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An LSD**-dosed Interview with James Galbraith

2010/05/26

[Update and bump: Related previous thoughts here.]

Libertarian Advocate notes Cesspool of Humanity’s disbelief of WaPo’s Ezra Klein’s LSD**-dosed Interview with James Galbraith.

EK: But putting inflation aside, the gap between spending and revenues won’t have other ill effects?

JG: Is there any terrible consequence because we haven’t prefunded the defense budget? No. There’s only one budget and one borrowing authority and all that matters is what that authority pays. Say I’m the federal government and I wish to pay you, Ezra Klein, a billion dollars to build an aircraft carrier. I put money in your bank account for that. Did the Federal Reserve look into that? Did the IRS sign off on it? Government does not need money to spend just as a bowling alley does not run out of points.

What people worry about is that the federal government won’t be able to sell bonds. But there can never be a problem for the federal government selling bonds. It goes the other way. The government’s spending creates the bank’s demand for bonds, because they want a higher return on the money that the government is putting into the economy. My father said this process is so simple that the mind recoils from it.

EK: What are the policy implications of this view?

JG: It says that we should be focusing on real problems and not fake ones. We have serious problems. Unemployment is at 10 percent. if we got busy and worked out things for the unemployed to do, we’d be much better off. And we can certainly afford it. We have an impending energy crisis and a climate crisis. We could spend a generation fixing those problems in a way that would rebuild our country, too. On the tax side, what you want to do is reverse the burden on working people. Since the beginning of the crisis, I’ve supported a payroll tax holiday so everyone gets an increase in their after-tax earnings so they can pay down their mortgages, which would be a good thing. You also want to encourage rich people to recycle their money, which is why I support the estate tax, which has accounted for an enormous number of our great universities and nonprofits and philanthropic organizations. That’s one difference between us and Europe.

Government does not need money to spend just as a bowling alley does not run out of points.”  Money as bowling points?  Dangerous metaphor.  Since Galbraith set-up this pin, let’s take a rumble down the lane…

Right off the top,  bowling-alleys do not create points.  Bowlers do that.  Imagine, if you will, the havoc if… an Alley decided to ‘create points’ out of thin air, to deposit unearned points into various bowlers’ scores.  A step further: Imagine the Alley deducting earned points for redistribution into a “bowling safety net.” The credibility of the Alley would flop in sync with the credulity of players keeping honest score.  Players – especially productive players – would seek other alleys or even other games entirely.  Alas… what Galbraith fails to appreciate is that alleys can indeed “run out of” (other peoples’) points.

It is clear from Galbraith’s quip that he confuses money with wealthMoney, as shown in the practice of double-entry accounting is a zero-sum phenomenon, however it is vital to understand that *wealth is not so. In any system there is a certain level of wealth; money is merely a unit representation of that total wealth.  Where money is an immediate, tangible unit of exchange, wealth is a long-term or future promise.  Printing more money thus does not print more wealth. Printing can only inflate the money supply and so dilute the unit value.  (Friedman showed that inflation is always and everywhere a monetary phenomenon.)

‘Tis why Government can print and borrow money, but it can not create wealth.  Government – especially centralized government – can only redistribute debt through the mechanism of money, and it does so at great cost to net wealth.  It is thus hideously inefficient.

The rule is awkward:  The voluntary exchange of money and valuables by willing buyers and sellers in a free market creates more wealth; it is thus a form of wealth redistribution.  In contrast, the forced exchange of money or services or valuables from one to another creates real and moral debt; it is thus a form of debt redistribution.  Biologists will recognize the parallels in symbiosis and parasitism.

Galbraith doesn’t want to admit that the only way to “spread the wealth around” is to ensure liberty and free markets. If one wishes to concentrate power, one must do the opposite: Limit freedom and regulate markets.  A society can not be simultaneously wealthy and centrally controlled.  Werner Heisenberg would get it.

A society can not be simultaneously wealthy and centrally controlled.

Then there’s this nonsense: “The government’s spending creates the bank’s demand for bonds, because they want a higher return on the money that the government is putting into the economy. My father said this process is so simple that the mind recoils from it.” Not so fast.  They want a higher return because… they must offset risk.  Risk.  That government spending is inherently risky is so obvious that liberals recoil from it.

Thanks to LA and Shakes for the heads-up.

[*Update: See Thomas Sowell, here. Tip o’ the hat to Ira Stoll – Ed.]

[**Liberal-Spending Disorder – Ed.]

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4 Comments leave one →
  1. 2010/05/18 14:00

    LSD indeed. How else can that nonsense be explained. Huffing paint fumes, maybe?

    • 2010/05/25 18:38

      Thanks Steven – I don’t know what accounts for the stubborn grip on increasingly discredited central planning & control theories. Gotta be the fumes, man.

  2. 2010/05/27 15:13

    Thanks for the link to the Cesspool!

    Galbraith blows my mind. Other liberals are taking que. I saw a few items yesterday on the deficit and deficit hawks. Lefties are acting like the deficit and the debt are ‘made up’ issues used to kill Obama administration policies.

    I guess it goes back to people on the left not having a clear understanding of economic concepts like scarcity and opportunity cost. They really do believe they can have their cake and eat it too.

    • 2010/05/27 16:12

      Yeah – Some fit into that camp, especially Rahm’s “F!R’s” who have never met a payroll. I’m a cynic: I think some others – especially in academia – know very well that snake-oil is what they’re selling.

      What they’re buying – Galbraith and Geithner and Kroooogman and their ilk – is power. They have the arrogance to think that they are indeed the modern luminous ones, the ones who can do it right “this time” where others have failed miserably before them.

      They also have the arrogance to assume that their asses can’t be fact-checked.

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