The Nation’s William Mitchell, who is also a research professor of economics and director of the Centre of Full Employment and Equity at Australia’s University of Newcastle, has just penned what is perhaps the most asinine treatise on economics ever written. In fact, the word “asinine” does not nearly begin to convey the level of economic obtuseness contained within.
What follows are some excerpts, some comments, and a single question by which I can demonstrate that the Mitchell Theory is a complete fraud:
“Austerity will worsen the crisis, because it is built on a lie. Public deficits do not cause inflation, nor do they impose crippling debt burdens on our children and grandchildren. Deficits do not cause interest rates to rise, choking private spending. Governments cannot run out of money.” Yes, if by “money” you mean those pieces of paper containing portraits of dead presidents, then yes, governments cannot run out of money. Weimar Germany showed us that governments can print so much money that there are bushel loads available for all. But Weimar also demonstrated that ”money” can indeed run out of value.
“The neoliberal narrative has run into some inconvenient facts. Interest rates remain low . . .” Indeed, when the government, in the form of the Federal Reserve “buys” the majority of America’s newly issued debt, it does seem to have a way of keeping interest rates down. It will be interesting to see what happens in the months after June when the second round of “quantitative easing” ends.
“In most of the developed world inflation is falling, and where it is rising, it is due to rising energy and food costs rather than excessive deficits.” Cart. Horse. Energy and food prices are increasing because of inflation. Rising prices are not the cause of inflation, any more than rising mercury is the cause of higher temperatures. Gas and food are more expensive because money is less valuable. Inflation is a monetary phenomenon.
To see why this is so, consider this thought experiment: A distant island nation untouched by outsiders happens upon a treasure chest of paper money that washes upon its shore. The paper itself has no intrinsic value, but perhaps because these native peoples are somehow also drawn toward pictures of dead white guys (DWGs), they decide to implement this paper scrip as currency. For years, a loaf of bread costs the same quantity of DWGs, and an hour of labor never varies in price, and land never escalates in value. Life goes on exceedingly well, until one day a native discovers a second chest with an equal quantity of money. He’s rich!
But then problems arise. Because the “rich” man can afford to outbid any of his neighbors for anything, he does so, buying up the best land, hiring the best workers, and marrying the prettiest wives. But what becomes of prices? Well, once the second load of currency works its way into the island’s economy, the cost of everything effectively doubles. It takes twices as many DWGs to buy the same loaf of bread. That’s because there was no increase in the island’s economic output; only an increase in the money supply. No additional value, but twice the currency means that value of each DWG is eventually half.
In fact, there’s probably a good study idea in here for someone to analyze the speed with which prices rise after a money supply change as a function of the velocity of money. One of the consequences of our recent economic troubles is that the velocity of money dropped. If my hunch is right, that would delay the consequences of inflation. This is perhaps why people like Mr. Mitchell are able to fool followers who are similarly blind to the inflationary dangers of the steps taken by the government and the Fed.
“But the government is not a big household. It can consistently spend more than its revenue because it creates the currency. Whereas households have to save (spend less than they earn) to spend more in the future, governments can purchase whatever they like whenever there are goods and services for sale in the currency they issue. Budget surpluses provide no greater capacity to governments to meet future needs, nor do budget deficits erode that capacity. Governments always have the capacity to spend in their own currencies. Why? Because they are the issuers of their own currencies, governments like Britain, the United States, Japan and Australia can never run out of money.” The list of nations that have mistakenly thought this is a long one going back at least to the days that Romans reduced the quantity of silver in the denarius. From Ancient Rome to Habsburg Spain to Zimbabwe, we know that this is not true.
“Why, then, do governments borrow? Under the gold standard governments had to borrow to spend more than their tax revenue. But since 1971 that necessity has lapsed. Now governments issue debt to match their deficits only as a result of pressure placed on them by neoliberals to restrict their spending. Conservatives know that rising public debt can be politically manipulated and demonized, and they do this to put a brake on government spending. But there is no operational necessity to issue debt in a fiat monetary system.” [Emphasis in original.]
My question is a different one: If the Mitchell Theory is correct, why then do governments tax?
The answer is simple: They have to, because even governments are not immune to the first law of thermodynamics. Energy, be it economic or otherwise, cannot be created from nothing. William Mitchell of the Centre of Full Employment and Equity is just another in a long line of charlatans promising perpetual motion machines. And the folks at the Nation join the list of fools who have gone broke following frauds.
I commend the entire article to you as an example of sophistry of the highest order.
RELATED: Forbes’ Reuven Brenner discusses a similar subject: “Macroeconomics’ New Alchemy: Getting Something for Nothing.”