Warren Mosler : Seven Deadly Innocent Frauds of Economic Policy

Here's another fascinating read. Warren Mosler published a book called "Seven Deadly Innocent Frauds of Economic Policy" in 2009 (updated in 2010). You can download it as a pdf file by clicking here.  Mosler explains tha the term “innocent fraud” was introduced by Professor John Kenneth Galbraith in his last book, The Economics of Innocent Fraud, which he wrote at the age of ninety-four in 2004, just two years before he died. Professor Galbraith coined the term to describe a variety of incorrect assumptions embraced by mainstream economists, the media, and most of all, politicians.

Here are the 7 frauds, with a brief description of how Warren Mosler deals with them.

• Deadly Innocent Fraud #1: The federal government must raise funds through taxation or borrowing in order to spend. In other words, government spending is limited by its ability to tax or borrow.
  Fact: Federal government spending is in no case operationally constrained by revenues, meaning
  that there is no “solvency risk.” In other words, the federal government can always make any and all payments in its own currency, no matter how large the deficit is, or how few taxes it collects. 
• Deadly Innocent Fraud #2: With government deficits, we are leaving our debt burden to our children.
  Fact: Collectively, in real terms, there is no such burden possible. Debt or no debt, our children get to consume whatever they can produce.
• Deadly Innocent Fraud #3: Federal Government budget deficits take away savings.
  Fact: Federal Government budget deficits ADD to savings.
• Deadly Innocent Fraud #4: Social Security is broken.
  Fact: Federal Government Checks Don’t Bounce.
• Deadly Innocent Fraud #5: The trade deficit is an unsustainable imbalance that takes away jobs and output.
  Facts: Imports are real benefits and exports are real costs. Trade deficits directly improve our standard of living. Jobs are lost because taxes are too high for a given level of government spending, not because of imports.
• Deadly Innocent Fraud #6:
  We need savings to provide the funds for investment.
  Fact: Investment adds to savings.
• Deadly Innocent Fraud #7:
  It’s a bad thing that higher deficits today mean higher taxes tomorrow.
  Fact:
  I agree - the innocent fraud is that it’s a bad thing, when in fact it’s a good thing!!!

It's just the sort of out-of-the-box thinking that I really like. I do have one problem though - and indeed, I've had a lengthy exchange with Warren about this. It seems to me that the claims that he makes would definitely be true if, as more and more people are proposing, governments reclaimed the right to create the money supply and banned the fractional reserve banking system that allows commercial banks (and the Fed) to create money with interest attached. Warren appears to think that there is no real problem with the current arrangement, and I must admit that I wasn't convinced on that point.

But, there's no doubt about it, this is very interesting stuff.