It is disappointing that the Treasury quashed talk of the Trillion Dollar Coin so early in the discussion. It may be good politics, and it certainly hurt the Republicans, so there’s that. But it halted at a very early stage a discussion of the actual role of money in our economy, just as we were beginning to unlearn the myths we learned in Econ 101 and relearn the subject in a new and useful way.
We were fortunate to have L. Randall Wray here for a Book Salon on his valuable Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems. I had a lot of unlearning to do, so it took a long time for me to read it, and when I finished, I realized that I would have to reread it to make sure it I actually unlearned everything I remembered from my introductory course, and relearned things from the correct perspective, the perspective of observed fact as opposed to received myth.
Until about the time of Galileo, people believed that the earth was the center of the universe, and that the sun revolved around the earth. That view was so widespread in part because it was an article of faith. The Roman Catholic Church regarded it as a matter of religious doctrine because of several verses of the Bible. Teaching Copernicus’ new theory was heresy, punishable by the Inquisition, and Galileo found himself in trouble over his support of the theory. At that point in human history, I don’t think it mattered exactly how it worked. In fact, for practically all purposes of our daily lives, it doesn’t matter. Just as for the people in Galileo’s time, it’s enough that the sun rises in the East and sets in the West, and we can go about our days in peace without even thinking about what’s moving where.
For Galileo and Copernicus, the first step was to look at the heavens, and see exactly what was actually happening. It required hours of patient looking, making careful notes and drawings, and plotting things out as they were observed. Only then was it possible to make sense of the data.
Right now, we live in a world of myths. There are some perfectly obvious myths, like the conservative view of Ronald Reagan, which are obvious because we can see their actual construction. Pushback is a struggle in the face of the dogmatic belief structure of the worshippers of Reagan, which doesn’t allow for contradictory information.
Adam Smith launched one of those myths in his Wealth of Nations, the myth that money arose in barter societies as a convenience. People believe that today, in spite of the fact that it was a pure invention, known in Smith’s time to be utterly false. That myth enabled Smith to say that money has intrinsic value, and that the role of government is to protect that value.
That myth infects everyone today. One form it takes is the conviction that a government is just like a household: it can only spend money it raises through taxes, just as people can only spend money they get from earnings or theft. Wray gives a good example of this myth in action in a colloquy between Congressman Sean Duffy (R-WI) and Ben Bernanke in Congressional Testimony on QE2 [link with very helpful commentary by Warren Mosler which I omit]:
“DUFFY: We had talked about the QE2 with Dr. Paul. When — when you buy assets, where does that money come from?
BERNANKE: We create reserves in the banking system which are just held with the Fed. It does not go out into the public.
DUFFY: Does it come from tax dollars, though, to buy those assets?
BERNANKE: It does not.
DUFFY: Are you basically printing money to buy those assets?
BERNANKE: We’re not printing money. We’re creating reserves in the banking system.
Here’s how Wikipedia describes Duffy:
Sean Patrick Duffy (born October 3, 1971) is an American politician, prosecutor, former sports commentator and reality televisionpersonality. He first entered public life as a cast member on The Real World: Boston and 2002’s Real World/Road Rules Challenge: Battle of the Seasons, before going on to serve as district attorney of Ashland County, Wisconsin and the U.S. Representative for Wisconsin’s 7th congressional district. He is a member of the Republican Party.
There is no reason to think Duffy is stupid; he is obviously quite competent. But he is in the grip of the myth of government spending based solely on revenues from taxation (or fines or fees or the like). It isn’t true, and Bernanke knows it. He can’t or won’t just say it to Duffy, so he uses language that Duffy won’t understand. I’m sure that Duffy’s possible confusion mirrors that which most Americans would feel.
Wray gives us an even more blatant example from Paul Samuelson, who wrote the textbook I used in College, as I suspect most of us did. Bill Black refers to it in his introduction to the Book Salon. Samuelson says in an interview on TV:
I think there is an element of truth in … the superstition that the budget must be balanced at all times [is necessary]. Once it is debunked [that] takes away one of the bulwarks that every society must have against expenditure out of control. [O]ne of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that the long-run civilized life requires. We have taken away a belief in the intrinsic necessity of balancing the budget if not in every year, [then] in every short period of time…. I have to say I see merit in that view.
Wray at 200. Samuelson’s myth is a dogma held by everyone today, including, no doubt, Sean Duffy. In order for us to see clearly what government can and cannot do, we have to make careful observations of the actual functioning of our economy. Economics will have to become a real science, and we will have to throw off the elitist myths handed down to us by Samuelson and his colleagues. The first step is debunking of stupid and cruel myths, and relearning based on close observation of reality. That is the discussion we lost when the Treasury cut off discussion of the Trillion Dollar Coin.
Image from Harmonia Macrocosmica, 1661