We can have BOTH low priced imports AND good jobs for all Americans

Attorney General Richard Blumenthal has urged US Treasury Secretary Geithner to take legal action to force China to let its currency appreciate. As stated by Blumenthal: “By stifling its currency, China is stifling our economy and stealing our jobs. Connecticut manufacturers have bled business and jobs over recent years because of China’s unconscionable currency manipulation and unfair market practices.”

The Attorney General is proposing to create jobs by lowering the value of the dollar vs. the yuan (China’s currency) to make China’s products a lot more expensive for US consumers, who are already struggling to survive. Those higher prices then cause us to instead buy products made elsewhere, which will presumably means more American products get produced and sold. The trade off is most likely to be a few more jobs in return for higher prices (also called inflation), and a lower standard of living from the higher prices.

Fortunately there is an alternative that allows the US consumer to enjoy the enormous benefits of low cost imports and also makes good jobs available for all Americans willing and able to work. That alternative is to keep Federal taxes low enough so Americans have enough take home pay to buy all the goods and services we can produce at full employment levels AND everything the world wants to sell to us. This in fact is exactly what happened in 2000 when unemployment was under 4%, while net imports were $380 billion. We had what most considered a ‘red hot’ labor market with jobs for all, as well as the benefit of consuming $380 billion more in imports than we exported, along with very low inflation and a high standard of living due in part to the low cost imports.

The reason we had such a good economy in 2000 was because private sector debt grew at a record 7% of GDP, supplying the spending power we needed to keep us fully employed and also able to buy all of those imports. But as soon as private sector debt expansion reached its limits and that source of spending power faded, the right Federal policy response would have been to cut Federal taxes to sustain American spending power. That wasn’t done until 2003- two long years after the recession had taken hold. The economy again improved, and unemployment came down even as imports increased. However, when private sector debt again collapsed in 2008, the Federal government again failed to cut taxes or increase spending to sustain the US consumer’s spending power. The stimulus package that was passed almost a year later in 2009 was far too small and spread out over too many years. Consequently, unemployment continued to rise, reaching an unthinkable high of 16.9% (people looking for full time work who can’t find it) in March 2010.

The problem is we are conducting Federal policy on the mistaken belief that the Federal government must get the dollars it spends through taxes, and what it doesn’t get from taxes it must borrow in the market place, and leave the debts for our children to pay back. It is this errant belief that has resulted in a policy of enormous, self imposed fiscal drag that has devastated our economy.

My three proposals for removing this drag on our economy are:

1. A full payroll tax (FICA) holiday for employees and employers. This increases the take home pay for people earning $50,000 a year by over $300 per month. It also cuts costs for businesses, which means lower prices as well as new investment.

2. A $500 per capita distribution to State governments with no strings attached. This means $1.75 billion of Federal revenue sharing to the State of Connecticut to help sustain essential public services and reduce debt.

3. An $8/hr national service job for anyone willing and able to work to facilitate the transition from unemployment to private sector employment as the pickup in sales from my first two proposals quickly translates into millions of new private sector jobs.

Because the right level of taxation to sustain full employment and price stability will vary over time, it’s the Federal government’s job to use taxation like a thermostat- lowering taxes when the economy is too cold, and considering tax increases only should the economy ‘over heat’ and get ‘too good’ (which is something I’ve never seen in my 40 years).

For policy makers to pursue this policy, they first need to understand what all insiders in the Fed (Federal Reserve Bank) have known for a very long time- the Federal government (not State and local government, corporations, and all of us) never actually has nor doesn’t have any US dollars. It taxes by simply changing numbers down in our bank accounts and doesn’t actually get anything, and it spends simply by changing numbers up in our bank accounts and doesn’t actually use anything up. As Federal Reserve Chairman Bernanke explained in to Scott Pelley on ’60 minutes’ in May 2009:

(PELLEY) Is that tax money that the Fed is spending?
(BERNANKE) It’s not tax money. The banks have– accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed.

Therefore, payroll tax cuts do NOT mean the Federal government will go broke and run out of money if it doesn’t cut Social Security and Medicare payments. As the Fed Chairman correctly explained, operationally, spending is not revenue constrained.

We know why the Federal government taxes- to regulate the economy- but what about Federal borrowing? As you might suspect, our well advertised dependence on foreigners to buy US Treasury securities to fund the Federal government is just another myth holding us back from realizing our economic potential.

Operationally, foreign governments have ‘checking accounts’ at the Fed called ‘reserve accounts,’ and US Treasury securities are nothing more than savings accounts at the same Fed. So when a nation like China sells things to us, we pay them with dollars that go into their checking account at the Fed. And when they buy US Treasury securities the Fed simply transfers their dollars from their Fed checking account to their Fed savings account. And paying back US Treasury securities is nothing more than transferring the balance in China’s savings account at the Fed to their checking account at the Fed. This is not a ‘burden’ for us nor will it be for our children and grand children. Nor is the US Treasury spending operationally constrained by whether China has their dollars in their checking account or their savings accounts. Any and all constraints on US government spending are necessarily self imposed. There can be no external constraints.

In conclusion, it is a failure to understand basic monetary operations and Fed reserve accounting that caused the Democratic Congress and Administration to cut Medicare in the latest health care law, and that same failure of understanding is now driving well intentioned Americans like Atty General Blumenthal to push China to revalue its currency. This weak dollar policy is a misguided effort to create jobs by causing import prices to go up for struggling US consumers to the point where we buy fewer Chinese products. The far better option is to cut taxes as I’ve proposed, to ensure we have enough take home pay to be able to buy all that we can produce domestically at full employment, plus whatever imports we want to buy from foreigners at the lowest possible prices, and return America to the economic prosperity we once enjoyed.

38 Responses

  1. Almost perfect. Would it be made better by including a sentence or two explaining why the resulting deficits are not inflationary, the reason being that inflation results from spending power exceeding real output of goods and services, rather than any absolute level of government expenditure, and that this excess demand can also be adjusted through fiscal policy when the need arises? Otherwise, it is spot on.

      1. Nominal aggregate demand. The role of fiscal policy is to balance nominal aggregate demand in relation to real output capacity. If NAD falls short, e.g., when the public desires to save, then there is not enough spending power to sustain full utilization of capacity, resulting in recession and rising unemployment. Conversely, if NAD exceeds real output capacity, then inflation will result. Under a fiat regime, the government as currency issuer has the prerogative and ability to harmonize NAD and real output capacity, therefore, I would argue, it has the responsibility to do so. The “fiscal discipline” doctrine is doctrinaire, based on moralizing, not operational reality.

  2. yes, good thoughts.
    i do that elsewhere but maybe ended this too soon as you suggest.

    and of course allowing low priced imports keeps our cost of living lower than otherwise.

    1. Yes, I think that the inflation objection needs to be anticipated and countered. It’s the consistent response.

      1. Although this has probably been mentioned before, I thought I would mention it again. One objection to inflation, real or imagined, is that it is cheating. Gov’t spending might bring about recovery and full employment, but you don’t get something for nothing, and we, or our children, will pay through the nose later, probably by inflation. You can argue that there will be no inflation, but nobody knows the future. What we do know is that there is no free lunch. Somebody has to pay sooner or later. That moral objection can, and, IMO, should be addressed.

      2. I agree, MIn. That reasoning, based on “everyone knows,” is flawed, but until this is demonstrated, it will remain the conventional wisdom. People have to be shown how it is that the government as currency issuer is fundamentally different from households, firms, and states in the US, because the currency issuer is not financially constrained and users of the currency are. For the latter, there is no free lunch, but without the currency issuer there is no lunch at all.

      3. Tom Hickey, stumbled over a 1972 interview with Abba Lerner, he has some interesting things to say about inflation (he does bring to mind the oil and healthcare sectors)

        It is really due, not to people trying to buy more than is available, but to the various contributors to production, trying to get or demanding as their share for work, or for capital, its profit, more than 100 per cent of the total product.

        As to your point, “People have to be shown how it is that the government as currency issuer is fundamentally different from households, firms, and states in the US”. Maybe we need to start at first principles:

        The two primary sovereign powers are the monopoly of violence and seignoriage. Or to put it another way, the difference between the US and every household, firm and State is that only Uncle Sam can own nuclear weapons and create money. This means our Government can create the money to pay our debts as they come due and no foreign creditor can ever coerce us into paying (yes I know I’m oversimplifying). As Thomas Edison pointed out, the Government can just as easily create money as it can create debt, so why not eliminate the interest costs by cutting out the middle man and creating money directly?.

        Americans have long entrusted its elected leaders with the power to use nuclear weapons, its difficult to argue then why they shouldn’t also be entrusted with the power to create money. If anyone sincerely believes inflation is more dangerous than nuclear war, perhaps what we should really be worrying about is untreated mental illness. :o)

      4. Beowulf, what Lerner said then is no longer the case regarding production in an environment dominated by global labor arbitrage, where wages are flat to falling, but it is true in FIRE, where most of the price increases are emerging. Employee compensation is only holding flat because of increases in benefits, primarily health insurance, which is going to increased profit share for FIRE.

        Secondly, you say, “…why not eliminate the interest costs by cutting out the middle man and creating money directly?” I am not sure what you mean by this. If you mean ending the $4$ requirement to offset deficits with debt issuance, I agree. If you mean something different, please spell it out.

        Here’s how currency creation works as I understand it. When funds are appropriated in the budget, the various agencies disburse these funds, and the Treasury covers this either by crediting bank accounts directly or issuing checks. The Fed provides reserves to the Treasury account for settlement in the interbank system. If there is a budget deficit, the Treasury issues debt to offset it IAW current law rather than financial necessity.

        If you are saying that Fed CB operations should be explicitly assumed by government, I agree. But that would not really change anything but perception, since the CB is already a government agency.

        On the other hand, banks create credit money through credit extension. Loans create deposits. So credit money is debt-based.

      5. Tom Hickey,

        I take your point about wage inflation, I was thinking of what Lerner called “seller inflation”.

        You read me correctly about no longer offsetting deficits with public debt issuance, whether by adopting a zero interest rate policy or by paying IOR. Of course if the Fed simply bought and held Treasuries, it’d be the same economic effect as Tsy overdrafting its Fed account, either way Tsy would pay interest to the Fed, which would refund it back Tsy.

        The number one thing to stop the deficit hawks from crippling the economy, even more than they have already, is to require all new Tsy debt (and rolled over old debt) to only pay interest that the Fed is going to refund to Tsy. From what I’ve read, the budget hawks have as a target to cut the 2015 budget by $500 billion (with both tax hikes and spending cuts).

        Just read that the CBO projects $520 billion in debt service payments in 2015. There’s your $500 billion Peterson. If you strip out interest from the out years of CBO projections, the budget outlays suddenly gets much closer to revenue (and if we had genuinely reformed the healthcare system, outlays would be lower than revenue, but I digress).

      6. “including a sentence or two explaining why the resulting deficits are not inflationary, the reason being that inflation results from spending power exceeding real output of goods and services, rather than any absolute level of government expenditure,”

        Has ayone read Richard Koo’s holy grail of economics? It appears to me that while not openly MMT, he seems to get it on the point above, but also the inadequacy of quantitative easing.

  3. ” So when a nation like China sells things to us, we pay them with dollars that go into their checking account at the Fed. And when they buy US Treasury securities the Fed simply transfers their dollars from their Fed checking account to their Fed savings account.”


    One thing I’ve always wondered about this, and please forgive me if this is an appallingly stupid question, but how do Chinese manufacturers get the money for the products they sell to us if it only ends up in the Chinese ‘checking account’ at the Fed?

    What am I missing?

    1. As Tom’s link doesn’t seem to be working, I’ll take a stab at answering. The Chinese manufacturers get paid in dollars by US buyers. Then they turn around and sell the dollars to the Chinese government (which maintains the best bid in the marketplace for dollars of course) in exchange for renmimbi/yuan. So, as the Chinese government accumulates dollar reserves, the domestic money supply increases. In the medium term, this should increase domestic aggregate demand and Chinese inflation. Inflation often becomes a problem in countries which run mercantilist policies.

    1. getting very good receptions but probably not yet showing up on the radar screen with voters. but a good and growing start, with good media response. hopefully will gain momentum over the next 60 days

  4. This is mainly a rhetorical observation, but it goes hand in hand with the need to anticipate and counter the inflation response that many people will have, based on the quantity theory of money that people somnolently half-learned in econ 101.

    When you say that “operationally, spending is not revenue constrained,” people are going to say to themselves, “OK, so that must be implying that it is constrained non-operationally.” I think that needs to be addressed whenever you talk about what may be the case operationally.

  5. Warren,

    I see it a bit differently. There is no financial “constraint” I understand: the US Treasury/Fed (Govt sector) can simply issue Treasuries to foreign exporters to help the private sector enjoy the benefits of imports. However, it is damaging to the production sector. The total imports is around $2T or so and is deflationary. Of course there are exports too but the current account is still in deficit. A JG is an excellent thing for the household sector but a devaluation can be good for the production sector. The fact that devaluation is a gold standard idea doesn’t mean we have to reject it. The real aggregate demand as opposed to nominal can be higher with higher government spending and a devaluation.

  6. Warren,

    I know that the $8/hr national service job bank has been one of your ideas for a long time, but I still feel uncomfortable with it.

    Obviously, the government must provide enough money to the private sector to sustain aggregate demand, but government’s role in creating, using, or allocating tangible goods and services should be minimized as much as possible. Who will be deciding what these national service jobs will be? Who will be in charge of monitoring performance and punishing absenteeism? How did you arrive at the $8/hr figure? I assume it is meant to supplant the minimum wage (which is obviously counterproductive), but the minimum wage is a pretty arbitrary number too.

    If the national service jobs involve digging holes and filling them back in again, isn’t that just a waste of human resources? Aren’t we better off just providing a subsidy for a private sector job (perhaps a negative income tax rate)?

    I suspect you want to use the unemployment rate as a metric for deciding how big the federal deficit should be (rather than simply consumer inflation), but the big unknown is what the true structural rate of unemployment is. I’m sure it changes over time, and given Obama’s nutty policies, it’s probably much higher than it was just a couple of years ago.

      1. Bill Mitchell is communist though and although he can do accounting, he is incredibly naive about public choice theory.

        he is also very long winded and tiresome. proceed at own risk

    1. it’s a transitional job to facilitate the transition from unemployment to full employment

      there is always an unlimited amount of useful work that needs to be done

      its federally funded but the jobs can be at the state and local levels

  7. Good article by Warren, but I agree with ESM’s doubts about JG. Employers expand numbers employed up to the point where the marginal net revenue product of labour equals the minimum wage, union wage, going wage, etc. Therefore if EXISTING employers (public and private) are offered limited supplies of subsidised temporary labour at say half the minimum wage, they’ll expand employment even further. And if the labour is supplied for free, they’ll expand numbers employed further still, though in this case the output of the least productive employee (or marginal employee) would be zero. And zero output work is perhaps not justified.

    Temporary subsidised employment systems along the above lines have operated in several European countries for years, plus they formed part of the Argentina’s Jefes system.

  8. the program works best of course where there is sufficient agg demand to cause the employees to be hired by the private sector

    i would imagine the actual numbers employed to be maybe 3% of the work force at most, otherwise more tax cutting is in order (assuming we have the ‘right sized’ govt)

    1. Boy, you guys would have a banner time reinventing the wheel. Two words– community service. Every courthouse in America maintains a list of government agencies and nonprofits that a defendant sentenced to community service can work at for the mandated number of hours. If an ELR system was started up, I’d actually limit the criminal justice “volunteers” to police department projects (police cars always seem to need washing) to minimize any possible stigma for ELR participants. Meanwhile, ELR workers could profitably deliver Meals on Wheels, stack clothes at Goodwill, clean up the America Legion hall or (my favorite item on the list I’ve linked) feed the meowing residents of the “Cat Tail Farms Feline Sanctuary”.

      I suppose the more free labor (from the nonprofits’ perspective) is available, the more charitable work the nonprofits could undertake– Say’s Law and all that. Even if the work is of the sort that’d never pass an OMB cost-benefit analysis, the positive effects on the unemployed who’d be out in the world working with others instead of sitting at home waiting for the phone to ring, would make an ELR system worthwhile.

      1. Community service is meant as a punishment, and from what I’ve seen of it (a dozen or so people dressed in orange jumpers wandering around aimlessly picking up trash in the park on a saturday at 8am), it doesn’t look all that stimulating or productive. I would rather not pay somebody $8/hr to do that if they could stay at home browsing job listings, making phone calls, trying to learn a new skill, or taking care of their kids. There is a fine line between providing the unemployed real jobs and just wasting their time, and I don’t really trust the government to know where that line is.

        A real job is one in which the employee produces enough value to pay his own salary and benefits. During recessions, many people can’t find real jobs that pay enough for them to live on. Even during good economic times, some people have such low productivity that they can’t find real jobs that pay enough. For these people, the government has a role to play to subsidize them in some fashion. But if the government gets into the job creation business, then it makes it much harder to know whether a government job is a real job and how much the implicit subsidy is. It also can squeeze out real jobs from the private sector. You would miss out on that $7/hr job where the employee produces $10/hr of value and end up with a $8/hr government job where the employee produces $4/hr of value.

        The same problem is created by unions. You end up with higher productivity people working in lower productivity union jobs because the union jobs pay better (and then of course the lower productivity people can’t get jobs at all).

      2. ESM, you apparently haven’t read Bill Mitchell on this because you are evoking the standard responses without responding to the issues that he brings up

        One issue involves the opportunity cost of chronic unemployment, which is indicative of capacity underutilization. There is also the cost of degradation of human resources that unemployment, especially chronic unemployment involve, the social and economics cost of which is huge.

        Moreover, there is not only the issue of cyclical unemployment due to the business cycle. Monetarism based in targeting inflation using unemployment as a tool, as policy based on NAIRU does, produces chronic unemployment and underutilization of capacity. Conversely, MMT shows how fiscal policy can produce full employment at full capacity utilization along with price stability, obviating these costs and resulting in greater prosperity quantitatively and qualitatively.

      3. No civilized society will let its citizens starve, so providing nothing isn’t an option. So the choice isn’t between “providing the unemployed real jobs and just wasting their time”, rather its between guaranteeing them a check and guaranteeing them a job.

        By the way, those folks in “orange jumpers” aren’t doing community service, they’re guests of the local jail who’ve volunteered for an inmate labor detail. Not surprisingly, considering where’d they’d otherwise spend their day, its actually considered a privilege. Only inmates with good behavior records are allowed to sign up for it.

        In contrast, with a community service project, there’s no jail uniform required. At the end of the day, the nonprofit manager signs a time sheet documenting for the court how many hours of community service were performed. Otherwise, you wouldn’t know whether someone is there because of a court order or because they’re civic minded and had some free time (depending on what the criminal conviction is for, there are restrictions on who is allowed to work around children, the disabled and the elderly).

        A friend of my dad responded to a flyer asking for volunteers to assist with resodding the local YMCA soccer field. He got up early on Saturday, went down to the Y and enjoyed spending his morning working outdoors. He had a nice time chatting with the guys he met also volunteering. However, around noon when he pulled out a cooler from his car and popped the tab on a cold beer, his new friends all looked shocked. It turns out, my dad’s buddy was the only actual volunteer, everyone else at the Y that morning doing community service for DUI convictions. :o)

  9. Warren says “the program works best of course where there is sufficient agg demand to cause the employees to be hired by the private sector”. My answer: to the extent that the unemployed are allocated to temporary subsidised jobs with EXISTING employers, I think the assumption must be they are allocated to public and private sector in proportion to the share of GDP already taken by these two sectors.

    As against that, the private sector is much better at using relatively unskilled people then the public sector, thus in practice the private sector will take the bulk of these people.

    Re the 3%: yes that sounds about right.

    Re public ownership of all means of production, I didn’t mean to suggest that Bill Mitchell was in favour of this.

    Anyway, my basic point is that I think temporary subsidised placements with existing employers are better than specially set up “new employers” like WPA. The latter should be the absolute last resort, I think.

    1. Ralph,

      re public ownership, I think Warren was referring to Zanon’s comment about Bill being a communist and not to your post.

  10. Warren’s first para in 9 above could be interpreted as saying that ideally we wouldn’t need JG or any special schemes for the unemployed – obviously that is correct.

  11. Former Clinton Secretary of Labor Robert Reich says our labor force will never equal the glory days of the last decade in his latest columns at his blog. The jobs will not pay as well and will be of lower quality. Also taking a look at the SP500 earnings growth of the past few quarters, mostly its from the companies in our financial sector. Also looking at trade/currency issues, it seems we have greater problems with countries that export oil to us than with countries like china – so a yuan revaluation won’t really help much. Warren and the rest here who have working spouses – what is so TERRIBLE about having one spouse NOT WORK and stay home and have and raise the children? Reich says to instead increase immigration. Once you have exported the birthing policies of your nation to a foreign people, can you really expect the nation to continue forward for long? It seems an unsustainable path to me. In this country it is even illegal to work children under a certain age, but we buy products made from young child labor that is exploited in sweatshops from other nations – how hypocritical.

    The doctors used to make housecalls, the milk used to be delivered, I see quality of life deteriorating everywhere around me yet everyone here but Begotka says more more and faster faster – idle mothers or fathers staying at home unemployed with the kids is obviously a nightmare for most of you – did you all get raised by nannies or daycare? Neil Armstrong – some of you may remember him – he walked on the moon – he just wrote a letter to Obama what a disgrace he is dismantling the US Space program and NASA. This will result in many lost jobs for this country while we outsource space launches to Russia. Why do we make programs that subsidize real estate salespeople but not rocket scientists? Talk about dumb 🙁 Can a nation really prosper where everyone just sells houses back and forth to each other?

  12. ESM says community service involves “people dressed in orange jumpers wandering around aimlessly…”. Likewise the nickname for WPA was “we piddle around”. This problem, which is common on “make work” schemes arises because of the poor match of inputs: lots of unskilled labour and little skilled labour, capital equipment, etc. Plus there is the problem of allocative efficiency: i.e. if the market is not allocating the relevant resources, how much is the output valued?

    Having said that, some WPA schemes were efficient, but this is easy given catastrophically high unemployment as per 1930s: there is plenty of unemployed skilled labour available. Plus the WPA civil engineering schemes that used plenty of capital equipment, were in effect no different to normal civil engineering contractors. So what’s the point of such schemes? I don’t really see the logical niche for them.

    This is why subsidising the unemployed into temporary jobs with existing employers is better: the resulting operation involves more or less the normal mix of factors of production: unskilled and skilled labour, capital equipment, materials, etc. And as regards allocative efficiency, this is done by the market in the private sector. As to the public sector, the output consists of products that are widely accepted as being worthwhile: those produced by libraries, schools, army, navy, airforce, the social security system, etc.

  13. Dear Warren:
    Your other commentators almost put it together. Being a net exporter is inflationary. Being a net importer is deflationary. A net importer has a chronic increase in aggregate supply, which drives down prices. For the importer’s domestic industries, both price and quantity are reduced, and therefore revenue, price times quantity, is reduced. The economy contracts. A net exporter has a chronic decrease in aggregate supply, driving up prices. For the exporter’s domestic industries, both price and quantity are increased, (quantity because of returns from exports.) so revenue, price times quantity, is increased. The exporter’s economy grows, at the expense of the importer’s economy. See my post at

    Consider http://www.federalreserve.gov/releases/g17/current/

    I think your solution will only work if money is pumped in at a rate sufficient to shift the Aggregate demand curve as far to the right as (or further than) the Aggregate Supply curve has been shifted by imports, until the price level has returned to pre-imbalance levels. This will be enough to maintain the revenue of domestic industries. Since it will also drive up the demand for and price of Chinese exports, it will necessarily be inflationary. It will also be inflationary in China, aggravating the situation there, as the government will be forced to buy incredible amounts of US dollars.

    And US domestic industries, because of inflation, may still be in the hole…

    I think a better solution would be to ask the Chinese to please spend their trillion dollars, or at least enough to create and maintain a balance. US housing, for instance.

    Of course, the Chinese may already know all this, and are intent of destroying American industry.

  14. right, the trick is to keep agg demand at domestic full employment levels. the level of taxation required to do this will vary with the desire of the foreign sector to accumulate your financial assets as well as domestic savings desires

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