Warren Mosler and Soft Economics

Warren Mosler‘s Soft Economics

Extracts from:  Warren Mosler’s Soft Economics paper

“In the midst of great abundance our leaders promote privation. We are told that national health care is unaffordable, while hospital beds are empty. We are told that we cannot afford to hire more teachers, while many teachers are unemployed. And we are told that we cannot afford to give away school lunches, while surplus food goes to waste.

When people and physical capital are employed productively, government spending that shifts those resources to alternative use forces a trade-off. For example, if thousands of young men and women were conscripted into the armed forces the country would receive the benefit of a stronger military force. However, if the new soldiers had been home builders, the nation may suffer a shortage of new homes. This trade-off may reduce the general welfare of the nation if Americans place a greater value on new homes than additional military protection. If, however, the new military manpower comes not from home builders but from individuals who were unemployed, there is no trade-off. The real cost of conscripting home builders for military service is high; the real cost of employing the unemployed is negligible.

The essence of the political process is coming to terms with the inherent trade-offs we face in a world of limited resources and unlimited wants. The idea that people can improve their lives by depriving themselves of surplus goods and services contradicts both common sense and any respectable economic theory.”

  • Monetary policy sets the price of money, which only indirectly determines the quantity. It will be shown that the overnight interest rate is the primary tool of monetary policy. The Federal Reserve sets the overnight interest rate, the price of money, by adding and draining reserves. Government spending, taxation, and borrowing can also add and drain reserves from the banking system and, therefore, are part of that process.
  • The money multiplier concept is backwards. Changes in the money supply cause changes in bank reserves and the monetary base, not vice versa.
  • Debt monetization cannot and does not take place.
  • The imperative behind federal borrowing is to drain excess reserves from the banking system, to support the overnight interest rate. It is not to fund untaxed spending. Untaxed government spending (deficit spending) as a matter of course creates an equal amount of excess reserves in the banking system. Government borrowing is a reserve drain, which functions to support the fed funds rate mandated by the Federal Reserve Board of Governors.
  • The federal debt is actually an interest rate maintenance account (IRMA).
  • Fiscal policy determines the amount of new money directly created by the federal government. Briefly, deficit spending is the direct creation of new money. When the federal government spends and then borrows, a deposit in the form of a treasury security is created. The national debt is essentially equal to all of the new money directly created by fiscal policy.
  • Options over spending, taxation, and borrowing, however, are not limited by the process itself but by the desirability of the economic outcomes. The amount and nature of federal spending as well as the structure of the tax code and interest rate maintenance (borrowing) have major economic ramifications. The decision of how much money to borrow and how much to tax can be based on the economic effect of varying the mix, and need not focus solely on the mix itself (such as balancing the budget).

See Warren Mosler’s Soft Economics paper

One thought on “Warren Mosler and Soft Economics

  1. Pingback: Warren Mosler and Soft Economics | Think Left | kickingthecat

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s