Chapter 13

Economics & Politics

as of February 4, 2017

Macroeconomics was born as a distinct field in the 1940’s, as a part of the intellectual response to the Great Depression. . . . Its central problem of depression prevention has been solved . . .

Robert Lucas
2003 Presidential Address, American Economic Association

Economists do not see what stands right in front of their own eyes.

Ezra Pound (1944)

An Introduction to The Economic Nature of the United States

What most radio talk shows are about, if not sports, is politics. And political speech is largely about economics. Just like the talk show hosts, politicians seem to have no clue how to think about this subject. Nor do most so-called experts, who urge re-use of policies that made the great depression (of the 1930s) worse, while we teeter on the edge of a repeat depression.

Politics is how the government makes decisions. To say that politics is largely about economics is either naive or cynical, and at any rate is a double entendre. Most politicians are in it for the bucks. Many enter politics humble, and leave wealthy. The decisions they are asked to make are largely about economics, at least about money, particularly where and how it is spent. It seems impossible to devise a system in which government decisions are made for any but the most mundane of reasons, the aggrandizement of the decision-makers.  Many politicians speak and vote about economics as if national policies and family policies were indistinguishable, as if what they have learned about family finance translate to national finance. They are so inexpert, it is sad.

We would like it to be otherwise. We would like knowledgeable thinking to be the basis for public decisions. Much of this book is about the fact that decisions are made on some other basis. I take the typical academic cop-out: I will start with the naive view that political decisions are meant to be based on fact and sound economic theory. They are meant to be for the benefit of the country, not of the decision-makers themselves. For example, however the United States decides to react to global climate change, even if denying it and therefore not reacting, we would like the decision to be informed. Political leaders might look to experts, in this case climate scientists, to tell us what they think is happening, if anything; its causes, and the ability of mankind to affect it in the future, whether we have in the past or not. Of course that will not happen.

There is a feedback loop in our politics, as no doubt we think there should be. Economics and politics and science may lead world politicians to think there is a problem, and even to devise a solution. But unless people accept the problem, and that solution, nothing will happen. People will tell their politicians not to vote for it or.  Dictators will ignore it.

Not that the “people” are right, or that “leaders” always listen to them, or should. What happens is that, at some point, expertise in facts is irrelevant. I do not care if I am endangering the future of mankind, if it means I cannot drive my car wherever I want, using low-priced gasoline.1 Because of that thinking, human-kind, although knowing that man-made “global warming” was looming, has been unable to react to that knowledge. And because some moneyed interests profit from that inaction, it is espoused as the right way to think (another purposeful double entendre). As I wrote in Chapter 9, the point of education should be to empower children to see through the daily brain-washing to which they are subjected. That is why it is important to increase the role of scientists, and decrease the role of corporations and just plain ignorant people, in the material given to students.

Chapter 15 of this book is about finding experts. I suggest there that, as we cannot all be experts in everything, what we can do is recognize expertise in others and utilize it for our own good. And society’s. What a naive point of view! Many, perhaps most people do not seek knowledge. They “believe” for no valid reason at all. And then they take those unfounded beliefs into politics, where they erroneously advertise their beliefs as their knowledge, fooling others into thinking they have found the experts we are looking for.2

If you are not in a particular field, how can you judge who in that field is really an expert? Take personal finance, for example, where there is little expertise available to you and me. In Chapter 8 I suggested that we control our own financial affairs, and how we can do so. There are fields in which expertise does exist, and is available. Fields in which people can reliably tell you that if A happens, B will likely follow. Climate science is one such field. Health should be one such field except, as we saw in Chapter 3, for its politics and economics.

Ideology might trump rational investigation in economics, but I suggest that, lying behind that ideology, are selfishness and moneyed interests. There are two problems to be dealt with in this chapter. Some people posing as experts simply aren’t, but how do we know? I take that as the first problem. I hope to provide some clues, some basis from which we can discern who is an expert in economics, and who is not. Then we must confront the second problem, that some people will make economic pronouncements, and decisions, without any reasoned rationale. Its solution (for this book) is the same as the first. If you have some way to determine who is likely an expert, who is not, then you should also be able to discern who is operating on another plane entirely, for whom actual knowledge is irrelevant. Ignore them.


Yes, I am going to try to teach you a little economics here. Enough so you can dismiss the claims and policy pronouncements of charlatans. Ultimately, economics is an empirical science. It is like physics except that economists do not know when they have established an empirical “rule.”  In physics, in general, if a principle is established, you can rely on it in the sense of using it as the basis for invention. Although we do not know why the speed of light is what it is, we do know what it is. We can use that information, for example, to bounce light off of objects and measure their distance.3

In a very abstract sense, physics is probabilistic. To the consumer, the improbabilities within physics are irrelevant. One can count on our gizmos working until they fail even if, to the physicist, this “working” is a prediction, not a certainty.

Economic results may be both predictable and probabilistic. Predictions in economics, however, are much less reliable than those in physics. Where probability is a theoretical consideration in physics, it lies at the heart of every-day uses of economics. Except for astronomy, physics data come from experiments. Economics data come from complex interactions which we may or may not describe and “control for” correctly. Sometimes we think the data are wrong, sometimes we think the economic model is wrong, and occasionally we realize that our expectations were wrong. Still, there is knowledge in economics, despite the sad fact that few know it and many more ignore it.

We can start with some basics. Money is debt. It is that simple.

You object: Don’t just define a word with another word!  If you are an expert, you can tell us what these words mean. Despite my disclaimers elsewhere in this book, we are now in a subject where I am an expert. So pay attention!

First, money is that which is accepted as payment for someone’s debt. My intention to purchase a half-gallon of milk says that I will pay for it in a manner acceptable to the seller. I will pay with money. I will pay with some object that the seller recognizes as money, and because I agree to pay that way, we make the transaction. My taking the milk puts me in debt, which is erased by my providing money.

I have written here two things that might seem contradictory. First, I said that money is debt. Then I said that money is what pays off debt. Can it be both? Yes.

Read the text printed on paper money. All paper money is a promissory note, a promise to pay. You may be lucky enough to obtain a silver certificate, which was a promise to redeem this paper in silver. Do not waste your time trying to get that redemption. By law, paper money is legal tender, “good for all debts public and private.” You are required by law to accept it as its own fulfillment.3A

At one time people wanted to be able to trade paper money for something else, perhaps silver, perhaps gold. Paper money was a promise to pay in gold, if you wanted gold. Then we made holding gold illegal, and all that was left was the paper, the promise to pay. The world did not end.4  Then holding gold was made legal again, except that gold was no longer money, it was—and is—just gold.

The grocer may accept my credit card in payment for milk. Now the card issuer is obligated to pay the seller, and I am obligated to pay the credit card issuer, who will take a commission for being in the middle of the “real” transaction.5 Debt is an obligation to pay a certain amount, and when that obligation is accepted as worth what it says it is, that debt functions as money. Thus a credit card may not be money, but it has “moneyness.” It can act as money in my purchase of milk. In some measures, as I will discuss below, your credit card balance is counted as money, because someone, some merchant, accepted it in exchange for goods or services. It did what money does, and so effectively becomes money itself.

Not all of my debt will be seen that way. Suppose I write a note that says I will pay $10, to whomever bears this piece of paper. You can take this paper to the local grocery, to use to pay for your milk. If the grocer knows me and trusts me, and we live in a friendly economy, he might well accept your word that I really did sign this note, and accept that I really will pay for it. Let’s say that the next customer who needs $10 in change also knows me, and knows that I will “pay,” whatever that means. So he accepts my note as the equivalent of $10. We have just created money. It is my debt, but it is accepted by others in payment for goods and services. I never have to pay that debt in any other way, as long as everyone accepts my note, my promise to pay, as payment for whatever real transaction they are making. Kings issued such debt, and no one went to the king and demanded payment in something else. The king’s debt was money.

Banks create money this way.5A A merchant accepts your check as money not because he knows you, but because he knows the bank. Obviously we have to regulate banks, so they are restrained in the amount of money they can create. That is what bank regulation is about—imposing discipline on financial institutions so their debt will function as money. The next time you hear a politician arguing against bank regulation, consider the chaos that would exist without it.

The King’s note said that it had a certain value in gold. Redemption was an arduous process, where carrying the king’s promise was not. He could issue, say, $200 in notes for every $100 he held in gold. As long as people accepted the notes—even if some people did redeem some of them—the King could create a money supply larger than his stock of gold. We do the same thing when we take out a mortgage. We have more assets (the house) than we can pay for now, based on our promise to pay in the future.

Someone is bound to reject my $10 grocery note. Then what can he be paid with? Some people will demand that money have intrinsic value—it has to be made of gold, or silver, or oyster shells or deer antlers. Who determines how much intrinsic value a certain weight of gold has? Ultimately, money is what other people will accept as money. Anything can become money, but to be sure that something is, governments pass laws declaring what you have to accept as money in their country. What they say is money is money. And that is how I will eventually pay my $10 note.

Almost all paper money in the United States is in the form of Federal Reserve Notes. It is debt of the Federal Reserve. Before there was a Federal Reserve system—and some of these still circulate—money was issued by the Treasury as Treasury Notes. Both say that you must accept this note in payment of “all debts public and private.” Don’t say that paper money is worth nothing, or must be backed by something else. What backs it is first of all the law, and second of all custom. If your grocer wants you to return and buy more milk, he will accept your paper money. And because he will accept it, it is money.

Thus paper money is money because it does the job money is supposed to do. That job is to act as a measure in transactions (your mortgage is measured in dollars), and to function as the way to effectuate those transactions.

When Southern states seceded from the Union (in 1862), they seceded from its legal currency as well. The United States could no longer command a North Carolina merchant to accept U. S. dollars in payment of debts. Not being a federation (a united single entity), the Confederacy also could not command citizens to accept its currency. So the individual states issued money, “by authority of law.” The law was only as good as the state’s ability to enforce it, and so the North Carolina dollar pictured below now is worth nothing, as my hand-written promise to pay $10 would quickly become. Because money is whatever people will accept to be money (that is, will exchange goods or services for), money is what a government declares to be money only to the extent that it can enforce that command. It is not the law that makes it money. It is everyone’s acceptance of it.


Following what what rules can the government issue tokens (they can be paper, metal, plastic, whatever) that we call money? The first rule, obviously, is that it cannot be counterfeited. The government has to have a way to certify that yes, this is really money you must accept in payment of debts. The second rule is that it must have some relationship to the economy. I will discuss that relationship in the next section. If there are no rules governing the issuance of money, then the “value” of money declines, a phenomenon we know as inflation. When the price of goods (in money) increases, then the value of money (in goods) decreases. Thus we call on experts to determine how much money should be in circulation. Those experts work for the Federal Reserve Bank, which is charged with regulating the money supply.

Let’s leave aside how the “Fed” determines how much money should circulate. I will describe the logic and the mechanics of the Fed’s creation of money below. As I started by saying that money is debt, and you wondered whose debt that is, the simple answer is that most of it is debt of the Federal Reserve Bank. However, little of your financial affairs involves actual Federal Reserve Notes, that is, cash. Surely “money” is something larger than that.

Indeed, money is ultimately what others do and will accept as money, and that would seem to include at least your checking account.5A

       It is necessary that money be a guarantee of future exchange.5B

We can stop thinking of “money” as a binary element—something is money or it isn’t money—and start thinking of “moneyness” as a characteristic. If money is a metric—Federal Reserve notes are 100 on the scale of moneyness, but your checking account might be 99, your portfolio of stocks and bonds might be 92, your car might be 70, etc.—then we can have different definitions of “money,” depending on how far down that scale we go.

Wikipedia has a fair discussion under “money supply,” indicating that there are different definitions of “money.” Here is a better explanation, with more detail:

The U.S. money supply comprises currency—dollar bills and coins issued by the Federal Reserve System and the U.S. Treasury—and various kinds of deposits held by the public at commercial banks and other depository institutions such as thrifts and credit unions. On June 30, 2004, the money supply, measured as the sum of currency and checking account deposits, totaled $1,333 billion. Including some types of savings deposits, the money supply totaled $6,275 billion. An even broader measure totaled $9,275 billion.

These measures correspond to three definitions of money that the Federal Reserve uses: M1, a narrow measure of money’s function as a medium of exchange; M2, a broader measure that also reflects money’s function as a store of value; and M3, a still broader measure that covers items that many regard as close substitutes for money.6

There are many definitions of money, but they all include only items with a lot of “moneyness,” differing only in how much. Sometimes we call things with moneyness “close substitutes for money,” not money itself.  Close substitutes can be converted into money readily, and so are counted (for example, when you apply for a mortgage) as part of your ability to pay your bills.

It bothers some people that there is no “intrinsic” value to our money. It is just paper. Former Congressman Ron Paul is one of them:

I don’t like the fact that they [the Fed] have monopoly control. It’s a cartel: they print the money. . . . I want to legalize competition and allow individual Americans to use gold and silver in competition, as money. Today if you do that, you can go to jail.7

It is true that the Fed has monopoly control over the issuance of money. It cannot prevent you from issuing your own debt, however. As I have already indicated, that is how most people purchase a home. Their debt, their promise to pay later, gets them a real home now. What the Fed has a monopoly on is issuance of debt that everyone is required to accept as payment.

It is no longer illegal to own gold.  You can dig gold and silver out of the ground. When you convert it to actual money, you will do so at the rate of exchange—say, $1300 per ounce for gold—that exists at that time. Suppose gold were accepted as money. As how much money? Could you lend someone $1300 and write an agreement that, when you are paid back, it will be in one ounce of gold? No.  The debt is written as a dollar amount, and paid in dollars.8

You can speculate on gold by buying a gold fund, as I explain in my Investing chapter. If you want to think of that as speculating on money, you can, because the gold-money conversion rate implies a money-gold conversion rate. You can hold your wealth in any form you want, and value it any way you want, but you can seldom pay off debt with any form other than money. You cannot command your grocer to accept gold in payment for milk, any more than you can make him accept your hand-written note of indebtedness. Neither is money.

The depth of Ron Paul’s ignorance is perhaps illustrated by this statement:9

The government has run up a huge debt in the name of the American people, who are sick and tired of being on the hook for it. There are no really good options left. Defaulting on a portion of the debt may not be without costs, but it is better than handing the government yet another credit card.

Even if your credit card is revoked, you still owe what you have “spent.”  Debt measures what you have spent in the past. Credit allows you to spend in the future. Credit means you can spend money you do not yet have.  This is not a bad thing.

Spending authorized by Congress can come from current or borrowed funds. Congress cannot decide not to pay for its obligations.10 Debt reflects prior authorizations to spend money the government did not have. It could do that because the U.S. government has credit. It always has credit, because the Federal Reserve will buy its bonds. You do the same thing every time you sign a credit card charge. Is either your borrowing, or the government’s borrowing, a danger to the economy?11

The cranks keep coming.

Ted Cruz knows a lot that isn’t so. In a world in which gold bugs have been wrong every step of the way, repeatedly predicting runaway inflation that fails to materialize, he demands a gold standard to produce a “sound dollar.”11A

Ted Cruz has firmly established himself as Ron Paul’s successor. He is ignorant about economics, and surrounds himself with “advisors” who are no better.


To the extent that concepts of money continue to evolve, they are evolving away from cash and therefore, I presume, from gold backing. Kenneth Rogoff, the Harvard professor who gave us the unsupportable empirical conclusion, that

rising levels of government debt are associated with much weaker rates of economic growth, indeed negative ones,11B  

moved on to argue that cash is unnecessary. Perhaps even pernicious. There are so many $100 bills “circulating outside financial institutions” that, he thinks, they are financing an underground economy. It that economy became visible, say by requiring digital fulfillment, tax revenues would increase.11C His immediate goal is to stop producing $100 bills.
As usual, Rogoff raises an interesting question, but fails to provide an answer. He seems not to acknowledge how much paper currency circulates outside the United States. The dollar—perhaps in $100 units—is the word’s currency. It gets into the world from our purchase of goods and services, and is never redeemed by demanding goods and services from us. It is a major reason, as we will see, why the velocity of money is decreasing, reducing the effectiveness of monetary policy.

In a New Yorker article, Nathan Heller observes signs in Sweden saying “We Don’t Accept Cash.” Small businesses prefer electronic payments. Heller never mentions that in a country with a legal tender such behavior is illegal. In the United States and Sweden a business must accept cash. Laws can be changed, but one would think that someone discussing this issue would notice when a proposal requires it.

Why the government should regulate the money supply is the content of the section after next. First, as promised, let’s see how the Federal Reserve regulates the money supply.


The Federal Reserve

Federal debt is in the form of government bills and bonds of different durations. “Bills” are just short term (90 day) “bonds.” The Treasury can issue such debt, if authorized to do so, and sell it at auction. The phrase “if authorized to do so” means if the debt ceiling has not been reached. The “debt ceiling” is almost uniquely an American institution. Only one other country, Denmark, needs specific authorization to issue debt. If Congress has authorized spending, the government spends. Whether it also should tax—take in as much money as it spends—is a decision made under the term “fiscal policy,” which is discussed below.

Buyers of a nation’s debt can be other countries, banks, other institutions, or the Federal Reserve. Individuals, also, can participate in such auctions. Except for the Fed, all purchasers pay for those bonds with existing money. The Fed’s selling bonds absorbs money.  It lowers the “moneyness” of the financial assets of the bond sellers.

The opposite occurs when the Fed buys bonds.  The seller may receive Federal Reserve Notes, or their equivalent as a bank deposit. The money supply is expanded by the Fed buying bonds, reduced by its selling bonds. If the Treasury needs money to pay its bills, it can issue its debt. If that debt is purchased by you and me (or a foreign central bank), the money supply stays the same. If the Fed buys the debt, the money supply is increased.

Seldom will the Fed literally print money to buy bonds. It sends a deposit to the treasury’s or your bank account.  Don’t quibble about the form of the money. You will consider a check from the U.S. Treasury or the Federal Redserve to be money, if you get one. You can still think of it as money—your money—when it is sitting inside your checking account. The Fed also does print money. That is what it is supposed to do. And that is why, when we add up the money supply, every definition includes at least cash plus demand deposits at banks.

The Fed is not constrained to purchase only new Treasury bonds, or even only Treasury bonds of any kind. Whatever the Fed buys, it does so by issuing money in exchange. It may prefer to purchase existing bonds, and in fact this is one of its tools used to regulate the money supply. When it purchases such a bond, from anyone, it creates money—it substitutes money (its debt) for some other asset. That makes the receiver of that money more liquid (more able to spend) than he used to be. That is presumably why the seller sold the bond. If the seller wants to pay off a debt, he needs money, which he can get easily by selling bonds to anyone, including the Fed. When the Fed is the buyer, the money supply is made larger.

There is nothing more to it, except to notice again that the Fed could buy anything, and in doing so would create money. The first advantage of operating the money supply with Treasury bonds is that the Fed gets interest, which it can use to pay its bills.  Second, the Fed is not risking that what it has purchased becomes obsolete, or fails to function.  Third, it gives back to the Treasury that which it has not spent.12  Fourth, the Fed is operating in an active market, where it can sell bonds as easily as it can buy them, and more easily than it can trade just about anything else. As implied in the second point, purchasing any other asset, the Fed would essentially be speculating on the future value of what it buys. A Treasury bond can be considered a riskless asset. When redeemed, it is worth its face value, just like money.

The Fed has other tools, perhaps the most important one being lending money to banks. When it wants banks in turn to lend the money out, it sets a low interest rate. “Cheap money” in this sense is indeed money that banks pay something for, but not very much. Remember, a standard definition of “money” includes demand deposits at banks. When a bank lends you money, it creates such a deposit in your account. After you spend it, it will appear in someone else’s checking account. In this way, banks, also, create money. The Fed influences the extent to which they do so by regulating the price of money to the banks, as well as how much capital (the bank’s own money) it requires the bank to have.

The Relationship Between Money and The Economy

Suppose the Gross Domestic Product (GDP) of our economy is $3 Trillion. That’s the value of goods produced in a year. It is the sum of all final goods and services purchases/sales. I say “final” because we do not want to count selling raw materials to a tire manufacturer, then selling tires to the company that makes cars, and then selling the cars to the dealers, and the dealers’ selling the cars to the customer. The sum of those transactions will exceed the value of the car. The last sale ends the chain, and measures all the “value” in the preceding transactions. So we will count only it, the “final” sale.

In this economy, the sum of all these final transactions is in the order of $3 Trillion per year. Does that mean that the money supply must have been $3 Trillion, so all sales could be paid for? Or, because of all these intermediate transactions, do we require is a money supply larger than GDP?  No and no. As scary as it looks, it is simple to express this in mathematics. The GDP of the economy must be:

GDP = ∑piti

∑ is the Greek capital letter sigma, which has appeared in previous chapters of this book. It has been adopted everywhere as the symbol for a sum of discrete things. When you see ∑, say to yourself, “sum of.” pi (say “p sub i”) is the price of each purchase i—where we mean by “purchase” a final use purchase. Subscripts like i, j and k are used to indicate the separateness of the things we are summing. Once again, if a bottler buys milk from a farmer, or the grocer buys it from the bottler—the company that puts the milk in cartons—those sales are not counted here, although they do require money. What is counted as gross domestic product is when the customer buys the milk from the store. pi is the price, and ti represents a measure of what was sold/purchased. ti is “things.” Using the same subscript indicates that the price pi is of the thing described by ti.

The sum of all half-gallons of milk, each one multiplied by its final sales price, is the contribution of milk (as milk, not as an ingredient in other products) to GDP. We sum these transactions over a year. When we say “GDP” we mean “one year’s worth of domestic production, measured by final sales.”

A unit of money, regardless whether it is metal or paper, or just an account, may be used more than one time during a year. The store owner would collect his $, his money, for his milk, and pay, let us say, half of that to the bottler, which pays half of that to the farmer. The farmer then goes shopping for underwear or boots or apples. The store owner has to pay his workers, his rent, utilities, etc. After paying all expenses, he may have made enough to save some, but most of what he took out of the store was itself re-spent. You can see that we do not need $3 Trillion in money to finance a $3 Trillion economy. How many dollars you need—how large a money supply—depends on how fast they turn over in use. This datum, the turnover rate, is called the velocity of money, and is symbolized by the letter V.

As in Anna Schwartz’s description, above, we can think of many measures of money, but we have records of each one. We know the sum of all paper currency outstanding, we know the amount in demand (checking) accounts, and in other accounts in banks, etc. We even know how much “float” there is in credit cards. “Float” here is the amount that cardholders owe to the credit card companies. Soon, much of it will be paid off, but until it is, one might think of it as an addition to the money supply.13

Here, then, is what is known as the fundamental equation of money:


where PT = ∑piti, getting rid of the clumsy summation. MV is the money supply times its velocity, the number of times it “turns over” in a year.


is what ties money—the left side of the equation—to the real economy, the goods and services purchased with money, on the right side.

Although we have a measure of the money supply, we have to calculate velocity. As we know how much money there is, and we have measured the GDP, the velocity of money is calculated from this equation:

V = (PT)/M = (GDP)/M

The fact that some money essentially never turns over—people just like to keep it in “reserve”—is built in. The more cash held in peoples’ hands or their bank accounts, the lower V will be. That you spend almost everything you make within a month does not mean that V would be around 12. Calculating V from final sales only is the convention, adopted to relate the money supply to our measure of production. The velocity of money in the United States, in 2010, was around 8.5. So we need a money supply whose value is around 12 percent of GDP.14

One could read this “fundamental” equation as saying that money is worth what it buys. The goal of “price stability” is that money should buy tomorrow approximately what it bought yesterday. The money supply can be expanded, as explained above, by the Fed’s replacing other assets with actual money. When money is also another commodity (say, gold), the expansion of the money supply depends on the availability of that other stuff.

Apparently Ron Paul would prefer to have the supply of gold, rather than the Federal Reserve, regulate the amount of money the United States has. The absurdity of that position should be obvious. The money supply would then be limited to the amount of gold in the Treasury. But wait! Didn’t we learn above that a gold-backed money supply would be represented, for day-to-day transactions, by paper debt obligations? And as not all of that paper would be converted to gold, the Treasury could have some multiple of its gold circulating as paper?

Yes, but what multiple? That would become a political issue. To the extent that gold is mined elsewhere, other countries could affect our supply of money. We would have to outlaw individual ownership of gold, for fear that very wealthy people could manipulate its value. Ultimately, that political issue (how much paper money can the treasury issue for a given supply of gold) would be solved by defining the paper itself as money. Which is what we have done. Ron Paul’s system can end nowhere but where we already are.15

Other countries do affect our money supply, something the Fed has to keep track of and account for. What is a “trade deficit?” That is when we purchase from other countries more (that is, more in value) than we sell. Those countries, persons in those countries, are accepting our money for what we buy, and not turning around and buying something from us. They are holding our money, or buying from another country that accepts United States money in payment. Indeed, dollars are the world’s business currency. That means that we can get real goods and services from other countries in exchange for pieces of paper, or accounts in banks, not requiring anything more “real” in exchange. Only one country can do that.  At present, we are it.

Why, in addition to satisfying the world’s demand for dollars, would a nation want its money supply to grow? Because of the fundamental money equation:

MV = PT.

If we want T (goods and services) to increase, without raising P (prices), we have to expand the money supply to accommodate it. When someone says “we have to pay off all of our debt” just ask him “Why?” Paying off the national debt would reduce the money supply. It could be wise, it could be stupid; but let’s do it only if it is wise, not because it is someone’s fetish. The usual case is that we want M, which is federal debt, to grow so that T can grow.

Our grandchildren will not be called upon to pay off that debt. Not ever. When someone tells you how much debt each future American will be called upon to pay back, you can be certain that you are not listening to an expert.

Here, for example, is Porter Stansberry, in the summer of 2013, in a pamphlet designed to get me to give him money in exchange for advice:

Even if all U.S. citizens were taxed 100% of their income for an entire year … it would still not be enough to pay off the federal debt!16

He goes on to tell us that he has “never seen this fact reported anywhere else.” Could that be because it is irrelevant?

The analogy, “families have to pay off their debt, so does the government” is wrong because families cannot issue money. People who use that analogy are the opposite of experts. Not only does the federal government not have to pay off all of its debt, it would be a disaster if it did so. Here is (former) Congressman Ron Paul again:

The national debt now stands at just over $14 trillion, while net total liabilities are estimated at over $200 trillion. The government is insolvent, as there is no way that this massive sum of liabilities can ever be paid off.17

We could easily pay it off by issuing more Federal Reserve Notes. There are good reasons not to do this–not to so drastically increase the money supply—but if we did, lenders would have to accept such notes as payment for bonds. It makes no sense to say that we cannot pay off our national debt with dollars created by the Federal Reserve, dollars the holder of bonds would be required to accept as payment for those bonds. Paul implies that we should pay it all off in some undefined future. Why? We have not paid off the debt we created to finance World War II.  It is still there, in the form of money.

What a bizarre thought, that the creator of United States money might have no United States money, and no way to get any. Do not waste your time listening to such people.

Money and Growth

What we mean by “growth” is that in each successive period we produce more goods and services, more T. Increased production will require more money, but that can be accomplished through increasing the money supply (M) or increasing the rate of turnover of money (V). We need a concept of the “effective money supply” which is MV, not M—it is money that turns around and can be used again.

This idea that there can be more T (real goods and services) in our economy, needs something else besides money to work. It requires either a) that there is unemployment, people willing and ready to go to work, needing only the opportunity; or b) productivity increases, we can get more product from the resources now being used. Or both. It also requires people who want to do things, who want to engage resources to make something. If they are entrepreneurs, they will want to sell those things. If they are the government, they will want to finance those things, perhaps collecting user fees (like tolls), perhaps not.

So let’s assume that there are people with new ideas that will lead to the creation of last year’s GDP with a smaller labor force. There will soon be unemployed resources. Unemployed people. But there are also things the government can do to “grease the wheels” of this growth. Like build highways and bridges, restructure and monitor the energy grid, enforce contract laws, etc. In order to increase growth in the economy, governments have to improve the “infrastructure.” If you do not understand why this task falls to government, just ask yourself who else would do it, or why no one else does. Only government will finance them, although everyone will benefit from them.

To expand markets requires the swift and safe transportation of goods over greater distances. It requires a court system, so that arrangements made here to sell there, are honored in both places.18 There are many things only a government can do to smooth the workings of the marketplace. Some of the payoff from those things will accrue to future generations, so it makes sense to charge those generations with at least some of the cost.

How do you do that? How do you charge your children for the cost, for example, of building a bridge which will take five years to build and then last 100 years? Shouldn’t it be paid for over the next 105 years, not immediately?

The way to make future people pay for the benefits we produce, but they will receive, is by financing the capital that creates those benefits over time though debt. We borrow to build, raise revenue over time (user fees or taxes) with which the debt is paid off.

Oh no, say many so-called experts. We can’t “burden” our children with debt! We will have to pay for everything we do now. This sounds reasonable as long as we think that everything we build will be consumed in a year. Then surely we should pay for it in the same year. If we build bridges or a new energy grid, or a new aqueduct to bring water from upstate to New York City, it will be mostly future generations who will benefit from it. It is worth building because our children will be better off having it. Why we should be afraid to charge them for being better off, I do not know. A mortgage or a car loan is accepted under the same principle: pay for it as you use it. Although the analogy between a family and government often fails,  the logic that debt allows us to pay for durable items over their life applies to both families and nations. The difference is that nations may never pay off all their debt. Rather, that debt becomes the source of their money supply.

Monetary Policy

Monetary policy is determined by the Federal Reserve System, and to a large extent consists of manipulating M. V, much as we would like it to be constant, is not. So increasing M may or may not be translated (through economic activity) into an increase in T.  If V declines while M is increasing, monetary policy is thwarted in its attempt to stimulate the economy.

There is another problem. Within this framework, buying and selling financial assets does not appear. They are not freshly produced “things” like asparagus and automobiles. Buying stocks or bonds is simply a change in the form in which you hold your wealth. That all makes sense, but let’s acknowledge that an increase in the money supply might result in neither an increase in the prices of things, nor in the number of things. It is possible, even likely, that the monetary “easing” of 2012-2014 supported the stock market, as well as the economy. Why some people think this is a problem with the actions of the Federal Reserve, I do not know. It is a weakness inherent in trying to use monetary policy to increase economic activity, rather than just directly doing so, by federal spending. But it is not a weakness in what this Federal Reserve System did, it is a weakness generated by what congress did not do, which should have been to increase spending on infrastructure.

Just below is a picture of what the Federal Reserve has been doing—its monetary policy—from 2007 into 2014.19 It has most notably been purchasing long term treasury bonds (yellow) and mortgages held by federal agencies (brown). In return it created money hoping that this some of it would be used to purchase T, things freshly made, the making of which employed people and rewarded capital.


If there is no increased T to be had—if all resources are fully utilized—an increase in M will surely increase P, unless V slows down suddenly and dramatically. During and after the Vietnam war, when there was full employment, and I was incorrectly predicting inflation, the velocity of money decreased. The dollar became the reserve currency of the world. Dollars did not come back to claim U.S. goods and services. V declined as M increased, and there was no inflation. Later, V increased, as did inflation. Monetary policy reacted, interest rates rose, the money supply was reduced.  It is not that simple, and not that easy, but paper currency backed by a government people the world over think is stable, works. We have no need for gold.

It continues not to be that simple, because we do not know where all of our dollars are, or what those who hold them will do with them. Velocity continues to vary—going down in the 20-teens, one reason why, despite the fears of many, inflation has been relatively low.19A


Just above is a graph showing the velocity of money, produced from quarterly data provided by the Federal Reserve Bank of St. Louis, from 1959 through the second quarter of 2014. I put a gray mask over the early years, leaving exposed the years exposed in the previous graphic (2007-2014). Velocity of M1 reached its peak (at 10.68) in the fourth quarter of 2007, and then steadily declined to 6.2 by the second quarter of 2014. Meanwhile, the Fed was increasing the money supply, trying to increase spending.

An increase in money may be just what we need to accommodate real growth. Or to stimulate real growth, as it did after World War II. Which is why the Federal reserve increases M in a world with available resources, so that if people spend it, it will produce more T. The Fed started their policy of “Quantitative Easing” (QE—buying lower quality bonds) in 2008, when V was declining. T increased by less than some “experts” had predicted. Some people predicted inflation.20  They were wrong. Others were screaming that QE was too small, inadequate to “start up” the economy. They were right.

If we have available resources, and if we need things done (roads repaired, bridges built, electrical grids redesigned and rebuilt, etc.) but they are not being done, the solution is for the federal government to sponsor them. To increase T (real goods and services), the federal government needs to spend money, which it can borrow from the Fed (which, remember, prints it). To demand—as some in Congress do—that such spending be “offset” by expenditure reductions, or financed by taxation, defeats its purpose. Anyone who insists that new expenditures be so offset is not an expert.


What else, besides infrastructure, could the United States have spent on with newly “printed” money? In a TED talk, Michael Metcalfe asks “Can we simply print money for aid?”21 I have taken the graphic just above from that talk. Metcalfe is explaining that central banks saw no difficulty in creating $3.7 trillion in new money to “rescue” the financial system. Why can’t we do something much smaller, but similar in principle, to rescue children in poor countries, he asks. Such talks are supposed to present novel ideas, far-sighted innovative, creative thinking to the public. Metcalfe’s idea is worthy, but hardly novel. The understanding that one can purchase real things from money newly “printed” by a central bank should not seem shocking. It should be seen as an opportunity. Metcalfe would take that opportunity to advance a particular agenda. There should be no debate about the former prospect, the creation of money in a period of underemployment. What that money should be used for is indeed worthy of public debate.

Federal taxing and spending is called fiscal policy. To get a correct fiscal policy requires that our legislators have some understanding of what you have just learned. They do not have that understanding. Fearing to increase the national debt, they have cost us trillions of dollars of real production.

Yes, economics is complex; more complex than I have described here. For the most part, I have not contended with the rest of the world—which imports from us, exports to us, and holds much of our money. When there is higher than usual unemployment, we generally think that resources are available for expansion of the economy. However, the unemployed people may not have the skills, or live in the right places, or be willing to do the tasks that are demanded by new industries. On the other hand, since 2012, North Dakota has been booming from new production of oil. People are moving there, living in trailers, and earning over $60,000 a year in jobs that elsewhere pay under $40,000. That was the economy at work. And so is the dramatic reduction in the price of oil in 2014-2016, resulting in declining North Dakota employment.

Whether or the extent to which an increase in money is inflationary is one question answered by econometric models, equations that try to anticipate the results from some action. Unfortunately, those models often give us incorrect answers. Still, the general rule—that is, the general theory, and the current fact—is that when there are many unemployed resources, barring a decline in V, an increase in M leads mostly to an increase in T, and has little effect on P. Will increased M be spent productively? Increasing federal spending could accomplish this result directly. When we have high unemployment and the federal government incorrectly reduces its spending, monetary policy is all that is left. So-called “experts” scream when it is used, and prevent direct expansion. Why has the recovery been anemic? The idiots are in charge.

Turn on CNBC or read an op-ed page, and the odds are that you won’t see someone arguing that the federal government and the Federal Reserve are doing too little to fight mass unemployment. Instead, you’re much more likely to encounter an alleged expert ranting about the evils of budget deficits and money creation, and denouncing Keynesian economics as the root of all evil.22

As there is confusion between credentials and expertise. There is also confusion between one’s score on an IQ test and true intelligence. “We must stop glorifying intelligence and treating our society as a playground for the smart minority” writes David Freedman.22A But those who hold to disproved and counter-factual theories have passed the “intelligence” tests used to screen for them. The problem is not that we fail to appreciate qualities other than intelligence. The problem is that we do not know what intelligence is, and continue to reward people who lack it.

To use monetary policy to increase real economic activity is something like pushing on a string. It puts more money into circulation with the hope that those who get it will put it to some productive, economy-growing use. Reducing taxes as fiscal policy also uses this string-pushing technique. Perhaps most people, when they pay less in taxes, spend more. But they may not. They may pay off debt, or (mathematically the same thing) increase savings.

A more sure way to increase T, if there are unemployed resources, is for the federal government to spend directly, or give money to states to spend. Build a highway system, for example. Put up free wireless internet everywhere. Support research in converting wind or sunlight to electricity. Contract with builders, who will buy machinery, buy materials, and hire workers. Not only will we have better roads, or better internet, or renewable power; we will have them at less cost than it appears, as those who receive these funds will pay taxes on their new income.

Right now, the U.S. economy could use some borrowing and spending. . . . “We don’t have enough demand in the economy. . . . Spend money, and we can cure the problem.”22B

Cost-Benefit Analysis

States cannot create money, which is why states try to pay off their debt, whereas it would be inadvisable for the federal government to do so. Through borrowing, most of the cost of state-financed roads will be paid by those who will use them, some of whom are not yet alive. But if these new roads are productive, they lead to a higher average income, then paying off the bonds will cost less than these future citizens will have gained. The roads will be free—even “profitable”—by any calculation one makes. Such a calculation is known as a “cost-benefit” analysis.

One would want cost-benefit analyses to be made by experts. The dilemma is obvious. To be expert, you need years of experience. To gain years of experience, you need to have satisfied clients who, unfortunately, do not seek an expert analysis, only a favorable one. The result, as you would expect, is that cost-benefit analyses of proposed public projects are over-optimistic.

Can a new stadium or arena revitalise the surrounding neighbourhood?. . . The answer to the question is dependent on how neighbourhood is defined, how revitalisation is defined, and the extent and nature of the redistribution of income and well-being that the stadium or arena project involves.23

In each case studied, the cost-benefit analysis was favorable for the project to go forward with public money. Some projects were beneficial, some were not; some people gained, some people lost. What a surprise!

The NASCAR Hall of Fame in Charlotte, North Carolina, was subsidized by city funds because a cost-benefit analysis—an “impact” analysis—predicted that it would bring in more than twice as many visitors as it has.24  Oops! Such studies are sponsored by those proposing the venture, not by the government being asked to subsidize it. If the economist engaged to do this analysis is not as enthusiastic as the project “boosters,” the study can be buried. That expert will get no more cost-benefit analysis business.

Similarly, for some time North Carolina subsidized the film industry, reimbursing 25 percent of certain expenditures, those expected to benefit North Carolina residents. This was called the North Carolina Production Tax Incentive (PTI). A bribe. Still, bribery might pay. We need a study to determine if it does. Robert Handfield, supported by several regional film commissions and the Motion Picture Association of America (MPAA) says it does.25 When questioned about it by the state’s Fiscal Research Division,

Handfield said suggestions of bias are baseless. That he’s done similar self examinations on companies like BP and Bank of America, which footed the bill. “They rely on me to report what I find,” said Handfield, “That’s why I’m hired to do those kinds of studies.”26

No.  He was hired because they know what Handfield will find. It is true that the film industry pays taxes to North Carolina, but Handfield produced no convincing calculation that the state received back more than it paid, and no evidence at all that this was the most effective bribe available to the state.27

As noted, this direct spending of funds by government, spending more when there are unemployed resources, less when resources are all absorbed by the private economy, is called “fiscal policy.” Monetary policy is operated by the Federal Reserve Bank, but fiscal policy at all levels of government requires legislation. Some legislators may be experts in fiscal policy, but most will not be; and besides, legislative “action” is usually an oxymoron. It does not require an expert to see when public works programs are called for and when they are not. Getting government to do something about it takes expertise beyond my imagination.

Legislation occurs slowly, and usually badly. As monetary policy requires an institution that can effectuate it in a timely manner, perhaps fiscal policy could use a similar institution. Monetary policy can only try to induce more or less spending, but not actually do it. That is the dilemma of the recession of 2009-2014. The only institution that understood the issue—the need to get more money spent in the economy—was the Federal Reserve, which could operate only with monetary policy, the weakest tool we have to stimulate economic growth.28

Freed from the burden of a commodity-backed currency, the treasury borrows Federal Reserve Bank Notes from their creator, the Federal Reserve Bank. It places those notes in accounts in commercial banks, and then spends those accounts to purchase needed goods and services. It does have to pay interest to the Fed, from whom it has borrowed. It will get some of that interest back, but not all. The Fed has expenses, and it may later sell some bonds, absorbing money (reducing the money supply). We know it does that. That is the daily working of monetary policy, increases and decreases in M.

Let’s imagine that we had another institution, a development fund, say, that could spend when and as its directors see fit, on infrastructure and other development stimulating items. The advantage of such a development fund is that it would allow the operation of fiscal policy without requiring new legislation.29 When the economy requires pulling on a string, instead of pushing, the development fund could do so. It would fund only projects whose benefit is projected by its own calculation, not that of some sponsor, to exceed its costs. As those benefits would accrue in the future, it would fund those projects with borrowed money, which would be paid back into a sinking fund. For this to work requires that all parties be responsible, be driven by facts and the public good. And that the functionaries be expert. These requirements, of course, doom that vision.

Fiscal Policy

There are three kinds of resources:

  • Those that, if not used now, will be forever lost. These include labor, sunshine, flowing water, wind and tides.
  • Those that, if not used now, will be available for use in the future. These include gems, minerals, coal, gas, oil, the water in aquifers and some of the water in reservoirs.
  • Those that can be used now and, over time, replenished. These include agricultural products, forests and, if carefully managed, most water in reservoirs.

No one makes these distinctions. Some people say that, to achieve “energy independence,” we must drill for oil and gas. Yet using up the once-only supplies of oil and gas jeopardizes this country’s future. It would be smarter to explore and drill for these resources, and then cap them. Keep them available, but unused. Meanwhile, let’s deplete the finite resources owned by the rest of the world, and build an energy grid based on those things (sun, wind, moving water like rivers and tides) that, if not used now, are lost forever.

No so-called expert, to my knowledge, supports this thinking. Energy “independence” to them means depleting our resources. How foolish! It is true that, when we send money to Saudi Arabia for oil, the Saudis may use that money to purchase capital goods and make themselves wealthier forever. Purchase capital goods from whom? Why do we think we are harmed if others are wealthier? Quite the contrary. A wealthy Saudi Arabia will import goods from us, whether their wealth is from oil or production yet un-imagined. A smart U.S. energy policy would put resources into building a strong economy, preserving once-only resources by developing the use of renewable resources.

Perhaps those already in the coal, oil and gas business, and those in ancillary businesses (such as trains and pipelines) have strangled all voices but their own. Perhaps others have realized that increasing use of storable one-time-only resources is really stupid, but they do not know how to develop alternatives so that the economy can make a smooth transition from one to the other. Perhaps, although one can see electricity, natural gas or hydrogen replacing gasoline for automobiles and trucks, one cannot envision a replacement for jet fuel. Why the future economy has to be based on one or the other, I do not know, but the coal, oil and gas interests tell us—and more importantly, our government—to drill-baby-drill, which means use up the domestic supply as fast as possible. This is what we do. If you do not like the word “stupid” to describe this policy, try the word “inexpert.”

If privately owned domestic oil wells are to be capped for future use, then the owners of those wells need to be compensated. Surely, one would think, that is a technical issue that experts can solve. They have. When an oil well reaches production, companies often sell the rights to the future flow of oil.30 The market mechanism to preserve oil for future generations is already in place. The United States could simply outbid others for those future rights, then cap the wells to preserve them. With what money would they do that? With borrowed money. Sell bonds, because those wells are assets that will be used in the future. Let the future pay for the oil (simple enough: sales of oil later will be used to retire the bonds). Instead of owning and capping wells, currently we bring oil above ground and dump it in salt mines (or huge tanks). The national oil reserve pays to move it from one place to another. Just keeping it where it is would cost less.

Although “wasting” any resource that will disappear whether used or not should strike you as foolish, the one resource that most demands to be used when it is available is labor or, as Marxists would (correctly) say, labor-power. There are two sides of that picture: It is not only a waste of resources to have unemployed labor-power, it impoverishes everyone. The whole idea of setting up the economy, separating the money supply from metal, creating an agency to regulate the monetization of government debt, etc., was to enrich the economy, to make it function better. That means enriching its citizens, which is best done by putting them to work.

In a recession, the government needs to spend money—but to do so wisely, so that what it buys is worth while. Only legislative incompetence—not a fear of excessive money in the system, or excessive debt—leads to any other action. Josh Barro, perhaps despairing that congress will ever understand economics, contends that “loose monetary policy is a viable substitute for loose fiscal policy.”31 No.  Pushing on a string is not a good substitute for pulling on one.  Increasing the money supply is the best one can do when neither the president nor the Congress is willing to increase spending, but it is not equivalent. That is why the United States has not recovered from “the great recession.” For Barro to assert this equivalency sets him firmly as a non-expert.

A forest of 200 year old trees is renewable, but it takes 200 years to renew it. If there were 200 such forests, then one could be harvested and replanted each year. In 200 years there would be only one 200 year-old forest, but there would be one that year, and one the next, etc. forever. However, there would never again be 200 forests all with 200 year-old trees, which might be used for other things (recreation, say) than cutting down. It might be better to consider a forest of 200 year old trees “non-renewable.” There are many legitimate issues to be debated. We debate none of them, because we do not accept the framework within which we would do so. Increasing national forests, and increasing support for the U.S. Forest Service, is an example of fiscal policy. Given our economic malaise, the federal government should do bothy, even if it increases the federal deficit. It should do so intelligently, which perhaps makes my suggestion a non-starter. Too bad the public debate is limited to ten-second sound bites, and dominated by people who lack the capacity to think in such conceptual terms.

Radio and television commentators will tell you that there are more trees in the United States now than there were when the nation was founded. They equate a two year old tree with a 20 year old tree with a 200 year old tree. You do not buy into that, do you? Those people are not even so-called experts, they are just skillful talkers. The simple logic of “majority rule” does not work when the majority is manipulated by a self-aggrandizing minority. It can all work out well if our political leaders rise above their backers, and do “what’s right” for the country—as well as they can figure it out. Forests are a resource best not left entirely to the private market, where “drill-baby-drill” could easily become “saw-baby-saw.”

With our wilderness preserves, national forests and parks, we seem to have some understanding that some values are not well expressed in the market. We count on political solutions to over-ride economic solutions and, historically, at times they have done just that. We might want to recognize that the market solution is not always the best economic solution, and point to our own history as illustration.


Not many people see human history as completely random. If there were no regularities or broadly predictable tendencies in social life, we would be incapable of purposive action.32

There are two kinds of economics research: theoretical and empirical. One kind of empirical research describes the regularities and the irregularities, and tries to measure inputs and outcomes in the economy. Theoretical research then constructs relationships that might exist. A branch of empirical research—let’s call it theory testing—then asks if the relationships predicted by the theorists actually exist.

For example, Arthur Laffer became well-known during the 1980s for predicting that tax reductions would lead to enough new tax revenues to make up for the revenue lost from lower tax rates. “Supply side economics” was based on the hope that those with higher after-tax incomes would spend them on United States goods and services.

The first part of Laffer’s theory, that when one’s income increases he will spend at least some of it, is pure Keynesian.33 John F. Kennedy’s economic policies had been based on that correct relationship. The second part of Laffer’s theory postulated that economic activity would be so stimulated by a tax decrease that it would generate more tax revenue than it cost. That is demonstrably wrong. A reduction in tax rates, federal or state, has never paid for itself. Sometimes tax collections increase, but never by as much as spending.34

Real experts knew that “supply side” tax decreases would not pay for themselves, as I wrote to Arthur when his proposition became famous (we are acquaintances—he responded politely). By 2011, Laffer admitted this distinction: tax rate reductions will stimulate economic activity, but they will not pay for themselves. He moved on to another incorrect proposition, that increasing the money supply—which the Federal reserve did do—would lead to a disastrous inflation.35  You now know why that prediction was incorrect: M increased, V decreased, and unemployed resources became employed. Arthur Laffer, despite his PhD and notoriety, has always been just another incorrect so-called expert.

Unfortunately, disciples learn the mantra, not the logic. Some (such as Larry Kudlow on CNBC) still claim that decreasing taxes is the only way to stimulate the economy, and (he says) it’s free. These people are wrong.35A Lowering taxes—pushing on a string—might have some stimulative effect, but much less than directed spending. It will not pay for itself.

The typical Enlightenment view of history is of an organically evolving process, in which each phase emerges spontaneously from the next to constitute the whole we know as Progress. The Marxist narrative, by contrast, is marked by violence, disruption, conflict and discontinuity.36

Both of these statements are simplifications, but both views are correct. Which approach produces the more useful theories can only be determined by empirical testing. Laffer’s famous napkin graphic assumed that there was a government revenue upside-down U curve.  Assuming that our tax rates were to the right of the peak, Laffer concluded that we could get the same revenue at lower tax rates.  No empirical evidence has ever supported that speculation.37  Tax cuts reduce government revenue.

The government must compete with private spending for “worthiness.” The size of government should depend on how much we want of what government provides (or should), how much we want of what the private sector provides, and whether the private sector is providing it. Charlatans and cranks see it differently. To them,

The right response to a weak economy? Shrink the government. The right response to a strong economy? Shrink the government. That is not an argument. It is faith alone, and it is not only based on no evidence, but it is incapable of even being tested by evidence.38

Small government fanatics cannot be economic experts. What do we want the private sector to produce, that it both can and will produce better than the public sector? Would more milk shakes and tanning salons be a better outcome than free pre-school, improved roads and power distribution?

Those who think the private sector will, on its own, solve macro-economic problems—specifically, lack of demand—are still among us:

Wrote John Cochrane of the University of Chicago Booth School of Business on his website: “If you believe the Keynesian argument for stimulus, you should think Bernie Madoff is a hero. Seriously. He took money from people who were saving it, and gave it to people who most assuredly were going to spend it.”39

And so writing, Professor John Cochrane excludes himself from being considered an expert in economics. Comparing Madoff to Robin Hood—in terms of the distribution of wealth—might be tenable (albeit incorrect, as many of Madoff’s victims were not wealthy), but Cochrane misunderstands the logic of a Keynesian stimulus.  In arguing against it, he is willing to squander the billions of dollars that unemployed people might have earned, and the public works they would have created—which in fact we did squander from 2008 on by following advice like his.  Remember, some resources, when not used, are lost forever.

Many humans believe disproved relationships.  Some espouse policies like a “balanced budget amendment” that would stifle both fiscal and monetary activity. It is true that, as a nation, we have behaved badly.  Both fiscal and monetary policies at times are badly run. I suggest, however, that we do have the knowledge to run them better. What we do not have is the political will or the institutions to find and employ real experts who are more interested in enriching the nation than themselves. We need a political class that will seek expertise, can determine when it finds it, and will utilize it for the public good.

That indeed is the expert problem. There must be real experts. Among those who claim to be, the real ones are few. The real ones who would put their skill to good use for the public—not just for themselves—are fewer. But they exist.

People who have the authority to select experts must want to obtain real expert advice, must be expert at this selection process, and must be honest civil servants who monitor their selectees. They seldom are. Our institutions do not seek experts if they exist. And if they do, we do not know how to identify them. And even if such an expert is identified, as in the Peter Diamond example in the previous chapter, our institutions often fail to take advantage of that knowledge. Nor do they understand when they have selected badly. Other agendas prevail. Politics prevails.


I did not include inter-country trade in this analysis because the United States stands alone among countries. We generate the world’s currency. We print dollars and send them overseas in exchange for real goods. Many of those dollars never come back to claim goods made in the United States. In that sense, only the United States can “tax” persons in other countries for the use of its currency. Anyone who tries to make an analogy between any other country and the United States, or between a family and the U.S. government, ignores this fundamental distinction. Neither you nor I nor any state can print currency that will be accepted at its face value throughout the world. But the U.S. government can.

The fact that some dollars are created but never used to demand product means that, again, one cannot assume that inflation is an inevitable result of increasing the money supply. Of course there is some limit to our capacity to flood the world with out currency, and see it valued, absorbed, saved. We are nowhere near that limit. More of our currency at home would allow more production, and genuinely enrich people. I have suggested infrastructure projects, which would leave real improvements in their wake, generate real wages (and taxes), and not affect inflation. Those who have prevented such an obvious fiscal policy have cost U.S. citizens literally trillions of dollars, and future citizens the results in buildings, roads, transportation and communication facilities.

That is all explained in the material earlier in this chapter. The same would be true of U.S. dollars wisely invested abroad. The key term here is “wisely.” Ignoring it for this paragraph, just think of U.S. dollars funding agriculture and manufacturing in other countries. Everything explained above applies. It would put others to work to feed us, clothe us, provide us with real things that we want. The basic facts are the same wherever it is done. There is plenty of capacity to produce in this world, plenty of raw materials, plenty of land on which to raise crops, plenty of people to work. Any money that, when spent, produces goods and services, has “backed” itself.

Unfortunately, we cannot trust institutions in other countries to use our money in this way. Nor do we know how to help build such institutions. In some abstract sense we are an impoverished world, compared to what we could be. In some very real sense, only the United States has a currency that could turn that problem into a solution. Do we really not know how to do so in a technical sense, or do we not know how to do so in a political sense? I think the latter. It is our lack of political expertise that reduces our income far below where it should be, and squanders an opportunity only we have to increase incomes throughout the world.40


You may have learned something about economics here, but I am sorry, it has been a waste of your time. Understanding, having real expertise, is not valued. Jared Bernstein summarized it this way, when a famous economics “finding” was discredited:

Why wouldn’t we expect a reaction from policymakers? Because they’re using research findings the way a drunk uses a lamppost: for support, not for illumination. If the R&R lamppost turns out to be wobbly, the austerions (or climate-change deniers, or supply-siders) will find another one. In this town, I’m sorry to say, you can pretty much go think-tank shopping to buy the result you seek.41

Those the media call “experts” have proved time and again that they are not. So-called experts are invited to write op-ed opinion pieces and appear on television panels. You are invited to comment on them. And you think, by so commenting, that you are part of the conversation. The economy deteriorates, as more and more ignorant, non-thinking people are elected to legislatures, to do the bidding of the money-interests that put them there.

People have lives, jobs, children to raise. They’re not going to sit down with Congressional Budget Office reports. Instead, they rely on what they hear from authority figures. The problem is that much of what they hear is misleading if not outright false.

The outright falsehoods, you won’t be surprised to learn, tend to be politically motivated. . . .

We have an ill-informed or misinformed electorate, politicians who gleefully add to the misinformation and watchdogs who are afraid to bark. And to the extent that there are widely respected, not-too-partisan players, they seem to be fostering, not fixing, the public’s false impressions.42

I think there is expertise in economics. Some may even be found in universities.

Copernicus, Gallileo and Newton all . . . worked outside the official world of learning.42A

When he started publishing his revolutionary ideas about physics, Albert Einstein was a Swiss patent office clerk. John Maynard Keynes was not affiliated with an educational institution when he started publishing his revolutionary ideas about economics, in 1909.

It would be unusual to find original thinking in “think-tanks,” which mostly select their members by ideology, where they are engaged to spout, not to think.43 It hardly matters where expertise is, if no one is looking for it. Our economy falling so far from its potential, for lack of appropriate fiscal policy, is a sad story. Unfortunately, it is the same story of the lack of real expertise that we see in the judicial system. “Justice” and “policy” are housed in similar institutions, lacking expertise, pretending they embody it. If the fact that institutions do not seek the expertise to operate according to their mandates is upsetting, consider (as I do in the last chapter) this even more disturbing question: How would such an institution determine who a real expert is? Even if institutions were directed toward finding experts, and wanted to do so, we have no confidence that they would know one should one appear.


  1. Some people argue that ideology trumps knowledge, that belief trumps facts. True, but where does this belief come from? From money (broadcasting fiction) and selfishness (believing it).
  2. The rich are even more likely than most people to believe that what’s good for them is good for America — and their wealth and the influence it buys ensure that there are always plenty of supposed experts eager to find justifications for this attitude.
    [W]hen politicians pick and choose which experts — or, in many cases, “experts” — to believe, the odds are that they will choose badly.

    Paul Krugman, “Who Wants A Depression?” New York Times, July 11, 2014, and “Knowledge Isn’t Power,” August 1, 2014.

  3. See Niayesh Afshordi, Robert B. Mann and Razieh Pouhasan, “The Black Hole at the Beginning of Time,” 311 Scientific American 2, August, 2014 at 6. They mention five parameters in the standard cosmological model that must take certain values for the model to work (to explain reality). Apparently those factors do have those values, but no one knows why.
  4. Bank of England coins and notes are legal tender in England and Wales, but not in Scotland. Not even Bank of Scotland banknotes are legal tender there.
  5. The United States stopped redeeming gold for dollars held by individuals in 1933, under President Franklin D. Roosevelt, but continued to trade dollars for gold, at a fixed price, among nations. In 1971, under President Richard Nixon, the United States stopped redeeming dollars for gold, regardless whose dollars they were.
  6. “Real” in economics means a good or service is involved. Many “real” transactions evolve into financial transactions, but they are different. Your buying a house is a real transaction. Fannie Mae buying your mortgage is a financial transaction. The difference is often reflected in “accounts,” so that the Gross Domestic Product can be thought of as the sum of all “real” transactions, regardless how they were financed.
  7.  “Banks don’t wait for a customer to drop £100 into their savings account before lending it to someone else. When they lend £100 they add the figure to the borrower’s account while simultaneously recording it as an asset on their own balance sheet.”
    William Davies, “The Big Mystique,” 39 London Review of Books 3, February, 2017 at 19.
  8. It may include credits that exist only on the internet, called cryptocurrency, of which the most well known is bitcoin. See John Lanchester, “When Bitcoin Grows Up,” 38 London Review of Books 8, April, 2016.
  9. Ezra Pound, An Introduction to the Economic Nature of the United States (1944).
  10. Anna J. Schwartz, “Money Supply,” The Concise Encyclopedia of Economics, on the internet at These are just the first two paragraphs. The article is not long, and is very worth reading.
  11. Quoted in Stephen Webster, “Ron Paul: Fed ‘monopoly’ could be broken if Americans use gold, silver as currency,”, December 15, 2010. Paul is wrong. There is no law preventing you from asking others to accept anything at all as money. You will not go to jail if you do so. The law only prevents your insisting that some item other than dollars be accepted as money. If Ron Paul is “The Tea Party’s Brain,” as The Atlantic called him (November, 2010 at 98), that explains a lot about the Tea Party.
  12. Private agreements that tried to monetize gold this way were invalidated by the Supreme Court in Norman v. B&O Railroad, 294 U.S. 240 (1935). The Court also invalidated a U.S. government debt instrument that promised repayment in dollars of the same gold value as existed when the deal was made. See Perry v. United States, 294 U.S. 330 (1935).
  13. Ron Paul, “The Pesky Neighbor and The Debt Ceiling,” (July 26, 2011).  I do not mean to pick on Mr. Paul. I think quoting an individual is more illustrative than summarizing a line of thought held by many people.
  14. Clause 4 of the Fourteenth Amendment states:

    The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.

  15. “I have a mortgage because I have a house. I would be less happy with no mortgage and no house.” Susan Dynarski, “What We Mean When We Say Student Debt Is Bad,” New York Times, August 8, 2014.
  16. Paul Krugman, “The 8 A. M. Call,” New York Times April 25, 2016.
  17. Quotation from a summary of the Rogoff-Reinhart theory and its demise: John Cassidy, “The Reinhart and Rogoff Controversy: A Summing Up,” The New Yorker (on line) April 26, 2013. Cassidy expresses my astonishment that Rogoff is unable to see how his research errors produced an indefensible conclusion. Cassidy’s last section title: “How Seriously Should We Take Economics?”
  18. Quotation from Kenneth S. Rogoff, “The Sinister Side of Cash,” The Wall Street Journal, August 25, 2016. See also Kenneth S. Rogoff, The Curse of Cash, Princeton Univetrsity Press, 2016.
  19. Of $13 Trillion in national debt—November, 2010—the Federal reserve holds over $1 trillion. So something like 7.5% of the interest paid by the United States government on its debt is returned to the Treasury. On September 28, 2016, the Fed held over $2.8 trillion in U.S. Government debt.
  20. The card allows me to create debt acceptable to merchants in exchange for real things. When I suggested this addition to “money” to Edwin Shaw, professor of economics at Stanford, in 1961, he scoffed at it. He was an expert in what was, but not in the logic of what was. His answer should have been that, if I can get the data, I can create my own measure of “money,” and see by using it in analyses whether it performs better than other measures. That is when I started realizing that academics may not be experts. Today, some accepted measures of the money supply include credit card float.
  21. Of the many definitions of “the money supply,” the most conservative is M1 (M-one), the original government definition of money. In the years 1976-1996, M1 was valued around $1.8 trillion. The velocity of money was in the range 6.5 – 7.5. M1 is defined at

    M1 consists of (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler’s checks of nonbank issuers; (3) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (4) other checkable deposits (OCDs), consisting of negotiable order of withdrawal (NOW) and automatic transfer service (ATS) accounts at depository institutions, credit union share draft accounts, and demand deposits at thrift institutions.

  22. In May, 2011, Utah made gold a valid currency. Unfortunately, it is worth only the value stamped on a gold coin, which will be far below its exchange value.

    Craig Franco hopes to cash in on it with his Utah Gold and Silver Depository, and he thinks others will soon follow. The idea is simple: Store your gold and silver coins in a vault, and Franco issues a debit-like card to make purchases backed by your holdings. (Josh Loftin, The Huffington Post May 22, 2011, “Utah Legalizes Gold, Silver Coins As Currency.”)

    What Franco really hopes to do is issue more credit than the value of the gold in his vault, creating, as I said in text, paper money. This money, however, would not be accepted outside Utah, and even there would not have the force of law commanding its acceptance. Do not expect much to come of this.

  23. Bold in the original. The title reflects Stansberry’s wishful thinking: “The End of Barack Obama?” The pamphlet predicts a “currency collapse,” which apparently means uncontrolled inflation. Stansberry had previously equated an increase in the money supply (M) with an increase in prices (P). You now know that anyone asserting that relationship (ignoring V and T) is not an expert.
  24. Ron Paul on Bloomberg News, July 22, 2011, as reported by The Daily Crux of the same date.
  25. See, for example, the brilliant book by Michael E. Tigar and Madeleine R. Levy, Law and the Rise of Capitalism, Monthly Review Press (1977)
  26. Data and graphic from the Federal Reserve Bank of Cleveland.
  27. Summers summarizes four conceptual explanations for low United States growth in the mid-twenty-teens: Debt overhang , supply-side headwinds, savings glut and liquidity trap.  Nowhere does he, or anyone else, mention the precipitous decline in V, which may be the result of one of these other explanations, but is the deflating mechanism. Lawrence Summers, “The Age of Secular Stagnation,” 95 Foreign Affairs 2 (2016).
  28. See the Wall Street Journal editorial of May 29, 2009, warning that “Congress and the Federal Reserve have flooded the world with dollars to beat the recession.” Actually, Congress has fought against this expansion of the money supply but, being independent, the Fed achieved it anyway.
  29., Michael Metcalfe, November, 2013.  TED stands for Technologyu, Entertainment, Design.
  30. Paul Krugman, “The Urge To Purge,” New York Times, April 5, 2013. He continues:

    Now, the fact is that these ranters have been wrong about everything, at every stage of the crisis, while the Keynesians have been mostly right.

    Being right when those with other views are consistently wrong should be some indication of who is an expert and who is not. Why the public—not to mention the media—does not apply this test I do not know.

  31. David H. Freedman, “The War On Stupid People,” The Atlantic, July/August 2016.
  32. James Suroweicki, “Trump’s Infrastructure Promises,” The New Yorker, November 28, 2016 at 35, quoting Dean Baker of the Center for Economic and Pubhlic Policy Research.
  33. Dennis Coates and Brad Humphries, “Can new stadiums revitalize urban neighborhoods,” 8 Significance 2:65 (June, 2011) at 69. Significance is published by the American Statistical Association.
  34. See “The NASCAR Hall of Fame Has Been Anything But,” Bloomberg Businessweek, February 23-March 1, 2015 at 22.
  35. Robert Handfield, “A Supply Chain Study of the Economic Impact of the North Carolina Motion Picture and Television Industry,” which is undated (this is a professional study?) but relates to 2012, and most likely was presented in 2014. See
  36. From the transcript of the WFAE-FM news program, June 12, 2014.
  37. The credit was initiated in 2010, and rescinded in 2014. See Richard Verrier, “On Location North Carolina cutting film tax credit program,” Los Angeles Times, August 27, 2014.
  38. In the decade-plus that Paul Krugman has been writing two columns a week for the New York Times, he has tried to make these simple points clearly, in the context of the facts of the moment. As he has written,

    This isn’t rocket science. It’s straightforward textbook economics, applied to our actual situation.

    Yet his analyses have had little effect. I do not know what keeps him going, faced with the ignorance that surrounds him. Quote from his column of October 4, 2002, reprinted in The Great Unraveling (2003) at 99.

  39. Except for legislation increasing the debt ceiling, monetary policy is effectuated without legislation. An institution—a central bank—that is free to operate monetary policy without interference from legislators, is almost universally accepted as a good idea. Wouldn’t a similarly independent fiscal policy institution also be a good idea? See Felix G. Rohatyn and Everett Ehrlich, “A New Bank to Save Our Infrastructure,” New York Review of Books, October 9, 2008.
  40. That is what the Permian Basin Trust (PBT) and the British Petroleum Trust for Prudhoe Bay oil (BPT) are, for example.
  41. Josh Barro, “The Reformists Trying To Change The GOP Can Already Claim One Significant Victory,” Business Insider, June 3, 2014.
  42. Terry Eagleton, Why Marx Was Right, Yale University Press (2011) at 55.
  43. John Maynard Keynes’ General Theory of Employment, Interest and Money in 1936, explained how government spending was needed, even though it unbalanced the budget, to get a country out of a depression.
  44. A prime example is Kansas in 2014, whose tax cuts followed a $75,000 contract to Laffer’s consulting firm. The failure of Kansas’ cuts was predicted, for example in Mike Shields, “The BraIns Behind the Brownback Tax Cuts,” Kansas Health Institute News, August 14, 2012. Announced: “Kansas falls $338 million short of revenue . . .” Kansas City Star, June 30, 2014. Described: Paul Krugman, “Charlatans, Cranks and Kansas,” New York Times, June 30, 2014. Editorialized: New York Times July 13, 2014.

    Laffer remains positive. Governor Brownback’s policies “will be extraordinarily beneficial for the state of Kansas” he says. In fact, they will be ruinous, but do facts matter? Quotation from Patrick Caldwell, “What’s The Matter With Sam Brownback?” Mother Jones, November/December 2014, at 26.  See Josh Barro, “Tax Cuts Still Don’t Pay For Themselves,” New York Times, March 17, 2015. This time Barro gets it right.

  45. Arthur Laffer, “Get Ready for Inflation and Higher Interest Rates,” Wall Street Journal, September 6, 2011. This was two years after the Journal itself made the same erroneous prediction. Not only has inflation been low since then, so have interest rates.
  46. “Mr. Kudlow has a record of being wrong about, well, everything.” Paul Krugman, “Trump and Taxes,” The New York Times, May 13, 2016.
  47. Eagleton, cited in Note 32, at 56.
  48. In the first edition of his Principles text book, Greg Mankiw (Harvard University) called supply-side economists (Laffer, Kudlow, etc.) charlatans and cranks. That terminology was deleted from all later editions. Mankiw now says that economists “differ.” See Greg Mankiw’s Blog July 2, 2007. He was right the first time.
  49. Neil H. Buchanan, “The Great Denial: Anti-Government Ideologues Fight A Losing Battle Against Reality,” Verdict (at November 6, 2014.
  50. Peter Coy, “John Maynard Keynes Is The Economist The World Needs Now,” Business Week, October 30, 2014.
  51. I discuss world economic development further in Chapter 16: Epilogue.
  52. “The Reinhart/Rogoff Mistake and Economic Epistemology,” Jared Bernstein Blog, April 18, 2013.
  53. Paul Krugman, “Moment of Truthiness,” New York Times, August 16, 2013, page A23.
  54. Dmitri Levitin, “Such Matters as the Soul,” review of David Wooton, The Invention of Science (2016),

    38 London Review of Books 18 at 29, September 22, 2016

  55. Or not to think too much, or not to write it down. I wrote a book at The Brookings Institution.  They offered to publish it, except without a chapter I thought was critical to my argument in which I showed that all previous studies of this subject contained a common error. I would not agree to delete that chapter. Other experts did read that chapter, unpublished, and agreed with my correction of their methodologies. The price I paid was that I do not have a Brookings book to my credit. The price they paid was that they do not have my book to their credit.