an individual underpays by even just a few dollars, there are twelve different state governments that can and will seize your property and sell it, without having to pay you a dime of the earnings. This is known as home equity theft. Unfortunately, the Perez family is not the only victim of this practice in Michigan.

In 2014, Uri Refaeli lost his home after it was foreclosed on and seized by Oakland County, Michigan. In 2011, Rafaeli purchased a small $60,000 property for his business, Rafaeli, LLC.

While he had paid his 2012 and 2013 property taxes in full, he discovered that he had accidentally underpaid in 2011. When he made this realization and tried to correct his mistake in 2013, he forgot to account for the interest that had accrued on his back taxes. As a result, he underpaid by a measly $8.41. The county seized and sold his property for $24,500. Rafaeli never saw a dime of this money.

When it comes to outstanding debt, just like private companies, governments are eager to get what is owed and there nothing wrong with them attempting to do so. However, when they begin to go after more than they are owed, the situation becomes troublesome.

To make matters worse for Michigan, the state also has a shady reputation for using this practice to its own benefit. According to Pacific Legal Foundation (PLF), local governments pad their budgets with the money earned from this stolen property. Each year in Detroit’s budget, there is a line with the estimated total revenue that the government is expecting to bring in from foreclosures of this very nature.

Earlier this year, it was discovered that Wayne County Treasurer Eric Sabree had violated Treasurer’s office rules by funneling foreclosed properties to family members and well-established and connected businessman for a fraction of the cost.

While state Treasurer’s office rules prohibit family members from participating in these auctions, several Freedom of Information Act requests filed on behalf of a Detroit News investigation found that transfers involving Sabree’s family overlap with his time in office. Since 2011, when Sabree began as deputy treasurer, Wayne County has transferred ownership of more than one-fourth of privately owned properties in Detroit as a result of back taxes – making the whole situation in Michigan even more suspicious.

 

Home Equity Theft in Montana

 

Michigan is not the only state guilty of using the practice of home equity theft. In Montana, local governments have been known to sell private homes of those with back taxes to “preferred” private investors, a practice that helped get the practice of home equity theft banned statewide just a few months ago.

Eighty-year-old electrician Gary Guidotti once owned four homes in Great Falls, Montana, which he rented out to help support himself and pay his bills. When the Great Recession hit in 2007, some of his tenants were no longer able to afford rent and stopped paying altogether. And without their rent helping to support him, Guidotti stopped paying his property taxes.

In 2008, Cascade County, Montana issued a tax lien of $1,125.45 on one of his homes. Just seventeen months after issuing the lien, the county ended up selling it to a well-connected private entity for pennies on the dollar at $667.20. The private company, Sunrise Financial, acquired the deed to the property in 2011 and in 2015, sold the property for $139,300. Guidotti, of course, received no compensation from the sale of his home.

“This can’t be fair”, Guidotti said. “It (the law) has to be changed, but what’s the sense in fighting? The lawyers will have it all anyway. It’s just the way it goes.”

Without his properties, Guidotti was forced to move into a motorhome parked behind one of the homes that he used to own.

 

Challenging Home Equity Theft in Court

 

Our country was founded on the fervent belief that individuals have the right to their life, liberty, and, as is especially applicable here, their property. Greatly influenced by philosopher John Locke and his Second Treatise on Government, our country’s Founders understood how important property rights were to securing individual liberty and protecting Americans against government overreach.

In chapter five of Locke’s famous essay, “On Property”, he writes:

 

 

Though the earth, and all inferior creatures, be common to all men, yet every man has a property in his own person: this no body has any right to but himself. The labour of his body, and the work of his hands, we may say, are properly his. Whatsoever then he removes out of the state that nature hath provided, and left it in, he hath mixed his labour with, and joined to it something that is his own, and thereby makes it his property. It being by him removed from the common state nature hath placed it in, it hath by this labour something annexed to it, that excludes the common right of other men: for this labour being the unquestionable property of the labourer, no man but he can have a right to what that is once joined to (emphasis added), at least where there is enough, and as good, left in common for others.

 

When a person works, like Ramouldo Perez did, and uses the fruits of his or her labor to purchase property, that property is theirs and theirs alone. This respect for the sanctity of property rights has been one of the most defining characteristics of the American idea.

Yet, practices like home equity theft and civil asset forfeiture, which allow law enforcement to strip individuals of their property without due process, have belittled this sacred principle and harmed many innocent people in the process. The confiscation of a person’s property, especially over a few dollars of unpaid taxes, is thoroughly unAmerican. Private property should be protected by the government, not seized and sold off before an individual has an opportunity to remedy the situation.

The unconstitutional practice of home equity theft has allowed individuals to be stripped of their property without fair compensation. But there is hope that this practice could soon be reined in or perhaps even stopped altogether.

In May, after diligent efforts made by PLF, Montana passed Senate Bill 253, giving property owners further protections against home equity theft.

The new law protects homeowners’ equity by requiring homes be sold to the highest bidder. Now the extra profits must be returned to the former owner after deducting taxes, interest, penalties, and costs,

Christina Martin of the Pacific Legal recently wrote.

In addition to Perez vs Wayne County, this fall, the Michigan Supreme Court will also begin hearing oral arguments for Rafaeli vs Oakland County.

_____

Brittany Hunter is a senior writer for the Foundation for Economic Education. Additionally, she is a co-host of Beltway Banthas, a podcast that combines Star Wars and politics. Brittany believes that the most effective way to promote individual liberty and free-market economics is by telling timely stories that highlight timeless principles.

https://fee.org/articles/home-equity-theft-how-a-man-s-home-was-seized-over-841-in-unpaid-taxes/

https://www.zerohedge.com/news/2019-07-28/government-officials-steal-mans-home-over-841-unpaid-taxes

How the Government Can Steal Your Stuff

Six Questions about Civil Asset Forfeiture Answered

by Nora V Demleitner

The Conversation (July 26 2019)

Naked Capitalism (July 27 2019)

1. What Is Civil Asset Forfeiture?

Civil asset forfeiture laws let authorities, such as federal marshals or local sheriffs, seize property – cash, a house, a car, a cellphone – that they suspect is involved in criminal activity. Seizures run the gamut from twelve cans of peas to multi-million-dollar yachts.

The federal government confiscated assets worth a total of about US$28 billion during the decade ending in 2016, Justice Department data indicate.

In contrast to criminal forfeiture, which requires that the property owner be convicted of a crime beforehand, the civil variety doesn’t require that the suspect be charged with breaking the law.

Three Justice Department agencies – the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), the Drug Enforcement Administration (DEA) and Federal Bureau of Investigation (FBI) – do most of this confiscating. Most states also permit local prosecutors to take personal property from people who haven’t been charged with a crime. However, some states have begun to limit that practice.

Even when there are restrictions on when and how local and state authorities can seize property, they can circumvent those limits if the federal government “adopts” the impounded assets.

For a federal agency to do so requires the alleged misconduct to violate federal law. Local agencies get up to eighty percent of the shared proceeds back, with the federal agency keeping the rest. The divvying-up is known officially as “equitable sharing”. Crime victims may also get a cut from the proceeds of civil forfeiture.

John Oliver’s “Last Week Tonight” segment on civil asset forfeiture in 2014 used humor to help viewers understand the practice:

2. Can People Get Their Stuff Back?

Technically, the government must demonstrate that the property has something to do with a crime. In reality, property owners in most states must prove that they legally acquired their confiscated belongings to get them returned. This means the burden is on the owners to dispute these seizures in court. Court challenges tend to arise only when something of great value, like a house, is at stake.

Unless an owner challenges a seizure and effectively proves his innocence in court, the agency that took the property is free to keep the proceeds once the assets are liquidated.

Many low-income people don’t use bank accounts or credit cards. They carry cash instead. If they lose their life savings at a traffic stop, they can’t afford to hire a lawyer to dispute the seizure, the Center for American Progress – a liberal think tank – has observed.

And disputing civil forfeitures is hard everywhere. Some states require a cash bond; others add a penalty payment should the owner lose. The process is expensive, time-consuming and lengthy, deterring even innocent owners.

There’s no comprehensive data regarding how many people get their stuff back. But over the ten years ending in September 2016, about eight percent of all property owners who had cash seized from them by the DEA had it returned, according to a report from the Justice Department’s inspector general.

3. Who Opposes the Practice?

Many conservatives and progressives dislike civil asset forfeiture. Politicians on the left and right have voiced concerns about the incentives this practice gives law enforcement to abuse its authority.

Critics across the political spectrum also question whether different aspects of civil asset forfeiture violate the Fifth Amendment, which says the government can’t deprive anyone of “life, liberty, or property, without due process of law” or is unconstitutional for other reasons.

Until now, the Supreme Court and lower courts, however, have consistently upheld civil asset forfeitures when ruling on challenges launched under the Fifth Amendment. The same goes for challenges under the Eighth Amendment, which bars “excessive fines” and “cruel and unusual punishments”, and the 14th Amendment, which forbids depriving “any person of life, liberty, or property, without due process of law.”

In 2019, the Supreme Court unanimously found for the first time that these constitutional protections against excessive fines apply not just to the federal authorities but to the states as well.

Some concerns resonate more strongly for different ideological camps. Conservatives object mostly about how this impounding undermines property rights.

Liberals are outraged that the poor and communities of color tend to be disproportionately targeted, often causing great hardship to people accused of minor wrongdoing.

Another common critique: The practice encourages overpolicing intended to pad police budgets or accommodate tax cuts. Revenue from civil asset forfeitures can amount to a substantial percentage of local police budgets, according to a Drug Policy Alliance study of this practice in California. This kind of policing can undermine police-community relations.

The Justice Department’s guidelines state that forfeitures “punish and deter criminal activity by depriving criminals of property used in or acquired through illegal activities”.

However, the Inspector General’s office noted “without evaluating data more systemically, it is impossible for the Department to determine … whether seizures benefit law enforcement efforts, such as advancing criminal investigations and deterring future criminal activity”.

4. What is the Scale of this Confiscation?

The federal revenue raised through this practice, which emerged in the 1970s, mushroomed from $94 million in 1986 to a high of $4.5 billion in 2014, according to the Justice Department.

The Justice Department says it returned more than $4 billion in forfeited funds to crime victims between 2000 and 2016, while handing state and local law enforcement entities at least $6 billion through “equitable sharing”.

The scale of seizures on the state and local level is less clear.

5. What Happened During the Obama and Trump Administrations?

Under the leadership of Attorney General Eric Holder, the Obama-era Justice Department determined that civil asset forfeiture was more about making money than public safety. It then changed the guidelines for asset adoption.

Beginning in 2015, joint state-federal task forces could continue to share forfeiture proceeds but state agencies were no longer permitted to ask the federal government to forfeit property they had taken on their own.

“I love that program”, Attorney General Jeff Sessions said in 2017. “We had so much fun doing that, taking drug dealers’ money and passing it out to people trying to put drug dealers in jail. What’s wrong with that?”

Attorney General William Barr, Sessions’ successor in the Trump administration, has also defended this policy.

Attorney General Jeff Sessions has expressed astonishment regarding the unpopularity of civil asset forfeiture.

6. Congress and the States

When Sessions changed the policy, legislative changes seemed possible. Senate Judiciary Committee Chairman Chuck Grassley sent Sessions a memo about how the federal funds obtained from seizures were wasted and misused. In some cases, Grassley wrote, the government provided “misleading details about some of these expenditures”.

The House of Representatives voted in 2017 for an amendment that would restrict civil asset forfeiture adoption.

The House also approved a bipartisan measure restricting civil forfeiture on June 20 2019. This one goes further though and would substantially curtail the federal government’s powers.

State governments have also tried to discourage this kind of confiscation. New Mexico, Nebraska, and North Carolina have banned civil forfeiture. Michigan has made it easier to challenge these seizures. California limited equitable sharing, and other states have increased the burden of proof the government must meet. But in many states, investigative reporting has shown that innocent owners continue to lose their property.

In a Georgia Law Review article, I gave examples of other ways to keep police departments and municipalities funded, such as increasing fines and fees.

Unless the police pursue some alternatives, funding woes will continue to contribute to abusive policing practices that fall most heavily on those who can the least afford them: the poor and communities of color.

_____

Nora V Demleitner is Professor of Criminal and Comparative Law, Washington and Lee University.

https://theconversation.com/how-the-government-can-steal-your-stuff-6-questions-about-civil-asset-forfeiture-answered-81973

https://www.nakedcapitalism.com/2019/07/how-the-government-can-steal-your-stuff-6-questions-about-civil-asset-forfeiture-answered.html

Taxes for Revenue are Obsolete

by Yves Smith

Naked Capitalism (July 16 2019)

UserFriendly chided me for not having reproduced this classic, as I did for Michal Kalecki’s 1943 essay on the obstacles to reaching full employment. Apparently, this classic article by Beardsley Ruml on why what we would now call a sovereign currency issuer doesn’t need taxes in order to spend doesn’t show up well on the Internet (for instance, links to full versions don’t have a preview, which is an impediment to sharing it on Twitter). So to encourage you to read and share it, we’re reproducing it below. Enjoy!

This article was first published in the January 1946 issue of American Affairs.

Taxes for Revenue are Obsolete

by Beardsley Ruml,

Chairman of the Federal Reserve Bank of New York


Mr Ruml read this paper before the American Bar Association during the last year of World War Two. It attracted then less attention than it deserved and is even more timely now, with the tax structure undergoing change for peacetime. His thesis is that given (1) control of a central banking system and (2) an inconvertible currency, a sovereign national government is finally free of money worries and need no longer levy taxes for the purpose of providing itself with revenue. All taxation, therefore, should be regarded from the point of view of social and economic consequences. The paragraph that embodies this idea will be found italicized in the text. Mr Ruml does not say precisely how in that case the government would pay its own bills. One may assume that it would either shave its expenses out of the proceeds of taxes levied for social and economic ends or print the money it needs. The point may be academic. The latter end of his paper is devoted to an argument against taxing corporation profits.

– Editor.

The superior position of public government over private business is nowhere more clearly evident than in government’s power to tax business. Business gets its many rule-making powers from public government. Public government sets the limits to the exercise of these rule-making powers of business, and protects the freedom of business operations within this area of authority. Taxation is one of the limitations placed by government on the power of business to do what it pleases.

There is nothing reprehensible about this procedure. The business that is taxed is not a creature of flesh and blood, it is not a citizen. It has no voice in how it shall be governed – nor should it. The issues in the taxation of business are not moral issues, but are questions of practical effect: What will get the best results? How should business be taxed so that business will make its greatest contribution to the common good?

It is sometimes instructive when faced with alternatives to ask the underlying question. If we are to understand the problems involved in the taxation of business, we must first ask: “Why does the government need to tax at all?” This seems to be a simple question, but, as is the case with simple questions, the obvious answer is likely to be a superficial one. The obvious answer is, of course, that taxes provide the revenue which the government needs in order to pay its bills.

It Happened

If we look at the financial history of recent years it is apparent that nations have been able to pay their bills even though their tax revenues fell short of expenses. These countries whose expenses were greater than their receipts from taxes paid their bills by borrowing the necessary money. The borrowing of money, therefore, is an alternative which governments use to supplement the revenues from taxation in order to obtain the necessary means for the payment of their bills.

A government which depends on loans and on the refunding of its loans to get the money it requires for its operations is necessarily dependent on the sources from which the money can be obtained. In the past, if a government persisted in borrowing heavily to cover its expenditures, interest rates would get higher and higher, and greater and greater inducements would have to be offered by the government to the lenders. These governments finally found that the only way they could maintain both their sovereign independence and their solvency was to tax heavily enough to meet a substantial part of their financial needs, and to be prepared – if placed under undue pressure – to tax to meet them all.

The necessity for a government to tax in order to maintain both its independence and its solvency is true for state and local governments, but it is not true for a national government. Two changes of the greatest consequence have occurred in the last twenty-five years which have substantially altered the position of the national state with respect to the financing of its current requirements.

The first of these changes is the gaining of vast new experience in the management of central banks.

The second change is the elimination, for domestic purposes, of the convertibility of the currency into gold.

Free of the Money Market

Final freedom from the domestic money market exists for every sovereign national state where there exists an institution which functions in the manner of a modern central bank, and whose currency is not convertible into gold or into some other commodity.

The United States is a national state which has a central banking system, the Federal Reserve System, and whose currency, for domestic purposes, is not convertible into any commodity. It follows that our Federal Government has final freedom from the money market in meeting its financial requirements. Accordingly, the inevitable social and economic consequences of any and all taxes have now become the prime consideration in the imposition of taxes. In general, it may be said that since all taxes have consequences of a social and economic character, the government should look to these consequences in formulating its tax policy. All federal taxes must meet the test of public policy and practical effect. The public purpose which is served should never be obscured in a tax program under the mask of raising revenue.

What Taxes Are Really For

1. As an instrument of fiscal policy to help stabilize the purchasing power of the dollar;

2. To express public policy in the distribution of wealth and of income, as in the case of the progressive income and estate taxes;

3. To express public policy in subsidizing or in penalizing various industries and economic groups;

4. To isolate and assess directly the costs of certain national benefits, such as highways and social security.

In the recent past, we have used our federal tax program consciously for each of these purposes. In serving these purposes, the tax program is a means to an end. The purposes themselves are matters of basic national policy which should be established, in the first instance, independently of any national tax program.

Among the policy questions with which we have to deal are these:

* Do we want a dollar with reasonably stable purchasing power over the years?

* Do we want greater equality of wealth and of income than would result from economic forces working alone?

* Do we want to subsidize certain industries and certain economic groups?

* Do we want the beneficiaries of certain federal activities to be aware of what they cost?

These questions are not tax questions; they are questions as to the kind of country we want and the kind of life we want to lead. The tax program should be a means to an agreed end. The tax program should be devised as an instrument, and it should be judged by how well it serves its purpose.

Stable Purchasing Power

By all odds, the most important single purpose to be served by the imposition of federal taxes is the maintenance of a dollar which has stable purchasing power over the years. Sometimes this purpose is stated as “the avoidance of inflation”; and without the use of federal taxation all other means of stabilization, such as monetary policy and price controls and subsidies, are unavailing. All other means, in any case, must be integrated with federal tax policy if we are to have tomorrow a dollar which has a value near to what it has today.

The war has taught the government, and the government has taught the people, that federal taxation has much to do with inflation and deflation, with the prices which have to be paid for the things that are bought and sold. If federal taxes are insufficient or of the wrong kind, the purchasing power in the hands of the public is likely to be greater than the output of goods and services with which this purchasing demand can be satisfied. If the demand becomes too great, the result will be a rise in prices, and there will be no proportionate increase in the quantity of things for sale. This will mean that the dollar is worth less than it was before – that is inflation. On the other hand, if federal taxes are too heavy or are of the wrong kind, effective purchasing power in the hands of the public will be insufficient to take from the producers of goods and services all the things these producers would like to make. This will mean widespread unemployment.

The dollars the government spends become purchasing power in the hands of the people who have received them. The dollars the government takes by taxes cannot be spent by the people, and, therefore, these dollars can no longer be used to acquire the things which are available for sale. Taxation is, therefore, an instrument of the first importance in the administration of any fiscal and monetary policy.

To Distribute the Wealth

The second principal purpose of federal taxes is to attain more equality of wealth and of income than would result from economic forces working alone. The taxes which are effective for this purpose are the progressive individual income tax, the progressive estate tax, and the gift tax. What these taxes should be depends on public policy with respect to the distribution of wealth and of income. It is important, here, to note that the estate and gift taxes have little or no significance, as tax measures, for stabilizing the value of the dollar. Their purpose is the social purpose of preventing what otherwise would be high concentration of wealth and income at a few points, as a result of investment and reinvestment of income not expended in meeting day-to-day consumption requirements. These taxes should be defended and attacked it terms of their effects on the character of American life, not as revenue measures.

To Subsidize Some Industrial or Economic Interests

The third reason for federal taxes is to provide a subsidy for some industrial or economic interest. The most conspicuous example of these taxes is the tariffs on imports. Originally, taxes of this type were imposed to serve a double purpose since, a century and a half ago, the national government required revenues in order to pay its bills. Today, tariffs on imports are no longer needed for revenue. These taxes are nothing more than devices to provide subsidies to selected industries; their social purpose is to provide a price floor above which a domestic industry can compete with goods which can be produced abroad and sold in this country more cheaply except for the tariff protection. The subsidy is paid, not at the port of entry where the imported goods are taxed, but in the higher price level for all goods of the same type produced and sold at home.

To Assess the Costs of Certain Benefits

The fourth purpose served by federal taxes is to assess, directly and visibly, the costs of certain benefits. Such taxation is highly desirable in order to limit the benefits to amounts which the people who benefit are willing to pay. The most conspicuous examples of such measures are the social security benefits, old-age and unemployment insurance. The social purposes of giving such benefits and of assessing specific taxes to meet the costs are obvious. Unfortunately and unnecessarily, in both cases, the programs have involved staggering deflationary consequences as a result of the excess of current receipts over current disbursements.

The Bad Tax

The federal tax on corporate profits is the tax which is most important in its effect on business operations. There are other taxes which are of great concern to special classes of business. There are many problems of state and local taxation of business which become extremely urgent, particularly when a corporation has no profits at all. However, we shall confine our discussion to the federal corporation income tax, since it is in this way that business is principally taxed. We shall also confine our considerations to the problems of ordinary peacetime taxation since, during wartime, many tax measures, such as the excess-profits tax, have a special justification.

Taxes on corporation profits have three principal consequences – all of them bad. Briefly, the three bad effects of the corporation income tax are:

1. The money which is taken from the corporation in taxes must come in one of three ways. It must come from the people, in the higher prices they pay for the things they buy; from the corporation’s own employees in wages that are lower than they otherwise would be; or from the corporation’s stockholders, in lower rate of return on their investment. No matter from which sources it comes, or in what proportion, this tax is harmful to production, to purchasing power, and to investment.

2. The tax on corporation profits is a distorting factor in managerial judgment, a factor which is prejudicial to clear engineering and economic analysis of what will be best for the production and distribution of things for use. And, the larger the tax, the greater the distortion.

3. The corporation income tax is the cause of double taxation. The individual taxpayer is taxed once when his profit is earned by the corporation, and once again when he receives the profit as a dividend. This double taxation makes it more difficult to get people to invest their savings in business than if the profits of business were only taxed once. Furthermore, stockholders with small incomes bear as heavy a burden under the corporation income tax as do stockholders with large incomes.

Analysis

Let us examine these three bad effects of the tax on corporation profits more closely.

The first effect we observed was that the corporation income tax results in either higher prices, lower wages, reduced return on investment, or all three in combination. When the corporation income tax was first imposed it may have been believed by some that an impersonal levy could be placed on the profits of a soulless corporation, a levy which would be neither a sales tax, a tax on wages, or a double tax on the stockholder. Obviously, this is impossible in any real sense. A corporation is nothing but a method of doing business which is embodied in words inscribed on a piece of paper. The tax must be paid by one or more of the people who are parties at interest in the business, either as customer, as employee, or as stockholder.

It is impossible to know exactly who pays how much of the tax on corporation profits. The stockholder pays some of it, to the extent that the return on his investment is less than it would be if there were no tax. But, it is equally certain that the stockholder does not pay all of the tax on corporate income – indeed, he may pay very little of it. After a period of time, the corporation income tax is figured as one of the costs of production and it gets passed on in higher prices charged for the company’s goods and services, and in lower wages, including conditions of work which are inferior to what they otherwise might be.

The reasons why the corporation income tax is passed on, in some measure, must be clearly understood. In the operations of a company, the management of the business, directed by the profit motive, keeps its eyes on what is left over as profit for the stockholders. Since the corporation must pay its federal income taxes before it can pay dividends, the taxes are thought of – the same as any other uncontrollable expense – as an outlay to be covered by higher prices or lower costs, of which the principal cost is wages. Since all competition in the same line of business is thinking the same way, prices and costs will tend to stabilize at a point which will produce a profit, after taxes, sufficient to give the industry access to new capital at a reasonable price. When this finally happens, as it must if the industry is to hold its own, the federal income tax on corporations will have been largely absorbed in higher prices and in lower wages. The effect of the corporation income tax is, therefore, to raise prices blindly and to lower wages by an undeterminable amount. Both tendencies are in the wrong direction and are harmful to the public welfare.

Where Would the Money Go?

The second bad effect of the corporation income tax is that it is a distorting factor in management judgment, entering into every decision, and causing actions to be taken which would not have been taken on business grounds alone. The tax consequences of every important commitment have to be appraised. Sometimes, some action which ought to be taken cannot be taken because the tax results make the transaction valueless, or worse. Sometimes, apparently senseless actions are fully warranted because of tax benefits. The results of this tax-thinking is to destroy the integrity of business judgment, and to set up a business structure and tradition which does not hang together in terms of the compulsion of inner economic or engineering efficiency.

Premium on Debt

The most conspicuous illustration of the bad effect of tax consideration on business judgment is seen in the preferred position that debt financing has over equity financing. This preferred position is due to the fact that interest and rents, paid on capital used in business, are deductible as expense; whereas dividends paid are not. The result weighs the scales always in favor of debt financing, since no income tax is paid on the deductible costs of this form of capital. This tendency goes on, although it is universally agreed that business and the country generally would be in a stronger position if a much larger proportion of all investment were in common stocks and equities, and a smaller proportion in mortgages and bonds.

It must be conceded that, in many cases, a high corporation income tax induces management to make expenditures which prudent judgment would avoid. This is particularly true if a long-term benefit may result, a benefit which cannot or need not be capitalized. The long-term expense is shared involuntarily by government with business, and, under these circumstances, a long chance is often well worth taking. Scientific research and institutional advertising are favorite vehicles for the use of these cheap dollars. Since these expenses reduce profits, they reduce taxes at the same time; and the cost to the business is only the margin of the expenditure that would have remained after the taxes had been paid – the government pays the rest. Admitting that a certain amount of venturesome expenditure does result from this tax inducement, it is an unhealthy form of unregulated subsidy which, in the end, will soften the fibre of management and will result in excess timidity when the risk must be carried by the business alone.

The third unfortunate consequence of the corporation income tax is that the same earnings are taxed twice, once when they are earned and once when they are distributed. This double taxation causes the original profit margin to carry a tremendous burden of tax, making it difficult to justify equity investment in a new and growing business. It also works contrary to the principles of the progressive income tax, since the small stockholder, with a small income, pays the same rate of corporation tax on his share of the earnings as does the stockholder whose total income falls in the highest brackets. This defect of double taxation is serious, both as it affects equity in the total tax structure, and as a handicap to the investment of savings in business.

Shortly, an Evil

Any one of these three bad effects of the corporation income tax would be enough to put it severely on the defensive. The three effects, taken together, make an overwhelming case against this tax. The corporation income tax is an evil tax and it should be abolished.

The corporation income tax cannot be abolished until some method is found to keep the corporate form from being used as a refuge from the individual income tax and as a means of accumulating unneeded, uninvested surpluses. Some way must be devised whereby the corporation earnings, which inure to the individual stockholders, are adequately taxed as income of these individuals.

The weaknesses and dangers of the corporation income tax have been known for years, and an ill-fated attempt to abolish it was made in 1936 in a proposed undistributed profits tax. This tax, as it was imposed by Congress, had four weaknesses which soon drove it from the books. First, the income tax on corporations was not eliminated in the final legislation, but the undistributed profits tax was added on top of it. Second, it was never made absolutely clear, by regulation or by statute, just what form of distributed capitalization of withheld and reinvested earnings would be taxable to the stockholders and not to the corporation. Third, the Securities and Exchange Commission did not set forth special and simple regulations covering securities issued to capitalize withheld earnings. Fourth, the earnings of a corporation were frozen to a particular fiscal year, with none of the flexibility of the carry-forward, carry-back provisions of the present law.

Granted that the corporation income tax must go, it will not be easy to devise protective measures which will be entirely satisfactory. The difficulties are not merely difficulties of technique and of avoiding the pitfalls of a perfect solution impossible to administer, but are questions of principle that raise issues as to the proper locus of power over new capital investment.

Can the government afford to give up the corporation income tax? This really is not the question. The question is this: Is it a favorable way of assessing taxes on the people – on the consumer, the workers, and investors – who after all are the only real taxpayers? It is clear from any point of view that the effects of the corporation income tax are bad effects. The public purposes to be served by taxation are not thereby well served. The tax is uncertain in its effect with respect to the stabilization of the dollar, and it is inequitable as part of a progressive levy on individual income. It tends to raise the prices of goods and services. It tends to keep wages lower than they otherwise might be. It reduces the yield on investment and obstructs the flow of savings into business enterprise.

https://www.nakedcapitalism.com/2019/07/taxes-for-revenue-are-obsolete.html

MMT Primer – Blog #23 Responses

Sovereign Debt Limits

by L Randall Wray

http://neweconomicperspectives.org (November 10 2011)

Thanks for comments and apologies for being late. I just returned from Rio. And lest you think I was just tanning on the beach, I was actually indoors at a conference – underground, no less.

Rather than repeating the questions, let me just summarize six key issues raised.

1. We need to tie ourselves to the masthead of budget limits to keep politicians from spending too much.

For better or worse we have a budgeting process through which Congress decides how much to allocate to programs, then submits the plan to the President. Once approved, this authorizes spending. That is the”democratic” process through which our elected representatives decide which programs are worthy of funding – and at what levels. Much of the spending is “open-ended” in the sense that it is contingent (unemployment benefits paid will depend on economic performance, for example). I do not see how adding a constraint beyond this is either necessary or consistent with democratic control and accountability. Certainly, I do not support many or even most of the programs Congress and the President decide to fund. I can vote to throw the bums out. If I’m rich enough, I can try to buy them off with campaign contributions. By its very nature, a debt limit is arbitrary and inconsistent with the budgeting process. In the past, it never mattered – the budget trumped the limit and Congress routinely raised the limit. Now the politics of a minority is trying to subvert the budgeting process. In truth, the bigger danger is the new super-duper hand-picked for ignorance deficit committee that is authorized to ignore Congress’s will as expressed in the budget and to slash and burn programs in a thoroughly undemocratic manner.

2. Public goods provision is always less efficient than private goods provision, and production of public goods crowds-out private goods and hence must reduce overall efficiency.

This is faith-based economics of the worst sort. It has absolutely no evidence to support it and defies any logic. Outside of communist or socialist societies, I truthfully cannot see any legitimate use for the hazy term “efficiency” in economics. Unlike communist societies, capitalist societies never operate near to full capacity (with World Wars the only possible exception) and hence it is never a simple matter of taking resources away from private use to support public use. And in any case, one cannot imagine any private production without first having in place public provisioning.

3. A bloated government is a drag on growth and causes inflation.

Could be true. However, everywhere I look in the West (that is to say, among developed nations) the problem is a government that is far too small to succeed in the tasks at hand. Too much privatization, too many idle resources, inadequate provision of essential public services.

4. Who has the authority to issue “warrants” or “platinum coins”?

As discussed above, Congress and the President first work out a budget. That authorizes Treasury spending. We can come up with all sorts of procedures to allow Treasury to accomplish that task. A relatively primitive but effective one would be for it to simply print up Treasury notes and spend. Or it can directly keystroke entries into the deposit accounts of recipients – but that requires that Treasury can also keystroke reserves onto bank balance sheets. Since we divide the tasks between Treasury and the Fed, having banks “bank at the Fed”, it must be the Fed that keystrokes the reserves. There is no fundamental reason for this – banks could have accounts at the Treasury used for clearing and then the Treasury would keystroke the reserves. But we don’t do it that way. So we could have the Fed act as the Treasury’s bank, accepting a Treasury IOU and keystroking bank reserves. But we don’t do that either – we say that although the Fed is the Treasury’s bank, it is prohibited from directly accepting a Treasury IOU. And hence we created complex procedures that involve private banks, the Fed, and theTreasury to accomplish the same thing.

Now I went through all that simply as an introduction to the warrant and platinum coins proposals.

Treasury has the authority to issue platinum coins in any denomination, so could, for example, make large payments for military weapons by stamping large-denomination platinum coins. It would thereby skip the Fed and private banks. And since coins (and reserves and Federal Reserve notes) don’t count as government debt for purposes of the debt limit, this also allows the Treasury to avoid increasing debt as it spends platinum coins. Similarly, we could create some new IOU we call a warrant that is made acceptable (for example) in tax payment. It would be a Treasury IOU but would not be counted among the bills and bonds that total to the government debt. Like currency, it would be “redeemed” in tax payment, hence demanded by those with taxes due. So it is just another finesse to get around arbitrary limits or procedures put on Treasury spending.

5. Total Fed commitments (so far) to bail out Wall Street: $29 trillion.

That figure results from a close study by two University of Missouri-Kansas City (UMKC) PhD students who will soon be releasing their study.

6. What about Italy (et al)? Do they face market imposed debt limits (rather than simply tying their shoes together voluntarily)?

Yes. Go to my Great Leap Forward blog today: http://www.economonitor.com/lrwray/2011/11/10/is-this-the-end-of-the-faith-based-european-monetary-union/. They are now more like US states, users not issuers of the currency.

http://neweconomicperspectives.org/2011/11/blog-23-sovereign-debt-limits-response.html

Wray: MMT Primer – Blog #23

The Debate About Debt Limits (US Case)

by L Randall Wray

http://neweconomicperspectives.org (November 07 2011)

This week we will look at a “special case”, and one that preoccupied Washington recently. As we know, governments spend by keystrokes that they can never run out of – a sovereign government that issues its own currency through keystrokes can never face a financial constraint. However, it can choose to “tie its hands behind its back” by imposing rules and procedures that limit its keystrokes. It could, for example, simply impose a limit of “100 keystrokes per year”. It could require the Treasury Secretary to climb Mount Everest or to seek approval from terrestrial or extra-terrestrial gods before he is allowed to enter a keystroke. It could require a solar eclipse or similar “miracle” before government is allowed to credit a balance sheet.

We should not be fooled by such self-imposed constraints. We should be able to see through them to understand that since they are imposed by government on itself, they can be removed. Unfortunately, virtually all economists and policymakers come to see such self-imposed constraints as “natural”, something to never violate. Today we will look at the US “debt limit” that consumed policy makers in the US last summer – and will likely be visited again.

Before we proceed, let me acknowledge that I’ve promised our wonky readers some balance sheets and a detailed treatment of internal operating procedures used by the Federal Reserve (Fed) and Treasury to get around the self-imposed constraints. I have not forgotten. That is a matter for a later post.

In the United States, Congress establishes a federal government debt limit. When the outstanding quantity of federal government debt approaches that limit Congress must approve expansion of the limit. Note that this debt limit is established by policy, not by markets – that is, Congressional action is required by Congress’s own rules, and not by market pressure. Hence, it is not a question of whether the US government could sell more bonds, or even over the interest rate it would pay on the debt it sells.

In the aftermath of the Global Financial Collapse (GFC) of 2007, the US budget deficit increased (mostly due to loss of tax revenue, as discussed in a previous blog). Predictably, the amount of debt outstanding grew to the limit, and so each year Congress has had to increase the limit.

This blog will look at current procedures to see if there is an alternative to increasing the limit – while allowing the Treasury to continue to spend. We examined most of the details of the operating procedures in a previous blog; in this blog we extend that understanding to come up with an alternative procedure. We will use the distinction between High Powered Money (Federal Reserve Notes, Reserves, and Treasury Coins) and Treasury Debt (bills and bonds) – only Treasury Debt is included in the debt limits, although we know that all of these are government IOUs.

So let us see how we can untie Uncle Sam’s purse strings while living with current debt limits. It is actually a relatively easy thing to do, requiring only a modest change of procedure.

First, we need to review how things usually work. Congress (with the President’s signature) approves a budget that authorizes spending. Treasury then either cuts a check or directly credits a recipient’s bank account. While the US Constitution vests in Congress the power to create money, in practice the Treasury uses the US central bank, the Fed, to handle its payments. Current procedure is for the Treasury to hold deposits in its account at the Fed for the purposes of making payments. Hence, when it cuts a check or credits a private bank account, the Treasury’s deposit at the Fed is debited.

The Treasury tries to maintain a deposit of $5 billion at the close of each day. Taxes paid to the Treasury are first held in deposit accounts it has with special private banks. When it wants to replenish its deposit at the Fed, Treasury moves deposits from these banks. Obviously there are two complications: first, tax receipts bunch around tax due dates; and, second, the Treasury normally runs an annual budget deficit – more than a trillion Dollars in 2011. That means Treasury’s account at the Fed is frequently short.

To obtain deposits, the Treasury sells bonds (of various maturities). The easiest thing to do would be to sell them directly to the Fed, which would credit the Treasury’s demand deposit at the Fed, offset on the Fed’s balance sheet by the Treasury’s debt. Effectively, that is what any bank does – it makes a loan to you by holding your IOU while crediting your demand deposit so that you can spend.

But current procedures prohibit the Fed from buying Treasuries from the Treasury (with some small exceptions); instead it must buy Treasuries from anyone except the Treasury. That is a strange prohibition to put on a sovereign issuer of the currency, if you think about it, but it has a long history that we will not explore in this box. It is believed that this prevents the Fed from simply “printing money” to “finance” budget deficits so large as to cause high inflation – as if Congressional budget authority (and threatened Presidential veto) is not enough to constrain federal government spending sufficiently that it does not take the US down the path toward hyperinflation.

So, instead, the Treasury sells the Treasuries (bills and bonds) to private banks, which create deposits for the Treasury that it can then move over to its deposit at the Fed. And then the Fed buys Treasuries from the private banks to replenish the reserves they lose when the Treasury moves the deposits. Got that? The Fed ends up with the Treasuries, and the Treasury ends up with the demand deposits in its account at the Fed – which is what it wanted all along, but is prohibited from doing directly. The Treasury then cuts the checks and makes its payments. Deposits are credited to accounts at private banks, which simultaneously are credited with reserves by the Fed.

In normal times banks would find themselves with more reserves than desired, so offer them in the overnight Fed Funds market. This tends to push the Fed Funds rate below the Fed’s target, triggering an open market sale of Treasuries to drain the excess reserves. The Treasuries go back off the Fed’s balance sheet and into the banking sector. (With the Global Financial Crisis, the Fed changed operating procedure somewhat – it be gan to pay interest on reserves, and adopted”Quantitative Easing” that purposely leaves excess reserves in the banking system. That is a topic for another blog.)

And that is where the debt gridlock problem bites. Treasuries held by banks, households, firms, and foreigners are counted as government debt (and nongovernment wealth through accounting identities!) and thus subject to the imposed debt ceiling. Bank reserves, by contrast, are not counted as government debt. (One solution is to just stop the open market sales of Treasuries in order to leave the reserves in the banking system. That is essentially what Bernanke’s Quantitative Easing 2 (QE2) does: the Fed is buying hundreds of billions of Treasuries to inject reserves back into banks – the reserves that were drained by selling the Treasuries to banks in the first place.) So we are getting Treasuries back onto the Fed’s balance sheet, and yet gridlock remains because there are still too many Treasuries off the Fed’s balance sheet.

Here is a proposal to change procedures in a way that eliminates the need to raise debt limits. When Uncle Sam needs to spend and finds his cupboard bare, he can replenish his demand deposit at the Fed by issuing a nonmarketable “warrant” to be held by the Fed as an asset. With the full faith and credit of Uncle Sam standing behind it, the warrant is a risk-free asset to balance the Fed’s accounts. The warrant is just an internal IOU – from one branch of government to another – really not anything more than internal record keeping. If desired,Congress can mandate a low, fixed interest rate to be earned by the Fed on its holdings of these warrants (to be deducted against the excess profits it normally turns over to the Treasury at the end of each year). In return, the Fed would credit the Treasury’s deposit account to enable government to spend. When the Treasury spends, its account is debited, and the private bank that receives a deposit would have its reserves at the Fed credited.

From the Fed’s perspective it ends up with the Treasury’s warrant as an asset and bank reserves as its liability. The Treasury is able to spend as authorized by Congress, and its deficit is matched by warrants issued to the Fed. Congress would mandate that these warrants would be excluded from debt limits since they are nothing but a record of one branch of government (the Fed) owning claims on another branch (the Treasury). The Fed’s asset is matched by the Treasury’s warrant – so they net out.

And Congress would not need to increase the debt limit when a crisis hits that results in growing budget deficits.

This proposal just shows how silly it is to tie the Treasury’s hands behind its back through imposing debt limits. We already require that a budget is approved before Treasury can spend. That constraint is necessary to impose accountability over the Treasury. But once a budget is approved, why on earth would we want to prevent the Treasury from keystroking the necessary balance sheet entries in accordance with Congress’s approved spending?

The budgeting procedure should take into account projections of the evolution of macroeconomic variables like GDP, unemployment, and inflation. It should try to ensure that government keystroking will not be excessive, stoking inflation. It is certainly possible that Congress might guess wrong – and might want to revisei ts spending plan in light of developments. Or, it can build in automatic stabilizers to lower spending or raise taxes if inflation is fuelled. But it makes no sense to approve a spending path and then to arbitrarily refuse to keystroke spending simply because an arbitrary debt limit is reached.

http://neweconomicperspectives.org/2011/11/mmp-blog-23-debate-about-debt-limits-us.html

“Conflict is Required”

Exposing America’s Warfare State

by Alexander Aston

The Automatic Earth blog (July 25 2019)

CounterPunch (July 25 2019)

“Dulce et Decorum est” is a poem written by Wilfred Owen during World War One, and published posthumously in 1920. The Latin title is taken from Ode 3.2 of the Roman poet Horace and means “it is sweet and fitting …”. It is followed there by “pro patria mori”, which means “to die for one’s country”.

 

 

The muffled tongue of Big Ben tolled nine by the clock as the cortege left the palace, but on history’s clock it was sunset, and the sun of the old world was setting in a dying blaze of splendour never to be seen again.

– Barbara W Tuchman, The Guns of August (1962)

 

If you have not read Barbara Tuchman’s The Guns of August you should do so, it is one of the great, accessible works of history. Tuchman details with great clarity the diplomatic failures, miscalculations, and political logics that ensnared the imperial powers of Europe into the cataclysm of the Great War. It was the book that Kennedy drew upon when navigating the Cuban missile crisis. Just over a century since the guns fell silent in Europe, and nearly fifty years since nuclear holocaust was averted, the world is teetering on what might very well be the largest regional, potentially global, conflict since the second world war.

The United States is a warfare economy, its primary export is violence, and it is through violence that it creates the demand for its products. The markets of the Empire are the failed states, grinding civil conflicts, escalating regional tensions and human immiseration created by gunboat diplomacy. In true entrepreneurial spirit, the United States has repeatedly overestimated its abilities to control the course of events and underestimated the complexities of a market predicated on violence. However, since the beginning of the twenty-first century, the American Imperium has proven itself as incompetent as it is vicious. After nearly two decades of intensifying conflicts, a fundamentally broken global economy, and a dysfunctional political system, Washington has turned feral, lashing out against decline.

The points of instability in the global system are various and growing, and the only geopolitical logics that the Imperium appears to be operating under are threats, coercion, and violence. It is at this moment, with the most erratic president in the country’s history, surrounded by some of the most extreme neo-conservative voices, that the United States has been belligerently stumbling across the globe. In the past few months, we have witnessed a surrealistic reimagining of the Latin American coup, the medieval melodrama of Canadian vassals taking a royal hostage from the Middle Kingdom, and British buccaneers’ privateering off the coast of Gibraltar. The Imperial system is in a paroxysm of incoherent but sustained aggression.

It has long been clear that if another Great War were to emerge, it would likely begin in the Middle East. Just over a century later, we have found ourselves amidst another July crisis of escalating military and diplomatic confrontations. European modernity immolated itself in the Balkans through miscalculation, overconfidence, and the prisoner’s dilemma of national prestige. The conditions of the contemporary Middle East are no less volatile than those of Europe when the Austro-Hungarian Empire decided to attack Serbia. If anything, conditions are far more complex in a region entangled with allegiances and enmities that transgress and supersede the national borders imposed in the wake of the first world war.

The United States’ withdrawal from the Joint Comprehensive Plan of Action (JCPOA) and the stated aim of reducing Iranian oil exports to zero has enforced a zero-sum logic between the American Imperium and Persia. With each move and counter move the two countries are further entangled into the dynamics of a conflict. Much like the run-up to July 28th 1914, tanker seizures, drone shootdowns, sanctions, military deployments, and general bellicosity reinforce the rationale of the opposing sides and make it harder to back down without losing face and appearing weak.

Due to the asymmetry of the two powers, the Iranians have the fewest options for de-escalation while the American establishment perceives the least incentive. This dynamic is further exacerbated by major regional powers agitating for a conflict they believe they will benefit from. Indeed, the slide to war might be inexorable at this point, the momentum of historical causality may have already exceeded the abilities of those in power to control. Czar Nicholas and Kaiser Wilhelm were cousins that desperately wanted to avoid war and were nonetheless impotent to avert disaster. There is nowhere near such intimacy, communication, and motivation in our current context.

If war with Iran erupts, the Pax Americana will come to an end and humanity will fully enter a new historical epoch. The most unlikely scenario is an easy victory for the United States, yet even this outcome will only exacerbate the decline of the Empire. The other great powers would expedite their exit from the dollar system and drastically increase investment into the means to counter American hegemony. Likewise, victory would further reinforce Washington’s hubris, generating more serious challenges to the Imperial order and making the US prone to take on even bigger fights. Ironically, easy military success would almost assure the outbreak of a third world war in the long-term.

War with Iran would likely ignite violence in Israel-Palestine, Lebanon, and Iraq, re-energise and expand the ongoing wars in Syria and Yemen as well as generate sectarian violence and domestic insurgencies across the Middle East. Under such conditions, regional actors would likely utilise a dramatically intensifying conflict as cover for their own agendas, for example with a renewed Turkish assault on the Syrian Kurds. The conditions for rapid escalation are extremely high in which non-linear dynamics could easily take hold and quickly outstrip any attempts to maintain control of the situation.

Pyrrhic victory for either side is the most likely outcome, making the parallels to the Great War all the more salient. Global conflagration is a possibility, but with “luck” the fighting could be contained to the region. Nonetheless, amplified refugee crises, supply chain disruptions, and immense geopolitical realignments will cascade out of such an event. Undoubtedly, there would be concerted efforts to abandon the dollar system as quickly as possible. Furthermore, rapid increases in the price of oil would all but grind the global economy to a halt within a matter of months, tipping citizenries already saturated with private debt into financial crises.

Furthermore, the entanglement of the military-industrial complex, the petrodollar reserve currency system, and the omni-bubble generated by quantitative easing has left the Empire systemically fragile. Particularly, the bubble in non-conventional fuels precipitated by QE, depressed oil prices with scaled-down exploration, R&D and maintenance make the possibility of a self-reinforcing collapse in the American energy and financial systems extremely plausible. It is a Gordian knot which war with Persia would leave in fetters.

The most likely long-term outcome of a war with Iran would be the economic isolation and political fragmentation of the United States. What is assured is that whatever world results will not look anything like the world since 1945. The first world war collapsed the European world system, dynasties that had persisted for centuries were left in ruins and the surviving great powers crippled by the overwhelming expenditures of blood and treasure. We are on the precipice of another such moment. The American world system is fundamentally dependent upon the relationship between warfare, energy dominance, and debt.

Conflict is required to maintain control of the energy markets which prop up a financialised economy. A dynamic that puts the nation deeper in hock while amplifying resistance to financial vassalage. Losing energy dominance undermines the country’s reserve currency status and weakens the Empire’s ability to generate the debt necessary to sustain the warfare economy. Likewise, the system of national and international debt peonage parasitizes global populations to work against their own best interests. This fuels resentment and resistance which further drives the warfare economy. It is, in the inimitably-American expression, a “self-licking ice cream cone”.

On August 3rd 1914, one week into the war, the British Foreign Secretary Edward Grey famously remarked that “the lamps are going out across Europe and we shall not see them relit in our lifetime”. At the beginning of the twenty-first century, we face similar, terrifying prospects. Indeed, we could witness the collapse of democratic societies for a very long time to come. If we have any hope of averting calamity we need to generate loud opposition to imperialist warfare.

This does not mean some hackneyed anti-war movement based on past glories and the parochialism of domestic politics, but earnest effort to find common cause in resisting the insanity of those that seek profit in our collective suffering. This means working with people that we have very deep disagreements with by respecting our mutual opposition to the masters of war. It also means serious commitment to strategies such as tax and debt strikes as expressions of non-consent as well as other peaceful means of direct action. Indeed, it is from a place of agreement that we can potentially rebuild civil discourse and renew our trust in the ability of democratic institutions to mediate our quarrels. Perhaps it is too late to change course, but how sweet and fitting it is to face madness with dignity.

 

 

What is the cause of historical events? Power.

What is power? … power is a word the meaning of which we do not understand.

Kings are the slaves of history.

– Tolstoy, War and Peace (1869)

 

* * * * *

 

Dulce et Decorum Est

by Wilfred Owen

Bent double, like old beggars under sacks,
Knock-kneed, coughing like hags, we cursed through sludge,
Till on the haunting flares we turned our backs,
And towards our distant rest began to trudge.
Men marched asleep. Many had lost their boots,
But limped on, blood-shod. All went lame; all blind;
Drunk with fatigue; deaf even to the hoots
Of gas-shells dropping softly behind.

Gas! GAS! Quick, boys! – An ecstasy of fumbling
Fitting the clumsy helmets just in time,
But someone still was yelling out and stumbling
And flound’ring like a man in fire or lime. –
Dim through the misty panes and thick green light,
As under a green sea, I saw him drowning.

In all my dreams before my helpless sight,
He plunges at me, guttering, choking, drowning.

If in some smothering dreams, you too could pace
Behind the wagon that we flung him in,
And watch the white eyes writhing in his face,
His hanging face, like a devil’s sick of sin;
If you could hear, at every jolt, the blood
Come gargling from the froth-corrupted lungs,
Obscene as cancer, bitter as the cud
Of vile, incurable sores on innocent tongues, –
My friend, you would not tell with such high zest
To children ardent for some desperate glory,
The old Lie: Dulce et decorum est
Pro patria mori.

Copyright (c) 2009~2019 ZeroHedge.com/ABC Media, LTD

https://www.theautomaticearth.com/2019/07/dulce-et-decorum-est/

https://www.zerohedge.com/news/2019-07-25/conflict-required-exposing-americas-warfare-state