Re: Refuting supply-side economics

From: William F Hummel (wfhummel_at_comcast.net)
Date: 09/22/04 

Date: Wed, 22 Sep 2004 03:54:52 GMT

On Tue, 21 Sep 2004 22:09:54 -0400, "Mark Monson" <m_monson@ztech.com>
wrote:
>
>"William F Hummel" <wfhummel@comcast.net> wrote in message
>>
>> Crowding out in financial terms is a myth. Treasury bond sales don't
>> compete with investment in the private sector. The proceeds from the
>> sales are immediately deposited in the Treasury's accounts in
>> commercial bank where they count as reserves of the banking system,
>> and available to back loans.
>>
>> Furthermore, the only reason the Treasury sells bonds is to recapture
>> its deficit spending. This reciprocal flow of funds has no net effect
>> on the aggregate bank deposits of the private sector.
>>
>> Crowding out only occurs in real terms, if the government preempts
>> labor and materials in demand by the private sector. The last time
>> there was any significant crowding out was in World War II when
>> rationing was imposed on a number of strategic materials, and the
>> civilian labor force was strained to the limit due to the needs of the
>> military.
>
>It is a fundamental mistake to think that public debt has the same effect on
>distribution of wealth as debt free greenbacks. The interest paid to treasury bond
>holders is a dead loss to taxpayers. They receive nothing in return for the
>interest they pay to bond holders. The goods consumed purchase with bond interest
>are goods that are lost to the producers.

There is no such thing as "debt free greenbacks." Intrinsically
worthless tokens such as greenbacks are necessarily a promise to
redeem, meaning a debt of the issuer. The only form of debt free
money is a valuable commodity, in which case the economy using that
"money" cannot be distinguished from a barter economy. Such money
could be "issued" by anyone who produces the commodity, and its value
is simply what goods and services a unit of the commodity could be
traded for.

Surprise! All government spending represents a "dead loss" to those
taxpayers who can't partake of the benefits of that spending. For
example, spending on a US highway in Vermont doesn't do anything for
those who never visit the state, which is probably over 95% of the
total population. Taxes for farm subsidies are a double whammy
because the consumer pays higher prices and gains nothing financially
from the taxes paid. All government spending redistributes financial
wealth. We accept the obvious inequities, hoping that it all balances
out in the end -- which of course it doesn't.

The unique thing about interest on the debt is that any taxpayer with
savings to lend can do so and receive interest payments, independent
of the political decisions in Congress. The benefits of all other
government spending is subject to power politics, in which most
taxpayers have no voice.
>
>You can say that taxpayers receive the use of borrowed funds that the government
>spends but that begs the question of the necessity in the first place of government
>debt.

Government debt is implicit in any fiat money system. If you can't
see that, you don't understand how a modern fiat money system works.

>The greenbacks experiment proved that government can regulate a base money
>supply without incurring debt by simply spending money into circulation.

Absurd. Simply spending intrinsically worthless fiat money into
circulation, and never recapturing it through taxes and bond sales (if
necessary) is a prescription for hyperinflation. The only exception
would be an economy that grows fast enough to absorb all of the fiat
money spent into circulation without price inflation. That implies a
government that is far smaller far smaller than we have today, and
certainly not one that supports a massive military/industrial complex.

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