Getting the Supreme Court out of the business of operating the nation
Supreme Court [Photo source: philstar.com]
He got particularly upset when, in a ruling on his discretionary spending program (DAP), the court said good results and good faith don’t count for anything.
The difficulty is that the Constitution requires that the Court be hands on rather than removed. So if the Court can’t – in its own thinking – grant that good results and good faith ARE important under the Constitution’s delineation of Executive responsibility, then the only way for the nation to move crisply forward is to extract the Court from the running of things.
I decided to explore what the problem is using the American Constitution to shed light on the matter.
What does the American Constitution say about the Judiciary?
The American Constitution starts with Articles I, II and III, one dealing with the Legislature, two dealing with Executive, and three dealing with the Judiciary. The first line of Article III jerked my head upright:
- The judicial Power of the United States, shall be vested in one supreme Court, and in such inferior Courts as the Congress may from time to time ordain and establish.
Whoa Nellie! Congress determines what subordinate courts exist, not the Supreme Court. That’s why the U.S. has networks of overlapping local and regional courts which deal with most cases. Only a very few material cases make it to the Supreme Court.
The U.S. Supreme Court is mainly a super-court of appeals. It’s own jurisdiction is very limited:
- In all Cases affecting Ambassadors, other public Ministers and Consuls, and those in which a State shall be Party, the supreme Court shall have original Jurisdiction. In all the other Cases before mentioned, the supreme Court shall have appellate Jurisdiction, both as to Law and Fact, with such Exceptions, and under such Regulations as the Congress shall make.
So CONGRESS determines when the Supreme Court can reach beyond it’s narrow charter and role as the appellate court of last resort.
Then we have another great distinction between the American judiciary and the Philippine judiciary: trial by jury:
- The Trial of all Crimes, except in Cases of Impeachment, shall be by Jury; and such Trial shall be held in the State where the said Crimes shall have been committed; but when not committed within any State, the Trial shall be at such Place or Places as the Congress may by Law have directed.
There again, in that last phrase, we see that Congress determines where some trials are held. Congress has a distinct role in managing the judicial process.
Indeed, Thomas Jefferson had a major argument with writers drafting the American Constitution. He believed the Supreme Court should report to the elected branches of government. He was overruled by those believing such placement would make the Court a political body. [Jeffersonian democracy; Wiki]
As it evolved, the Supreme Court became both untouchable AND political, by virtue of the ideological biases that presidents intentionally put on the Court bench when they appoint justices.
But the important point here: the U.S. Congress plays an important role in managing the judiciary function and assigning the Supreme Court its charter.
What does the Philippine Constitution say?
Whereas the American Constitution begins with a short preamble and then gets into the structure of government, the Philippine Constitution has five articles that precede government structure. These are:
- Article I: National Territory. Defines the lands, islands, and surrounding waters that form the Philippine territory.
- Article II: Declaration of Principles and State Policies. 34 short statements defining important principles and policies, including renouncing of war, serving the people, that “the separation of Church and State shall be inviolable”, banning of nuclear weapons, dignity of every person, youth patriotism, equality for women, honesty and integrity in public service, and other important matters.
- Article III: Bill of Rights. 22 statements of rights belonging to Filipino citizens, including freedom of speech, free access to the courts for the poor (huh?), right of counsel, no torture, due process, speedy disposition of cases (huh??), right not to testify against oneself, and other matters.
- Article IV: Citizenship. Defines how citizenship may be gained or lost and contains the intimidating statement that “Dual allegiance of citizens is inimical to the national interest and shall be dealt with by law.”
- Article V: Sufferage. Assures voting rights and privacy in voting.
These preliminaries illustrate the level of specific law-making, rather than general guidance, that is contained in the Philippine Constitution. It is problematic because the level of detail creates more opportunities for constitutional issues to arise. People can easily take disagreements directly to the Supreme Court, and they do.
After the preliminaries, the Constitution has three articles dealing with Legislative, Executive and Judicial departments, respectively. They are much more wordy and specific than the American version.
To cut to the chase, the Philippine Constitution grants more powers to the Supreme Court than does the American Constitution. It gives the Supreme Court operating powers by virtue of the types of cases the Court has primary jurisdiction over, as opposed to dealing primarily with appeals from lower courts. Here’s the text of the relevant sections:
Section 1. The judicial power shall be vested in one Supreme Court and in such lower courts as may be established by law.
Judicial power includes the duty of the courts of justice to settle actual controversies involving rights which are legally demandable and enforceable, and to determine whether or not there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the Government.
Section 2. The Congress shall have the power to define, prescribe, and apportion the jurisdiction of the various courts but may not deprive the Supreme Court of its jurisdiction over cases enumerated in Section 5 hereof.
No law shall be passed reorganizing the Judiciary when it undermines the security of tenure of its Members.
Section 3. The Judiciary shall enjoy fiscal autonomy. Appropriations for the Judiciary may not be reduced by the legislature below the amount appropriated for the previous year and, after approval, shall be automatically and regularly released.
So what do we take away from this that is pertinent to the current shoving match?
- Congress can define the court structure in the Philippines but cannot take from the Supreme Court the right to handle cases specified in Section 5. Following are three subsections of Section 5 that are particularly relevant to what the Aquino Administration terms “judicial overreach”; they define cases the Court can take on. Don’t worry about the Latin gibberish. I’ll provide some definitions later.
(1) Exercise original jurisdiction over cases affecting ambassadors, other public ministers and consuls, and over petitions for certiorari, prohibition, mandamus, quo warranto, and habeas corpus.
(2) Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of Court may provide, final judgments and orders of lower courts in:
(a) All cases in which the constitutionality or validity of any treaty, international or executive agreement, law, presidential decree, proclamation, order, instruction, ordinance, or regulation is in question.
(b) All cases involving the legality of any tax, impost, assessment, or toll, or any penalty imposed in relation thereto.
(c) All cases in which the jurisdiction of any lower court is in issue.
(d) All criminal cases in which the penalty imposed is reclusion perpetua or higher.
(e) All cases in which only an error or question of law is involved.
. . .
(5) Promulgate rules concerning the protection and enforcement of constitutional rights, pleading, practice, and procedure in all courts, the admission to the practice of law, the integrated bar, and legal assistance to the under-privileged.
. . .
- Congress cannot undermine the tenure of judges, interfere in Judiciary fiscal matters, or reduce the Judiciary’s budget.
So what does this mean?
The U.S. Supreme court primarily deals with appeals. The Philippine Supreme Court has primary operating jurisdiction for various petitions. Here are the areas of direct involvement, and the translation of the Latin terminology:
- Certiorari: a request for the Court to intervene in a lower court’s ruling.
- Prohibition: a request that the Court forbid an act; injunction.
- Mandamus: a request that the Court stop a court, corporation, or public agency from doing that which is required by law, or permit that which a law prohibits.
- Quo warranto: a request that the Court order someone to show that they have the authority to do what they are doing.
- Habeas corpus: a request that the Court determine if an agency has the right to physically detain someone.
The Court also deals with constitutional issues. This is a huge operating realm because almost any objection to a new law can be framed as a constitutional issue, giving the Court the right to delay, re-write or stop that law. TROs (temporary restraining orders) are a dime a dozen in the Philippines, and are one reason for the herky jerky way the Philippines progresses. Or does not progress.
The Supreme Court also has primary jurisdiction over issues pertaining to taxation, government fees, court jurisdiction, major criminal cases, and any lower court case where “an error or question of law is involved”. In other words, any case at all if the complainant raises a question of law.
Clearly, the Philippine Supreme Court is a pro-active operating court, not just an appellate court.
How to stop “judicial overreach”
Congress is restrained from reducing the Supreme Court’s budget or stop any cases from being heard, and it appears that complaints about the Supreme Court’s own discretionary fund are without merit because the Court is wholly responsible for its own fiscal affairs.
About the only way to stop the Court’s interference with Executive and Legislative acts it to change the Constitution.
What changes might be undertaken?
- At the most extreme, go Jeffersonian and have the Court report to Executive or the Congress.
- Less extreme, restrict the Court to appellate actions and constitutional issues. Remove the court’s power to interfere in lower court acts or issue injunctions (strike subsection 1 of Section 5). Require that the court issue a finding of “material consequence” before addressing a constitutional issue.
The real problem is the level of detail in the Constitution itself. The detail represents an open invitation for political challenge of almost any new law. So either the entire Constitution needs to be written in a general way to reduce the volume of constitutional challenges that arise, the powers of the Court to rule on constitutional matters have to be constrained, or the Court needs to recognize the dysfunction that currently exists and voluntarily hold itself to ruling only on material issues.
The best way would be for the Court to understand the ramifications of its eagerness to engage, and to step back to a proper role of confirming the powers of other branches of government rather than undermining them. The Court could discipline itself to deal only with issues of substantial merit and impact and stop writing legalisms that produce absurd “good faith, good intent and good results don’t count” rulings.
That’s what the President is asking the Court to do. He is asking the Court to discipline itself, to remove itself from nit-picking, and to grant reasonable deference to Executive and Legislative branches to give them the leeway they need to operate independent of the Court.
The conflict between Executive and Judiciary predominantly derives from the Judiciary’s stance that the Constitution must be interpreted in legalistic detail rather than in a scope of broader intents. Clearly, the intent of the Constitution is for Congress and Executive to get things done. Failure to recognize this mandate gets the Court into the predicament of stopping good works, delaying them, or otherwise making sure “good faith, good intent, and good results” do not happen.
If the Court insists on engaging operationally, then its powers must be curtailed by constitutional amendment.
The Court is not an elected body representing the people. The Court has no accountability for harmful results that occur when it delays, undermines or stops a program Executive and Legislative departments have worked earnestly to execute. In good faith.
The Society of Honor by Joe America 
In the news, Aquino said he was looking to have a dialogue with the Supreme Court to explore how the judiciary can exercise its power to provide checks and balances without becoming too powerful. Joe, how do you think this can be done? Thanks.
Self restraint on the part of the wise judges on the court. Dealing with material issues rather than all issues submitted. Concession by the Court that their role is not to obstruct unless harm is done. DAP did no harm.
The expanded power of the Supreme Court has its roots here. http://www.quezon.ph/2014/09/22/showdown-with-the-supremes/
Ahhh. Very good. Bounce-back from the excesses of Marcos. Now it is time to rebounce back to better balance, I think.:)
Yes indeed.
In addition, there is a tendency for ultimate arbiters like the Supremes to power creep. They, consciously or not, expand their powers beyond the boundaries set forth for them.
There is a famous SCOTUS decision that expanded the Court’s power way beyond what the Founding Fathers had in mind. I forget which it was, but I think it happened in the late 19th or early 20th century and again during FDR’s time. And that was what impelled FDR to attempt packing SCOTUS with his people.
Over here even members of the SC decry the power creep. In the infamous SC decision upholding GMA’s appointment of Corona as Chief Justice at a time when it was prohibited by the Constitution, one of the dissenters, AJ Antonio Carpio, spoke about the SC exceeding its boundaries.
The SC is the referree and its decisions are final unless it decides to change its mind about its finality like in the infamous PAL labor dispute and the chartered cities cases.
The reaction to the SC decisions in the martial law seemed reasonable at the time, we thought they were the solution to overreach by the elected branches of government but we were unable to foresee the consequences that we can now describe as an over-reaction to the former principle of leaving political questions to elected officials and judicial matters to judges. We went from one extreme to the other. Striking the right balance is tricky, it needs constant tinkering always with the big picture in mind and not blindly following the word of the law.
For example, Marcos wanted to return to the country from exile. He had the constitutional right of every Filipino to return home to back him up but the SC under then CJ Cecilia Muñoz Palma said no because his return could imperil the survival of the country’s recently recovered democracy.
That decision, recognizing a reality larger than words on a page, could have guided the SC decision on DAP, a program that the court itself recognized as having contributed positively to the welfare of the nation. If the court was afraid that deciding in favor of DAP would become a precedent, it could have said that its decision only held for the specific case brought before it (there is a legal term for that kind of a decision but it escapes me at the moment), that it should not be held as setting a precedent.
There is a line between “political questions”, those that belong exclusively to the elected officials and “justiciable questions”, those that fall under the scope of acting within the constitution; it is a movable gray line, and it takes common sense and wisdom to see discern it.
“Power creep”!!!!! Exactly, thanks for putting that so clearly. I wonder when the justices, as wise as they are supposed to be, and intelligent, too, will figure out exactly what it is that they are doing.
I think it’s the commerce clause.
SC can shore up all the efforts of the executive in it’s socio – economic programs / projects. It seems Sc has a meltdown by being in ” a judicial overreach” by trying to kill the upliftment of the poor people.
Despite of SC obstructing, I admire PNoy in showing his sheer grit and determination in pushing for the country’s economic growth. PNoy has been addressing the problems that Filipino families have confronted for years.
SC and executive have to find a way to come together and take meaningful steps towards the route of economic growth / economic recovery for the sake of the betterment of the lives of the common tao..
Yes indeed. The SC should play a constructive role, not “obstructive”.
@Joe Am
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Too many groups will activate rallies and protest if the Charter Change (CC) to revise the Philippine Constitution is “on the go”. Too many “perfect groups” (PG), some are operated by communist, some are operated by political parties, some are operated by powerful businessmen, some are operated by religious groups, some are operated by other countries and some groups are operated by Supreme Court (SC). These PG operates to benefit their groups operations (one of the operations is corruptions), mainly for MONEY which is everything here in Philippine. The only way to for amendments of Philippine Constitution (PC) is by Referendum. The revisions of the PC should be approved by each PG to please them. Reduction in their income for their operations will disapproved any constitutional changes or CC. Approve CC may be approved for some group but if the CC will bring back severe penalty for Corruptions such as jail for 1 year for 100k pesos to 1 million pesos, death penalty for more than 1 million pesos of corruptions and death penalty for drug trafficking, which means to cut corruptions, some groups shall disagree. Well, what the police force is doing? They should arrest the permit provider for allowing bad protester in the street. If there is no permit, police can arrest and jail the bad protester. Vibrant Democracy (VD) cause some snail pace development. In VD, corruptions thrive. What to do? Use police force.
The protest groups are a loud but largely irrelevant part of the voting population. That’s why they are so strident, to make up for the fact that people don’t really buy what they are selling, other than the sensationalist press. I agree they should be policed for permits and arrested when they are abusive, as with Abad. The constitutional revisions should ignore them, in the main, and do what is important to allow the Philippines to move steadily forward, rather than in fits and starts.
Looks like the SC is house cleaning. I just read that Ong is out. Maybe as more rogue judges are thrown out, the more responsive the other judges will be in cooperating with the other two branches. I am all for check and balances but there are times when all branches should work with each other, especially when it concerns the country’s progress and prosperity.
Yes, but Ong’s misdeeds were so visible, the Court couldn’t hide it, and still 5 SC justices opposed the decision. I want to read their logic. The lack of ethical discipline is a huge problem in the Philippines. I fear the courts remain substantially hidden behind closed doors. Even Madam Arlene has not been revealed after many months of supposed investigation. Who was she paying off? They are still seated, issuing rulings tied to money. Not law, or right and wrong, or harm done. Ethics is a discipline. Philippine government has precious little it seems to me. And no shame.
I can understand your frustration, Joe. What I don’t understand is why the SC can rule the executive and legislative branches’ funds as unconstitutional but it seems that no one assails the constitutionality of their judiciary spending kitty.
Sereno declared today that the housecleaning had just begun BUT more funds are needed to facilitate that and the updating of the system to make it more responsive and faster.
Why begrudge the President for stimulating the economy through DAP and the Legislative through PDAF when the SC have its JDF and knows that money is needed to grease their own wheel of justice?
Politicos in the Executive and Legislative branches act to further political and social goals. Husgadors in SC act to enable justifiable political and social goals. I can clearly see a Venn diagram where the goals of the three branches overlap. Why fight it?
I got a feeling that Madam Arlene had flown off the coop already. I would love to see her unmasked too.
The constitution says they run their own financial affairs, so I don’t see the SC DAP as unconstitutional. The problem is that they don’t concede to Executive a parallel need. As for Sereno’s money problems, I wonder if she considers how much time and labor could be freed up if the courts would work on ways to be speedy (like, reject trivial complaints and have judges stop granting excuses for delays), and to spend time on crime rather than trivial matters like annulments. Here’s to no-fault divorce in the Philippines as a way to free up the courts so they can work on corruption within their ranks.
There seems to be a singular lack of passion within the Court to do anything about Arlene.
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1. Marcos’ chickens are coming home to roost.
2. The conjugal dictatorship did not invent corruption but they institutionalized it… in all branches of government. Corruption has become the norm rather than the exception.
3. There are specific provisions in the Constitution that are emotional reactions to the dictatorship. The single term for the presidency is one and the expanded power of the judiciary, as Manuel has pointed out, is another.
4. Marcos created the Judiciary Development Fund (JDF), the pork barrel of the Judiciary. In this we see not only corruption but also a sense of entitlement in both the judges and employees.
4.1. During Corona’s impeachment trial it was revealed that the justices enjoy a wide range of perks in allowances, bonuses and other benefits.
4.2. It seems that 80% of the JDF is mandated for employees’ cost of living allowances. This would make judiciary employees favored over other government employees… but not perhaps as favored as Senate employees under then sainted Senate President Enrile.
4.3. Additionally, judiciary employees, unlike employees in other government branches and in private business, are not taxed on their benefits – and they have the gall to protest against BIR moves to implement the law. Look, the Judiciary is not following the law!
4.4. I gather non-ecumenical religious services were conducted at Padre Faura during Corona’s trial and I would not be surprised if accommodations for worship and religious paraphernalia continue to be provided to this day. Is it any wonder, in such a milieu, that the provisions of the RH Law were watered down?
5. But Marcos being the beast that he was at least had the sense to clothe his devilish stratagems in legal finery. (Refer to Manuel’s link.) With Binay, there is no attempt at finesse only crude trickery. (Refer to Raissa Robles’ uncoverings.) …But I digress from this blog’s topic. 🙂
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4.2 and 4.3 are revelatory. Hope that those are part of the judicial reforms CJ Sereno is talking about.
I think Joeam, this time you really oversimplified your comparison with the U.S. SC and the R.P. SC.
You are comparing an apple to a watermelon…You are thinking as the term in known in legal circles as an originalist as far as the constitution is concerned. Firstly the U.S. is not a nation state. Their constitution defined THE POWERS of the FEDERAL GOVERNMENT that stipulated the powers of the same over the original states. JEFFERSON, a VIRGINIAN FIRST WAS a champion of the power of the states over the central government.
The Philippines is struggling to become a nation state. We have had 3 constitutions so far. All three reflecting the history of the country at the time written…
There is powerful debate ongoing in the U.S. itself over the expanded scope of the Supreme Court’s power over the individual states…
JEFFERSON THEN ISSUED HIS WARNING CONCERNING THE U.S. SC after the MARBURY V. MADISON CASE, WHICH FOR THE FIRST TIME QUESTIONED THE POWER OF THE EXECUTIVE WHO AS JEFFERSON.
The U.S. CONSTITUTION HAS BEEN RECONSTITUTED SO MANY TIMES THROUGH THEIR DECISIONS, AND ANOTHER FAMOUS CASE, BROWN V. BOARD OF EDUCATION SERVES AS ANOTHER EXAMPLE…
Yes, absolutely I simplified because I am not trying to do a study of the two court systems, I am trying to understand (for myself and any interested readers) the simple point of how the Philippine Supreme Court gets so meddlesome and entwined in small legalistic thinking. I figured out why, and thought I’d share the enlightenment. MB added the perspective of exactly why the Philippine Court was given the charter it was given, to be a heavy check on a president who may aspire to be a dictator. That is precisely why the SC on DAP found it a constitutional error of discretionary judgment. The U.S. justice system is indeed built on case law, because the Constitution is broad, and its drafters expected those refinements would be made. If the sands shift with various rulings, it is because culture shifts, and opposing political biases creep into judgments.
There are 50 states and their own chief executives that create laws…You have state laws and federal laws. So naturally the power to create inferior courts cannot be vested in the Supreme Court in the U.S. The reason why Jefferson got pissed at THE USSC.
MAYBURY DECISION CRITICIZED JEFFERSON. THAT DECISION FIRST BROUGHT THE USSC AS THE THIRD SEPARATE BUT EQUAL BRANCH TO THE FOREFRONT.
SC DID NOT FIND DAP unconstitutional…..It INITIALLY found three aspects of the process unconstitutional…DAP WAS SIMPLY A BRAND CREATED BY ABAD OF PLAYING CATCH UP DUE TO CRTICISM’S OF INEPTITUDE. WE SHARE THE SYSTEM OF CASE LAW INTERPRETATION HERE…ALL SC DECISIONS HERE ARE BOUND BY CASE LAW AND VERY RARELY GO TO SET PRECEDENTS LIKE THE DECISION ON ERAP’S CONSTRUCTIVE RESIGNATION…GMA WAS SWORN IN AS ACTING PRESIDENT…
ALL COURT ARE BOUND TO EXPLAIN THEIR DECISIONS /RESOLUTIONS…
AS IS, DUE TO THE MARCOS FIASCO AND SUBSEQUENT LAWS, ONLY 25% OF THE BUDGET IS APPROPRIATED BY CONGRESS..ALL ELSE IS AUTOMATICALLY APPROPRIATED..
I PERSONALLY HAVE PARTICIPATED IN TRIALS IN NY STATE COURTS AND KNOW THE DIFFICULTY IN TRIALS IN MULTI JURISDICTIONS IN OTHER STATES..
HOWEVER HERE THERE IS ONLY A SINGLE STATE…BUT THE POWER WIELDED BY THE EXECUTIVE DEPARTMENT HERE EVEN IN THE COURT SYSTEM IS PALPABLE…I PERSONALLY HAVE EXPERIENCED IT…
THE EXECUTIVE DEPARTMENT WILDS AWESOME POWER OVER PROSECUTORS/JUDGES/JUSTICES…
POWER TO APPOINT AND PROMOTE LIES WITH THE EXECUTIVE.
APOLOGIES FOR ALL CAPS AS THIS OLD MACHINE HAS SEEN BETTER DAYS…..
It seems to me that case law in the Philippines is very wobbly. Very erratic. Very susceptible to payments or political favoritism. What case law precedent did Ong set when he dismissed the Napoles Kevlar case, I wonder. What horrors of case law would Corona have set? Or DID set, in a way, in accepting the midnight appointment. And it seems to me that President Aquino is right to challenge the DAP ruling for the benefit of all future presidents. To let a punitive ruling stand as a legitimate case, without challenge, would be a weak position. At lease Executive’s position is on record for future attorneys to consider in arguing their cases.
I STRONGLY SUGGEST YOUR READ THE DECISION ON DAP AND TAKE NOTE OF THE CASE LAW USED IN THE FOOTNOTES…AS FAR AS THE CASES YOU MENTIONED, ACCEPTING A MIDNIGHT APPOINTMENT IS NOT AGAINST THE LAW.
THE CASE WORTH READING WAS HIS APPROVING GMA’S RIGHT TO TRAVEL.
UNFORTUNATELY NAPOLES CASE WITH ONG NOT ONLINE.
IF THE SC POINTS OUT EVEN ONE OR TWO INSTANCES WHERE DISBURSEMENTS WERE APPROVED WITHOUT APPROPRIATION OUT OF THE PHP 144 BILLION OVER THE THREE YEARS, THEN THAT FALLS UNDER TECHNICAL MALVERSATION.
GMA IS CHARGED WITH A SIMILAR OFFENSE IN THE PCSO CASE.
PLEASE NOTE THAT ALLOWING UNOBLIGATED ALLOCATIONS TO BE CLASSIFIED AS SAVINGS AT ANY TIME AND CROSS BORDER TRANSFERS UNDER THE GAA OF 2011/2012/2013 MAY BE WHERE THE SC WOULD DWELL ON THE PARTICULAR SECTIONS OF THE ADMINISTRATIVE CODE OF 1987 WHERE CORY WAS EXECUTIVE AND LEGISLATURE AS HEAD OF A REVOLUTIONARY GOVERNMENT.
THE SECTIONS CONCERNED WERE LIFTED VERBATIM FROM A MARCOS PD AND WAS CENTERED ON THE AUTOMATIC APPROPRIATIONS FOR DEBT SERVICE.
FROM FEB. 1986 TILL THE NEW CONGRESS CONVENED IN 1987 THERE WAS NO CONGRESS. HENCE THE CORY GOVERNMENT BY EXECUTIVE FIAT HAD THE ALLOCATE POWERS UNTO ITSELF OVER FISCAL POLICY IN THE MIDST OF THE DEEPEST FISCAL HOLE THE GOVERNMENT WAS IN. VAT WAS BORN IN 1986 TO HELP PLUG PART OF THE HOLE.
FISCAL POLICY THEN WAS CORY AND THE IMF…NO CONGRESS….
FISCAL POLICY IS HANDLED BY THE EXECUTIVE AND/OR CONGRESS WHILE MONETARY POLICY BELONGS EXCLUSIVELY WITH THE CENTRAL BANK…
THE PHILIPPINES HAS ALWAYS BEEN IN A FISCAL HOLE SINCE 1946.. NOTHING MUCH HAS CHANGED..
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1. Plato identified the four cardinal virtues and associated them with the social classes as:
1.1. Courage, also called fortitude, was associated with the warrior class.
1.2. Temperance, also called restraint, was associated with the producing classes, the farmers and craftsmen.
1.3. Prudence, also called wisdom, was associated with rulers and reason.
1.4. Justice, also called fairness, was outside the class system and governed the proper relationship among the other three.
2. Aristotle distinguished between two types of wisdom:
2.1. Sophia which is theoretical wisdom.
2.2. Phronesis which is practical wisdom.
3. Sophia is disinterested understanding, and is a combination of:
3.1. Nous which is the ability to understand what is true or real.
3.2. Episteme which is knowledge or science.
4. Phronesis is doing or making use of knowledge, and is a combination of:
4.1. Techne which is skill and craftsmanship.
4.2. Good judgment which is the ability to decide what actions to take to ensure correct outcomes.
5. Of the four cardinal virtues, one might correlate the classes of Plato’s Republic with the branches of the modern republican state:
5.1. The Legislature is Prudence in that it makes the laws.
5.2. The Executive is Courage and Temperance in that it enforces and, at the same time, safeguards the laws.
5.3. And, naturally, the Judiciary is Justice in that it assures that the laws are applied fairly to all.
5.4. One might go further and submit that each branch of government should bear the cardinal virtues. For the Judiciary, the three other virtues would be:
5.4.1. Courage which can be interpreted as independence from the appointing power.
5.4.2. Prudence which can be interpreted as sagacity in judgment.
5.4.3. And Temperance which can be interpreted as moderation and judicial restraint.
6. Of Aristotle’s distinction between the wisdom of being and doing, one might observe that justice falls more within the area of phronesis than of sophia. And this is where part of the problem lies:
6.1. The Supreme Court not only feels that it possesses knowledge to make good judgments, but it also feels that it must make good use of that knowledge all of the time.
6.2. One might say that the Court has an uneven measure of phronesis as against sophia.
7. Apart from Western philosophy, Eastern philosophy also provides wisdom on the issue at hand.
7.1. One of Taoism’s central concepts is that of wu wei, which literally means “not doing”.
7.2. This should not be misconstrued as passivity or laziness. The deeper meaning is that sometimes the best action in a given situation is not to do anything. Overdoing may produce more harm than good. Wisdom may consist and may be contained in silence… and here I must stop.
8. Except for one more: Taoism emphasizes that when human nature is aligned with the rest of nature, harmony is attained. For the common cause of the common people, the three branches of government should – must – also act in harmony.
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I would add that Courage for the Judiciary is not only independence from the appointing power but also the ability to withstand temptations of bribery in any form. Corona, and now Ong, do not possess this virtue.
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I wish there were a way to have every SC justice read this piece. It is sections 5.4.2 and 5.4.3 that get right to the point of what I am trying to show that they are deaf to, based on their relentless pronouncements on details while dismissing the wisdom of restraint. The tao concept of “not doing” could be so powerful and switch the court from BLOCKING good deeds, to promoting them.
Or what’s a court really for??
I would say a well rounded public servant should embody all of Plato’s virtues regarldess of what societal class they came from. They should also have both of Aristotle’s wisdom – theory and practice.
It is time for Filipinos to be more discerning of their public servants and pick the best and the brightest to run the country. Do not let the “creme de la creme” leave the country in search of opportunity in foreign lands.
The government should be more proactive in early identification and grooming of the “best of the best” for public service. The youth are the country’s future. An investment in them now will pay tenfold in the future. Let’s teach them well and nurture their innate gifts. I should stop here before I start singing…
VPBinay should read your comment so that he may hopefully come to his senses that it is not only he and the members of his family who should be running Makati city and the whole country. There are many from the middle class who are patiently waiting for their turn but are not given the slimmest of chances due to a mindset of people like him who thinks of himself as the “anointed” one and must therefore stay in power and an electorate that would not be awakened to the fact that they should be the one ruling this country because they outnumber the few
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Juana,
Oh, go on, sing…
In going back to the ideals of Eastern and Western philosophy, I intended to simply establish the ethical underpinnings of our present-day institutions. I now realize that the gap between the ideal and the real is… stupendous. Stupendous not in the sense of eliciting awe but in eliciting amazement at how far we have fallen.
The Judiciary the incarnation of fairness? Hah!
Congress the embodiment of wisdom? Triple Hah!
A starting point of wisdom is the recognition of how deep we have fallen.
No, no, that’s too poetic. A starting point of wisdom is the realization that the merde is hitting the fan.
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No s**t, Edgar. 🙂
The bottom of the pit is not pretty even when we decorate it with festive banners and karaoke machines. And the realization that we have fallen in a snake pit is even worse.
“…and the President is irritated that the Court keeps throwing wrenches into his efforts to run this dilapidated, dirty, diesel economy and get it humming like a Lamborghini.”
What, exactly, is the President’s plan to get to a Lamborghini economy? Because even if the Supremes had granted favorable ruling on the few billion pesos in discretionary spending from DAP, it won’t do the trick even for a Ford Fiera economy.
The Development Plan sets out one version of activities. The official one, I suppose. My observations are that the steps being taken to improve the economy include: (1) financial stabilization by installing better tax disciplines, stopping the bleed from corruption and investing in high return areas (education), (2) laying down a better infrastructure of airports, roads, and trains, and starting to work on electricity and broadband services (3) reducing red tape that burden businesses, (4) promoting successful enterprises: call centers, tourism, gaming and trying to upgrade the laggards (agribusiness and mining), and (5) attracting more overseas investors.
The President is already entering into his lameduck year and it’s doubtful something significant could still be accomplished on the economic front given how the gov’t had spent most of its energies on the anti-corruption front, the muslim Mindanao conflict, and the Spratly’s bully.
If only for the reason that the President would really want to make a positive dent on the economy that I favor granting him a second term to rectify some fundamental flaws in our approach to economic development.
Franklin D. Roosevelt has had four terms and he managed to claw the US back from the Great Depression, very effectively managed the war effort, instituted policies for collective prosperity, died in office on his fourth term the most beloved President in US history.
I’d say we need a Roosevelt in this part of the world.
I’d say you have him if more people would support him rather than undermine. Look at the chart on infrastructure investments, and you will find another item to add to your accomplishments checklist. Look at tax collections. Look at money that could have been spent on development that went to typhoon recovery. Look at money spent under CCT programs to help people eat, that in a wealthier country, would have gone to development. All due respect to Roosevelt, but he did not take over a nation wracked in poverty with a culture of corruption that was the basic way of conducting business.
All due respect to Roosevelt, but he did not take over a nation wracked in poverty with a culture of corruption that was the basic way of conducting business.”
I hate to break it to you Joe but Roosevelt did, in fact, took over a nation wracked in poverty. He assumed office in 1933, four years after the crash of 1929 where images of breadlines, unemployment lines, and Hooverville kept his humanitarian resolve to do something.
Needless to say, where poverty flourish corruption follows. Bankers and the economic elite hated him but he thundered back “I welcome their hatred!”
Surely you can’t believe that a nation with thousands of factories shuttered due to a financial collapse is the same as a nation with very few factories, or that a nation of employable people thrown temporarily out of work is the same as a nation with millions and millions of undereducated and unskilled workers. Sometimes I fear you stretch too far to be objectionable.
Nope, I did not imply sameness of economic structure. I merely underscored the invalidity of your claim that Roosevelt “did not take over a nation wracked in poverty” with a subtle suggestion that maybe we could learn how he had managed to overturn the infrastructure of poverty.
The real point is the depth of the problems in the Philippines, and no one is going to right this ship in anything less than 20 years. It has been hell for Mr. Aquino to turn the boat about 15 degrees, and he is a bright and earnest guy. But he stabilized it, has tuned the engine a bit, and will leave the place in a lot better shape for the next person.
If we get the economics right, we could see very significant, very dramatic results in as little as 5 years, maybe even less. A sovereign gov’t with flexible and sovereign monetary system freed from the constraints of income or borrowing could embark in a massive, and I mean massive, spending intervention in its economy and see the results overnight.
That is of course assuming we don’t have a corrupt and ignorant policy makers in both Congress and the Executive branch doodling in self interest. In which case, overturning the infrastructure of poverty will take the form of a Sisyphean task, not 20 or 50 years but forever.
“Look at tax collections.”
This is one subject that falls into the counter-intuitive.
Because the Philippine national gov’t is monetarily sovereign, taxes don’t pay for gov’t spending. The finances of the national gov’t is different from the finances of provinces, cities, towns, barangays, corporations, households, your friends, your neighbors, yourself, and me. These entities have one thing in common: we are all monetarily non-sovereign. We all need to actually earn (or borrow) in order to spend. The national gov’t, in contrast, is not constrained either by income or borrowing in order to spend. It is the issuer of its own currency. It creates money, ad hoc and ex nihilo, by spending. Its spending ability won’t be affected even if its tax collection will fall to zero or increase to 100 trillion.
At the national level, spending is money creation. Taxation is money destruction. Taxes suck money from the economy. VAT for example is regressive taxation because it affects mostly poor and middle class consumers. If you want to get the economy humming, one thing you can do is lower your tax collection and increase your spending.
GDP = gov’t spending/investments + private sector spending/investments +
(exports-imports).
Well, taxes are levied, and they are spent, and they distribute wealth. The administration has exhibited better discipline at collecting what the lawmakers say should be paid. So if that is a bad thing, then someone should inform lawmakers that they are wrong for collecting taxes. I’ll leave that assignment to you.
Yup, after decades of brainwashing and sheer ignorance on some of the most fundamental laws of economics, rigidity has taken hold in the execution of our economic plans and policies such that improving the lives of ordinary Filipinos – the very thing politicians and propagandists of all stripes pay lip service to, often – hardly makes any advance.
Part of the brainwashing and propagation of economic lies, for example, can be seen in billboards of infrastructure projects by the national gov’t such as roads and bridges where a phrase proclaims “This is where your tax money go”.
Neither do taxes distribute wealth. Every tax peso being collected from rich and poor alike, only makes the private sector one peso poorer.
So yes, opening the eyes of our politicians and policy makers is a herculean task. There are of course others who are more capable and reach a wider audience :
http://www.nakedcapitalism.com/2014/08/taxation-government-spending-the-national-debt-and-mmt.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29
MISSED OUT AN IMPORTANT SECTOR IN THE ABOVE EQUATION—–MICHA OBVIOUSLY IS A PROPONENT OF SUPPLY SIDE ECONOMICS…
THE EQUATION SHE LISTED ABOVE IS A SIMPLE ECONOMIC EQUATION FOR THE DEMAND SIDE——-
GDP BY INPUT/EXPENDITURE/DEMAND = GOVERNMENT CAPITAL SPENDING + BUSINESS CAPITAL SPENDING + HOUSEHOLD SPENDING (INCLUDING DURABLE GOODS) + OR – EXPORT – IMPORT.
OBVIOUSLY GOVERNMENT SPENDING MUST COME FROM TAXES, REVENUE AND LOANS…..
PAYMENT FOR IMPORTS FROM THE SUPPLY OF FOREIGN EXCHANGE…SOURCE OF FOREX IS ANOTHER STORY ALTOGETHER…
THE CLASSICAL ECONOMIC PHILOSOPHER ADAM SMITH SAID GOVERNMENT MUST HANDLE INFRA, DEFENSE, EDUCATION AND THE RULE OF LAW….
THE DIFFERENCE BETWEEN THE GOVERNMENT AND INDIVIDUALS IS GOVERNMENTS ABILITY TO CONTRACT DEBT WHICH SIMPLY IS A SECURITIZATION OF FUTURE TAXES TO BE COLLECTED. (BONDS)
THAT IS WHAT POLITICAL SOVEREIGNTY IS ALL ABOUT. HOWEVER THE ABILITY TO CONTRACT DEBT IS DEPENDENT ON THE CREDITORS CONFIDENCE TO BE PAID BACK…HENCE THE LENDING RATE TO SOVEREIGN STATES IS ALMOST ALWAYS LOWER THAT RATES CHARGED TO THE PRIVATE SECTOR…
THE OTHER HALF OF THAT SOVEREIGNTY IS THE POWER TO HAVE A MONOPOLY OVER A FIAT CURRENCY WITHIN ITS TERRITORY…
GOVERNMENT SPENDING IS NOT MONEY CREATION…THAT FALLS TO THE CENTRAL BANK AND THE BANKS——MONEY CREATION IS DONE THROUGH CREDIT CREATION THAT RESULTS IN A MULTIPLIER EFFECT OF MONEY MULTIPLIERS…
IT IS SADLY TRAGIC THAT EVEN AQUINO DOES NOT HAVE A RUDIMENTARY UNDERSTANDING OF MACRO-ECONOMIC POLICY IN THE COUNTRY…
WE HAVE A STRUCTURAL FISCAL HOLE WHILE OUR MONETARYY POLICY HAS BEEN DEFAULTED TO THE U.S. FEDERAL RESERVE…
THERE ARE OTHER POLITICAL MODELS OFF COURSE AS GOVERNMENT SOMETIMES ASSUMES A LARGER ROLE IN THE ECONOMY APART FROM THE PRIVATE SECTOR…
QUESTION TO MICHA—-WHAT IS GOVERNMENT’S ROLE IN THE SCHEME OF THINGS…
SHOULD DISPUTES BE SETTLED ON THE DUELING FIELD?
http://thinkprogress.org/justice/2014/01/01/3109311/john-roberts-sequestration/
http://www.nytimes.com/2007/01/01/us/01scotus.html?_r=0
ROBERTS: Sequestration cuts have affected court operations across the spectrum. There are fewer court clerks to process new civil and bankruptcy cases, slowing the intake procedure and propagating delays throughout the litigation process. There are fewer probation and pretrial services officers to protect the public from defendants awaiting trial and from offenders following their incarceration and release into the community. There are fewer public defenders available to vindicate the Constitution’s guarantee of counsel to indigent criminal defendants, which leads to postponed trials and delayed justice for the innocent and guilty alike. There is less funding for security guards at federal courthouses, placing judges, court personnel, and the public at greater risk of harm.
That’s just one of the major harmful policy consequences coming from the right wing Tea Party lunatic fringe since it got into power in 2010. The Roberts court itself is a conservative majority which gave us the Citizens United, which enabled the election of Koch funded Tea Party wackos in Congress which, further, then crafted and passed legislations for more cruel and gratuitous austerity measures so, why is he complaining?
Isn’t that a perfect demonstration of the idiomatic phrase, chickens coming home to roost?
@R.Hiro
Thanks for your interest in this subject.
I am not an advocate of supply side economics and I wonder why you have concluded that from my post when I am, in fact, a Keynesian both by nature and nurture.
Anyways, you said : “OBVIOUSLY GOVERNMENT SPENDING MUST COME FROM TAXES, REVENUE AND LOANS…..”
To be fair, this is a myth that is so pervasive even here in the US and the MMT guys have a hard time disabusing the minds of policy makers as well as tenured academic economists. It bears repeating this simple fact : a monetarily sovereign gov’t does not need an income in order to spend. The practice of collecting taxes and/or borrowing is a remnant of the gold standard days when the spending and borrowing ability of the gov’t is limited by the finite amount of gold in its possession. When a sovereign gov’t has gotten off from the gold standard (such as the Philippines, I assume) that constraint is removed.
The only constraint in the sovereign gov’t’s ability to spend is inflation. Only when the economy is overheating that it’s time for the gov’t to apply the brakes and impose austerity measures. When the economy is depressed, that’s the time for the gov’t to step in the gas and indulge in spending spree (stimulus spending).
Notice that, that is the opposite behavior you would expect from non-monetarily sovereign entities such as households or corporations or towns and cities.
European nations such as France, Spain, Italy and others have also given up their monetary sovereignty by giving up their own currencies (franc, peseta, lira) in favor of the Euro. They’ve lost very significant flexibility in both monetary and fiscal policies because now they are dependent on money supply coming from the European Central Bank which imposes conditions and guarantees of structural adjustments before approving the loans.
Micha I do not mean to demean your words but I believe you do not understand what you know…
Firstly, your main thesis that governments with their own currency do not have to impose taxes is ludicrous. YOU OBVIOUSLY HAVE PROBLEMS WITH THE TERMINOLOGIES USED IN YOUR OWN ATTACHED VIDEO…KEYNESIAN POLICIES HAVE LONG BEEN THE REFUGE OF POLITICAL SCOUNDRELS. THE PRINCIPAL REASON WHY THE BRETTON WOODS AGREEMENT CAME TO AN END WAS THE REFUSAL OF THEN PRES. JOHNSON TO RAISE TAXES TO HELP PAY FOR THE VIETNAM WAR…ROBERT MUGABE IS ANOTHER EXAMPLE OF A POLITICAL SCOUNDREL WHO USED HYPER INFLATION AS A POLITICAL STRATEGY…
Governments operating under their own currency dot not have to pay back their debts ever as long as they continue to service the interest payments…That keeps their currency strong…However they need to impose taxes to pay for that interest…DURING THE SECOND WORLD WAR, THE MARGINAL PROGRESSIVE INCOME TAX RATE IN THE U.S WAS 90%. AT THE END OF THE WAR THE TOTAL DEBT OF THE US WAS OVER 100% OF GDP. BUT THE US ECONOMY GREW WHEN THE INDUSTRIAL POWER OF THE US SHIFTED TO CONSUMER DISPOSABLE GOODS. OBVIOUSLY EVEN WITHOUT PAYING FOR THEIR DEBTS THE DEBT TO GDP RATIO DROPPED GREATLY…THANKS TO GOVERNMENT SPENDING FOR THE COLD WAR NEW INNOVATIONS, INVENTIONS CAME ABOUT…
The father of macroeconomic policy, Keynes, proposed to the industrial economies of the West, when there was secular collapse of the financial markets that led to the Great Depression, that fiscal and monetary policies were vital in correcting the collapse in demand…
Obviously when there is a collapse in demand the demand for credit dries up so short term interest rates dive to zero…
For industrialized economies the only economic agent left with the power to pump prime demand is the government…Since the collapse also reduces the take of government revenue, the government then runs deficits to spend to pump prime demand since industrial economies will have unused capacities.
Obviously like what happened during the last severe downturn, the USA ran deficits as high as 10% of GDP TO PUMP PRIME DEMAND. The fed then drove both short term and long term interest rates lower….THE FED HAS THE UNILATERAL POWER TO CREATE MONEY AS SHOWN BY THEIR QE PROGRAM. NORMALLY THE FED HAS THE POWER FOR SHORT TERM RATES ONLY….CONGRESS HAS DELEGATED THAT POWER TO THE FEDERAL RESERVE SYSTEM. THE DEFICIT RATIO TODAY IN THE US IS ABOUT 3% OF GDP SINCE THERE HAS BEEN A RECOVERY ON THE DEMAND SIDE…
THE EURO IS AN ARTIFICIAL CURRENCY BECAUSE THE EURO-ZONE HAS NO FISCAL UNION….FISCAL POLICY AND MONETARY POLICY ARE TWO SIDES OF ONE COIN…
UNLIKE THE USA WHICH IS A FISCAL AND MONETARY UNION OF 50 STATES AND THEIR TERRITORIES…
THE UK IS PART OF THE EU BUT RETAINED MACROECONOMIC POLICY..
AT THE END OF THE SECOND GREAT WAR THE DOLLAR STANDARD REPLACED THE GOLD STANDARD….THE DOLLAR REMAINS THE PREMIER RESERVE CURRENCY OF THE PLANET…
HERE IN THE PHILIPPINES WE DO NOT HAVE THAT POWER SINCE WE DO NOT HAVE AN INDUSTRIAL CURRENCY…
OUR INFLATION IS NOT MONETARY BASED BUT BASED ON THE SUPPLY SIDE….
MICHA I STRONGLY SUGGEST YOU READ THE GENERAL THEORY OF EMPLOYMENT, INTEREST AND MONEY SINCE YOU PRIDE YOURSELF AS A KEYNESIAN….
THE SUPPLY OF RICE AND OIL DRIES UP AND THE INFLATION RATE RISES…
“Firstly, your main thesis that governments with their own currency do not have to impose taxes is ludicrous.”
Nope, you left out some words to make it more coherent. Monetarily sovereign gov’ts doesn’t need to earn an income or borrow in order to spend. Taxes do not pay for gov’t spending. Government’s ability to spend is not constrained by the amount of taxes it collects. Proof of this is that monetarily sovereign countries such as Japan, the US, and Britain have presently and in the past been able to deficit spend as much as over 100% of their GDP without having seen the attack of bond vigilantes as erroneously predicted by the Reinhart-Rogoff paper.
This insight is just now starting to be recognized in the mainstream economics profession, thanks largely to the efforts of MMT guys such as Warren Mosler, Randall Wray, Bill Mitchell, and Stephanie Kelton. Each of them have google page hits and published books if you care to know more about their post-Keynesian theory. Here’s an overview of MMT:
http://en.wikipedia.org/wiki/Modern_Monetary_Theory
But even as early as 1946, Beardsley Ruml, the then Chairman of the Federal Reserve Bank of New York saw that taxes for revenue are obsolete :
http://home.hiwaay.net/~becraft/RUMLTAXES.html
“The necessity for a government to tax in order to maintain both its independence and its solvency is true for state and local governments, but it is not true for a national government. Two changes of the greatest consequence have occurred in the last twenty-five years which have substantially altered the position of the national state with respect to the financing of its current requirements.”
“The first of these changes is the gaining of vast new experience in the management of central banks.”
“The second change is the elimination, for domestic purposes, of the convertibility of the currency into gold.”
What then is the purpose of taxation?
Ruml listed 4 items :
1. As an instrument of fiscal policy to help stabilize the purchasing power of the dollar;
2. To express public policy in the distribution of wealth and of income, as in the case of the progressive income and estate taxes;
3. To express public policy in subsidizing or in penalizing various industries and economic groups;
4. To isolate and assess directly the costs of certain national benefits, such as highways and social security.
Here’s an excerpt from Warren Mosler’s book :
How does the Federal Government Tax?
Let’s start by looking at what happens if you pay your
taxes by writing a check. When the U.S. government gets your
check, and it’s deposited and “clears,” all the government does
is change the number in your checking account “downward”
as they subtract the amount of your check from your bank
balance. Does the government actually get anything real to
give to someone else? No, it’s not like there’s a gold coin to
spend. You can actually see this happen with online banking
– watch the balance in your bank account on your computer
screen. Suppose the balance in your account is $5,000 and you
write a check to the government for $2,000. When that checks
clears (gets processed), what happens? The 5 turns into a 3 and
your new balance is now down to $3,000. All before your very
eyes! The government didn’t actually “get” anything to give to
someone else. No gold coin dropped into a bucket at the Fed.
They just changed numbers in bank accounts – nothing “went”
anywhere.
And what happens if you were to go to your local IRS office
to pay your taxes with actual cash? First, you would hand over
your pile of currency to the person on duty as payment. Next,
he’d count it, give you a receipt and, hopefully, a thank you for
helping to pay for social security, interest on the national debt,
and the Iraq war. Then, after you, the tax payer, left the room,
he’d take that hard-earned cash you just forked over and throw
it in a shredder.
Yes, it gets thrown away. Destroyed! Why? There’s no
further use for it. Just like a ticket to the Super Bowl. After
you enter the stadium and hand the attendant a ticket that was
worth maybe $1000, he tears it up and discards it. In fact, you
can actually buy shredded money in Washington, D.C.
So if the government throws away your cash after
collecting it, how does that cash pay for anything, like Social
Security and the rest of the government’s spending? It doesn’t.
Click to access 7DIF.pdf
Can you now see why it makes no sense at all to think that the government has to get money by taxing in order to spend?
In no case does it actually “get” anything that it subsequently
“uses.” So if the government doesn’t actually get anything
when it taxes, how and what does it spend?
How the Federal Government Spends
Imagine you are expecting your $2,000 Social Security
payment to hit your bank account, which already has $3,000
in it. If you are watching your account on the computer
screen, you can see how government spends without having
anything to spend. Presto! Suddenly your account statement
that read $3,000 now reads $5,000. What did the government
do to give you that money? It simply changed the number in
your bank account from 3,000 to 5,000. It didn’t take a gold
coin and hammer it into a computer. All it did was change
a number in your bank account by making data entries on
its own spreadsheet, which is linked to other spreadsheets
in the banking system. Government spending is all done by
data entry on its own spreadsheet called “The U.S. dollar
monetary system.”
Here is a quote from the good Federal Reserve Bank
Chairman, Ben Bernanke, on 60 Minutes for support:
SCOTT PELLEY: Is that tax money that the Fed
is spending?
CHAIRMAN BERNANKE: It’s not tax money.
The banks have accounts with the Fed, much the
same way that you have an account in a commercial
bank. So, to lend to a bank, we simply use the
computer to mark up the size of the account that
they have with the Fed.
The Chairman of the Federal Reserve Bank is telling us in plain English that they give out money (spend and lend) simply
by changing numbers in bank accounts. There is no such thing
as having to “get” taxes (or borrow) to make a spreadsheet
entry that we call “government spending.” Computer data
doesn’t come from anywhere. Everyone knows that!
Where else do we see this happen? Your team kicks a field
goal and on the scoreboard, the score changes from, say, 7
points to 10 points. Does anyone wonder where the stadium
got those three points? Of course not! Or you knock down 5
pins at the bowling alley and your score goes from 10 to 15.
Do you worry about where the bowling alley got those points?
Do you think all bowling alleys and football stadiums should
have a ‘reserve of points’ in a “lock box” to make sure you
can get the points you have scored? Of course not! And if the
bowling alley discovers you “foot faulted” and lowers your
score back down by 5 points, does the bowling alley now have
more score to give out? Of course not!
We all know how data entry works, but somehow this has
gotten turned upside down and backwards by our politicians,
media, and, most all, the prominent mainstream economists.
Just keep this in mind as a starting point: The federal
government doesn’t ever “have” or “not have” any
dollars.
It’s just like the stadium, which doesn’t “have” or “not
have” a hoard of points to give out. When it comes to the
dollar, our government, working through its Federal agencies,
the Federal Reserve Bank and the U.S. Treasury Department,
is the score keeper. (And it also makes the rules!)
You now have the operational answer to the question:
“How are we going to pay for it?” And the answer is: the
same way government pays for anything, it changes the
numbers in our bank accounts.
The federal government isn’t going to “run out of money,”
as our President has mistakenly repeated. There is no such
thing. Nor is it dependent on “getting” dollars from China or
anywhere else. All it takes for the government to spend is for
it to change the numbers up in bank accounts at its own bank,
the Federal Reserve Bank. There is no numerical limit to how
much money our government can spend, whenever it wants
to spend. It encompasses all
government payments made in dollars to anyone.
This is not to say that excess government spending
won’t possibly cause prices to go up (which is inflation).
But it is to say that the government can’t go broke and can’t be
bankrupt.
“Firstly, your main thesis that governments with their own currency do not have to impose taxes is ludicrous.”
Nope, you left out some words to make it more coherent. Monetarily sovereign gov’ts doesn’t need to earn an income or borrow in order to spend. Taxes do not pay for gov’t spending. Government’s ability to spend is not constrained by the amount of taxes it collects. Proof of this is that monetarily sovereign countries such as Japan, the US, and Britain have presently and in the past been able to deficit spend as much as over 100% of their GDP without having seen the attack of bond vigilantes as erroneously predicted by the Reinhart-Rogoff paper.
Micha there has never been a time that a government incurred a deficit of 100% of GDP IN A YEAR… JAPAN PRESENTLY HAS A DEBT TO GDP OF 200%. BUT THAT DEBT IS OWED TO JAPANESE CITIZENS BOTH HOUSEHOLDS AND CORPORATES. THAT HUMOUNGOUS DEBT IS DUE TO OVER A DECADE OF DEFLATION AFTER THE COLLAPSE OF THE BUBBLE ECONOMY IN JAPAN. THAT IS AN ACCUMULATION OF DEFICIT SPENDING OVER THE YEARS…
JAPAN RECENTLY RAISED THEIR VAT TAX AND IS DESPERATELY TRYING TO RAISE INFLATION…….THEIR SOVEREIGN INTEREST RATES ARE AT ZERO OR CLOSE TO ZERO…
REINHART- ROGOFF PAPER WAS A THESIS ON ALMOST TWO CENTURIES OF FINANCIAL CRISIS. THEY CONTEND ONCE A GOVERNMENT GOES OVER A CERTAIN DEBT TO GDP RATIO ECONOMIC GROWTH IS AFFECTED. NATURALLY THEIR THESIS HAS BEEN CRITICIZED.
NOW IT IS CLEAR THAT YOU DO NOT UNDERSTAND THE DIFFERENCE BETWEEN CASH IN CIRCULATION AND THE TOTAL MONEY SUPPLY. CASH IS A VERY SMALL PART OF THE TOTAL MONEY SUPPLY…HAVE YOU EVER SEEN A PAYMENT CHEQUE MADE OUT BY THE US TREASURY…WHEN YOU DEPOSIT THAT IN YOUR BANK THE AMOUNT IS CREDITED TO YOUR ACCOUNT… NO CASH ACTUALLY IS TRANSFERRED TO YOUR BANK..BANKING IS SIMPLY KEEPING LEDGER ACCOUNTS. TODAY WITH THE REVOLUTION IN TECHNOLOGY, THEY ARE SIMPLY DIGITS IN A SERVER….
HOW THE HELL DO YOU THINK A DEBIT CARD WORKS… YOUR PAYMENT IS TRANSFERRED TO THE VENDOR’S ACCOUNT AT THE SPEED OF LIGHT….
BUT IF YOU WISH TO GET PART OF YOUR DEPOSIT IN CASH, YOU GO TO AN ATM TO RETRIEVE CASH WHICH IS DEDUCTED DIGITALLY FROM YOUR ACCOUNT BY A COMPUTERIZED TELLER….
MY ALMOST BETTER HALF FILED AN ONLINE TAX RETURN AND SHE GOT HER REFUND IN HER BANK ACCOUNT WITHIN THE WEEK…..ALL FULLY DIGITIZED…..NO CASH INVOLVED.
IT IS OBVIOUS YOU HAVE A CHILD’S KNOWLEDGE OF BANKING AND MONETARY MATTERS….WHEN THE FED BUYS TREASURIES FROM THE MARKETS IT IS ALL DONE ELECTRONICALLY… IT SIMPLY TRANSFERS AMOUNTS TO THE SELLING BANKS ACCOUNT ELECTRONICALLY…THE INTEREST THEN IS PAID BACK TO THE GOVERNMENT INTERNALLY.
WHEN CHINA BUYS U.S. TREASURIES, IT’S ACCOUNT OF DOLLARS WHICH IS PARKED WITH US BANKS ARE USED AND THESE FUNDS ARE TRANSFERRED TO THE ACCOUNTS OF THE TREASURY…NO CARRIES BILLIONS IN CASH TO FACILITATE THE TRANSFER….
IN THE OLD DAYS OF THE 19TH CENTURY, YOU COULD EXCHANGE YOUR DOLLARS INTO GOLD AT THE TREASURY….
BUT THAT IS ALREADY PASSE….NO ONE USES SILVER OF GOLD SPECIE TO PAY FOR GOODS… IT IS TOO CUMBERSOME….
THE FEDERAL RESERVE SYSTEM IN THE U.S. IS INDEPENDENT FROM THE FEDERAL GOVERNMENT… IT RECEIVES NO TAX OR MONETARY SUPPORT FROM THE FEDERAL GOVERNMENT… IT IS A PRIVATE CORPORATION….
SOCIAL SECURITY IS PAID FOR BY THE PAYROLL TAXES CHARGED TO BOTH EMPLOYERS AND EMPLOYED…THIS GOES TO THE SOCIAL SECURITY ADMINISTRATION….THIS GOVERNMENT ENTITY ALSO INVESTED THEIR ACCOUNTS BY BUYING TREASURIES…THE SAME GOES FOR MEDICAID.
YOU HAVE THE FEDERAL RESERVE SYSTEM AND THE FEDERAL RESERVE BANKS….
THEY ARE TOTALLY INDEPENDENT INSTITUTIONS AND OPERATE WITHOUT TAX
MONEY….
ONLY THE FED CAN CREATE MONEY OUT OF THIN AIR AND IT DOES SO ONLY IN CASES OF EXTREME EMERGENCY….THE FED DOES NOT FUND THE FEDERAL GOVERNMENT…..IN ITS RECENT QE PROGRAM IT CREATED CLOSE TO 3 TRILLION DOLLARS TO BUY TREASURIES….
THE FEDERAL GOVERNMENT IS FUNDED THROUGH TAXES, REVENUE AND DEBT….
THE U.S. TREASURY IS PART OF THE FEDERAL GOVERNMENT.. THE FEDERAL RESERVE IS NOT….
HAVE YOU EVER LIVED, DONE BUSINESS WITH THE GOVERNMENT, OR DONE BUSINESS WITH BANKS IN THE US????
BY THE WAY ONE WAY OF SOLVING CORRUPTION IS TO ABOLISH LARGE DENOMINATIONS OF CASH AND MOVE TO REFILLABLE DEBIT CARDS…….BUT THE SUPPLY OF MONEY WILL NOT BE AFFECTED….
DO YOU KNOW WHAT A FRACTIONAL RESERVE BANKING SYSTEM MEANS……
GET USED TO IT DIGITAL CURRENCY IS MODERN DAYS CASH… MONEY SUPPLY IS COMPOSED OF CASH IN CIRCULATION, DEMAND DEPOSITS IN THE BANK, SAVINGS ACCOUNTS, SAVINGS IN CD’S, TRUST ACCOUNTS, FOREX ACCOUNTS…OBVIOUSLY THE BULK IS NOT IN CASH……TODAY THEY ARE RECORDED IN SERVERS…
I HOPE YOU CAN WRAP YOUR HEAD AROUND THIS…TOTAL ASSETS IN THE PHILIPPINE BANKING SYSTEM IS CLOSE TO 7 TRILLION PESOS….
DO YOU BELIEVE THAT 7 TRILLION LIES IN THE BANKS VAULTS….
NO IT IS NOT NECESSARY…..THIS IS THE 21STH CENTURY…
I am wondering if you had ever bothered reading the entirety of my recent posts or visited the links I’ve provided because what you were saying here had already been addressed and some may in fact be in congruence, especially on the subject of modern day electronic banking.
I would further suggest that you state your points or counterpoints without resorting to ad hominem if you are still interested in further engagement and/or discussion.
Thank you.
Cumulative deficit spending over the years is total national debt. Sorry for not stating it more clearly.
Question: If the government doesn’t tax because it needs the money to
spend, why tax at all?
Answer: The federal government taxes to regulate what economists call
“aggregate demand” which is a fancy word for “spending power.” In short,
that means that if the economy is “too hot,” then raising taxes will cool it
down, and if it’s “too cold,” likewise, cutting taxes will warm it up. Taxes
aren’t about getting money to spend, they are about regulating our spending
power to make sure we don’t have too much and cause inflation, or too little
which causes unemployment and recessions.
ONCE AGAIN YOU ANNOUNCED YOU WERE KEYNESIAN BUT POINT TO TAXATION AS THE WAY GOVERNMENT REGULATES AGGREGATE DEMAND… THE FEDERAL GOVERNMENT DOES NOT REGULATE AGGREGATE DEMAND.. THAT MANDATE FALLS TO THE FEDERAL RESERVE SYSTEM BY LEGAL MANDATE AND INTEREST RATES ARE USED TO REGULATE AGGREGATE DEMAND AND FULL EMPLOYMENT….
CREDIT CREATION IS DIRECTLY AFFECTED BY INTEREST RATES… CREDIT CREATION IS MONEY CREATION….PAUL VOLKER OF THE FED DESTROYED HIGH INFLATION IN THE EARLY EIGHTIES BY INCREASING THE OVERNIGHT RATE TO 14%.
TODAY THAT RATE IS CLOSE TO ZERO..
I RESPECT YOUR SPUNK BUT YOU ARE BASICALLY IGNORANT BORDERING ON STUPIDITY ABOUT MONETARY TOOLS.
The Federal Reserve Bank is an agency of the Federal gov’t. It is a creation of Congress and if Congress deems it so, it could abolish its existence by legislation. It’s Chairman is appointed by the President and it coordinates with the Treasury Dep’t on monetary policies.
The FRB is nothing more and nothing less than the equivalent of our own Bangko Sentral.
Do you also think our BSP is also a private corporation?
http://www.federalreserve.gov/faqs/about_14986.htm
Who owns the Federal Reserve?
The Federal Reserve System fulfills its public mission as an independent entity within government. It is not “owned” by anyone and is not a private, profit-making institution.
As the nation’s central bank, the Federal Reserve derives its authority from the Congress of the United States. It is considered an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government, it does not receive funding appropriated by the Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms.
However, the Federal Reserve is subject to oversight by the Congress, which often reviews the Federal Reserve’s activities and can alter its responsibilities by statute. Therefore, the Federal Reserve can be more accurately described as “independent within the government” rather than “independent of government.”
The 12 regional Federal Reserve Banks, which were established by the Congress as the operating arms of the nation’s central banking system, are organized similarly to private corporations–possibly leading to some confusion about “ownership.” For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.
http://www.federalreserve.gov/faqs/about_12799.htm
http://www.federalreserve.gov/faqs/about_12593.htm
Micha kindly update yourself on the FEDERAL RESERVE SYSTEM composed of the board of governors and the 12 FEDERAL RESERVE BANKS and the FEDERAL OPEN MARKET COMMITTEE…YES ALICE THE 12 RESERVE BANKS ARE PRIVATE CORPORATIONS THAT RECEIVE DIVIDENDS…..
YOU REMIND ME OF IMELDA MARCOS AND SARAH PALIN.. YOU ARE IN YOUR OWN UNIVERSE…
@RHiro, I would like to make note of Micha’s request that you refrain from ad hominem comments, as those personal aspersions are not at all relevant to the issue. I refer to the last line of your comment. The discussion is excellent. I hope the two of you can figure out a way to track toward understanding without the discussion descending into a battle of two 100 percenters who won’t budge and can’t find a way to win, and therefore turn to insult. If you can’t find agreement, then just agree to disagree and move on.
Your comments noted and apologies to MICHA…
FINALLY, MICHA, IF YOU WANT TO BELIEVE THAT THE TREASURIES JOB IS MANAGING DEMAND THROUGH TAXATION SO BE IT. THE FED ‘S MAIN MANDATE IS FULL EMPLOYMENT AND PRICE STABILITY….(FIGHTING INFLATION./DEFLATION) THEY DO NOT HAVE THE POWER TO TAX.
AS GO PALIN AND IMELDA,,DON’T DEMEAN THE TWO.. IMELDA IS STILL ON TOP OF THE WORLD AND PALIN IS MAKING LOADS OF MONEY… THEIR ACT IS STILL WELL RECEIVED IN SOME CIRCLES…
🙂
@RHiro
That’s an excellent resource link you provided about the Federal Reserve, freely available to anyone interested with a google browser.
Every sovereign country had their own central bank. Some would euphemistically call it the “lender of last resort” or a quasi-government institution.
For the purpose of this discussion however, I’m afraid that arguing about the nature of the central bank is a digression from the main topic that was started. It would be enough for now to say that it’s a functioning gov’t agency with the specific agenda of implementing gov’t monetary policies.
So, to reboot and to refresh, I will restate the main tenets of Modern Monetary Theory :
1. MMT believes that governments with the power to issue their own currency are always solvent, and can afford to buy anything for sale in their domestic unit of account even though they may face inflationary and political constraints.
2. Because the government can issue its own currency at will, MMT maintains that the level of taxation relative to government spending is in reality a policy tool that regulates inflation and unemployment, and not a means of funding the government’s activities per se.
Please state and support your disagreement (if any) with the above without resorting to ad homs. Thank you.
*******
Micha,
I do not understand economics, and I have a suspicion that economists don’t either. If they did, nations would not be in dire straits. A few questions:
1. Is there any government that is practicing MMT?
1.1. I am aware that the US is trillions in debt and has momentarily avoided falling off the fiscal cliff by raising the debt ceiling. It has not resorted to MMT and the US dollar continues to hold its value.
1.2. I am also aware that in Australia, the government speaks of keeping the budget in balance which I take to mean that revenues (earnings including taxes) must equal or exceed expenditure. The theory is that deficits are undesirable and surpluses are desirable, and the current aim is to put the budget back in surplus 2-3 years hence.
2. Is MMT the equivalent of printing money?
2.1. That may be a simplified reduction of the theory, but I can see that it is advantageous. For instance, it can be used to wipe out domestic poverty. This is so because you say that governments “can afford to buy anything for sale in their domestic unit of account”. And this can be done without employing the poor because taxes are “obsolete”.
2.2. I can also see that it is disadvantageous because of the threat of (hyper)inflation. The sovereign (fiat?) currency is not anchored on anything – neither gold nor a world currency. There is nothing to hold it up and therefore the flood of paper money needed to sustain domestic expenditure will inevitably devalue. The fiat currency will become toilet paper?
3. In the face (hyper)inflation, what are the consequences of MMT with respect to the purchase of imports? I gather Zimbabwe after its experience of hyperinflation has currently no national currency and currencies of other countries are in use.
Just an observation:
4. Your concept of what happens on a computer – when one receives a social security payment of $2,000 – may be rather naive from my point of view. It is true that your balance is incremented from $3,000 to $5,000 as you watch, but there may be a lot of background processes that go on before, during and after that visual change.
o For one, the amount is deducted from a social security bank account.
o For another, the amount is credited to your personal bank account, which is what you see.
o For another, the amount is also added to the national debt.
o For another, social security will recalculate your pension amount and determine when it is next due. It will also ensure that funds are available to meet other current and future allocations.
o For another, the bank may apply a transaction fee to your account.
o For another, the bank will take into account the new money when it calculates interest earnings.
There are certainly a lot more, but essentially the first four steps encompass what would affect the national level.
*****
@edgar lores
I’m glad you asked. I’m a new convert myself to this post-Keynesian, paradigm shifting view of economics but I will try.
1. Every nation that is a sovereign issuer of its own currency is, by default, practicing MMT. Although most, if not all, are pretending they are still tied to the gold standard. The movement itself is just gaining traction mostly here in the US with the University of Missouri-Kansas City and the Levy Economic Institute as the focal point for its adherents and academic research. One of the more visible proponent, Bill Mitchell, is a professor at Charles Darwin University in your native Australia. Earlier proponents include Abba Lerner, Hyman Minsky, Georg Friedrich Knapp, Alfred Mitchell-Innes, and Robert Skidelsky among others. As to be expected for any new paradigm shifting ideas, resistance from the old orthodox view is quite daunting.
1.1 Viewed from the concept of MMT, so-called national debt denominated in its own unit of account is not as horrible as it has been portrayed. In fact, when the economy is depressed or in a recession, it is desirable for the gov’t to deficit spend to make up for the shortfall in demand as households and businesses (private sector in general) try to leverage their own balances and are hesitant to spend. It is what Keynes called the “paradox of thrift”. Being frugal during hard times might make a lot of sense for an individual but if everyone does it at the same time, there will be a general shortfall in demand. Most of us are unaware of the concept that your spending is my income and your income is my spending. As such, during recessionary times, only the gov’t (public) sector has the ability and resources to fill that demand hole through stimulus spending.
The more or less 16 trillion dollar debt of the US is also the total private sector savings, both domestic and foreign. We could stop calling it national debt and start calling it private sector savings, and see what a difference that might make in our perception.
(Darn, I would love to continue this but I have to run…errand and responsibility calls. Will get back to this as soon as I can. I apologize).
cont’n….
1.1 For a monetarily sovereign country like the US, there is no such thing as a fiscal cliff or a debt crisis. It’s a bogus crisis manufactured to scare the bejeesus out of uncomprehending Americans and make them embrace the cruel and poverty inducing policies of austerity.
1.2 A gov’t that aims to balance its budget or achieve a surplus is fiddling with the danger of economic slowdown or, even worst, a full blown recession. Because to have a surplus means the gov’t must suck out more money than it spends from the private sector. Less money available in the private sector = less spending = less demand = less sales and profits for businesses = laying off of employees = everybody tightening their belts = anemic/depressed economy.
2. “Is MMT the equivalent of printing money?” MMT is premised on the gov’t’s ability to issue its own fiat currency and the leeway, the flexibility, the freedom that goes along with it. I don’t know if “equivalent” is the right word to use though.
2.1 “That may be a simplified reduction of the theory, but I can see that it is advantageous. For instance, it can be used to wipe out domestic poverty. This is so because you say that governments “can afford to buy anything for sale in their domestic unit of account”. And this can be done without employing the poor because taxes are “obsolete”.
Yes, absolutely. MMT can be used as a tool for collective prosperity.
2.2. “I can also see that it is disadvantageous because of the threat of (hyper)inflation. The sovereign (fiat?) currency is not anchored on anything – neither gold nor a world currency. There is nothing to hold it up and therefore the flood of paper money needed to sustain domestic expenditure will inevitably devalue. The fiat currency will become toilet paper?
MMT recognizes the threat of inflation. It is the only constraint in the gov’t’s ability to spend – not income or borrowing money from somewhere else. Taxation and interest rate adjustments are some of the tools available to control it. And of course, it could always apply the brakes on its spending when the danger of inflation is recognized.
3. “In the face of (hyper)inflation, what are the consequences of MMT with respect to the purchase of imports? I gather Zimbabwe after its experience of hyperinflation has currently no national currency and currencies of other countries are in use.”
I do not fully understand what you meant by “consequences of MMT with respect to imports”. There’s a system of free floating exchange rates in international trade. And because the US dollar is the reserve currency, it is used, for convenience, as the default medium of exchange.
Zimbabwe is a third world country with very limited ability to produce real goods and services. Mugabe confiscated the agricultural lands from white farmers (who knows how to do agriculture) and gave it to black Zimbabweans who has very little knowledge to grow crops. The scarce agricultural output that resulted, combined with waging war with its neighbors and the rampant corruption of his regime triggered the event of hyperinflation. Nations with resources and the knowledge or ability to exploit those resources will be immune from scarcity fueled inflation.
4. “Your concept of what happens on a computer – when one receives a social security payment of $2,000 – may be rather naive from my point of view. It is true that your balance is incremented from $3,000 to $5,000 as you watch, but there may be a lot of background processes that go on before, during and after that visual change”.
Of course account balances and spreadsheets calculations are involved but the nitty gritty of it was to illustrate how the federal gov’t conducts its business of paying somebody – from social security recipients to gov’t contractors buiding roads or supersonic fighter jets. No stacks of paper bills in duffel bags or bayong delivered to your doorstep. And if it’s just a matter of changing the numbers from a computer up or down in your bank account, what’s the need for a pool to draw it from?
MMT also recognizes the difficulty of the fact that, up until this time, the federal gov’t still keeps a ledger of its income and spending – a practice that is a remnant, unfortunately, of the gold standard days.
*******
Micha,
Thanks.
Sounds great in theory. The proof of the pudding… and all that.
I would like our country to try it, and give each Filipino P50M each. What will happen? The law of unintended consequences will have a field day.
1. Demand will rise, and supply will not be able to meet demand.
1.1. What is the consequence? Prices will rise.
1.2. If prices rise -> inflation.
2. Let’s say the government counters by decreeing that prices cannot rise.
2.1. What is the consequence? It’s basically first come, first serve. Then what?
2.2. People will rechannel their desires and accept substitutes – second-best, third-best. Then what?
3. Some consequences.
3.1. Everybody will have a car, assuming supply. Traffic will be humongous.
3.2. Everybody will resign. Why work? Production will plummet.
3.3. If nobody works, there will be no supply of anything. There will be consumption without production.
3.4. If there is no supply, there will be no satisfaction.
What basically happens is that desire is increased, and is momentarily satisfied; then frustration is increased, and becomes permanently embedded; at the same time motivation is removed.
It would be a good subject for a utopian/dystopian novel.
*****
“I would like our country to try it, and give each Filipino P50M each.”
Nope, MMT proponents do not suggest giving people free money. They suggest that monetarily sovereign gov’ts must spend for useful things like infrastructure, scientific research and development, subsidies to educational institutions, etc. that will allow people to be employed and doing useful productive things.
Your suggestion of free money is exactly the formula for creating a Zimbabwe.
Aw shucks. 😉
GET BACK TO YOU TOMM..
MICHA THERE IS NO GOVERNMENT IN THE OECD GROUP OF STATES THAT UTILIZE THE MMT WHOSE PROCESS YOU DESCRIBE.. COUNTRIES THAT TRIED TO SHORTCUT THE PROCESS OF MONEY CREATION BY SIMPLY PRINTING CURRENCY HAVE FAILED MISERABLY AS IN THE CASE OF GERMANY IN THE EARLY 20’S AND ZIMBABWE RECENTLY AND THE JAPANESE HERE DURING THEIR OCCUPATION…
http://www.oecd.org/ctp/tax-policy/revenue-statistics-ratio-change-previous-year.htm
http://en.wikipedia.org/wiki/List_of_countries_by_tax_revenue_as_percentage_of_GDP
http://www.oecd-ilibrary.org/economics/government-debt_gov-debt-table-en
http://www.oecd-ilibrary.org/economics/government-debt_gov-debt-table-en
ONE MUST NOT FORGET THAT THE JOB OF MODERN CENTRAL BANKS IS PREVENTION OF RAISING INFLATIONARY EXPECTATIONS DUE TO THE RAPID VELOCITY OF THE MULTIPLIER EFFECT ON PRICE LEVELS…
IT IS LEFT TO BANKS TO CREATE MONEY AND THE CB TO MANGE TO SPEED THROUGH THE PRICE OF MONEY CREATION – INTEREST SETTING…PLUS YOU HAVE DIFFERENT EXCHANGE RATE LEVELS OF OTHER COUNTRIES THAT SERVE AS A PRICE OF THE STABILITY OF OTHERS POLITICAL ECONOMY…
WHEN THE PHILIPPINES RAN OUT OF DOLLARS IN 1983 AND THIS CAUSED A MASSIVE DEVALUATION AND SUBSEQUENT INCREASE IN PRICE LEVELS, JOBO FERNANDEZ ISSUED T-BONDS PRICED AT 40% TO KILL INFLATIONARY EXPECTATIONS, CAUSED A DEEP DOWNTURN THAT CREATED WITH THE ASSASSINATION OF NINOY A DEADLY COMBINATION FOR MARCOS.
THE BANK OF ENGLAND WAS A PRIVATE BANK TILL 1946.. THE FIRST TWO CENTRAL BANKS IN THE U.S. IN THE 19TH CENTURY WERE PRIVATELY OWNED..
IN POINT OF FACT THE 12 DISTRICT FEDERAL RESERVE BANKS OF NY ARE PRIVATELY OWNED BUT ARE UNDER THE FED BOARD…
http://en.wikipedia.org/wiki/Federal_Reserve_Bank_of_New_York
http://www.newyorkfed.org/aboutthefed/org_nydirectors.html
http://www.federalreserveeducation.org/about-the-fed/structure-and-functions/districts/new-york/
FINANCIAL ECONOMICS IS THE NATURAL EVOLUTIONARY PROCESS OF INDUSTRIAL CAPITALISM….
MONEY AFTER ALL IS SIMPLY AN ABSTRACT IDEA… A REPRESENTATIVE IDEA OF OUR SHARED EXPECTATIONS OF VALUE……
IT IS A TOOL FOR TRADE AS A MEDIUM OF EXCHANGE, A TOOL FOR SAVINGS AS A STORE OF VALUE AND A TOLL AS A UNIT OF ACCOUNT…
PLEASE NOTE THAT MARKETS OF ALL KINDS INCLUDING CURRENCY MARKETS DEPEND ON PRICE INFORMATION…
PRICES DRIVE THE INTERPLAY OF SUPPLY AND DEMAND….
MICHA THERE IS NO GOVERNMENT IN THE OECD GROUP OF STATES THAT UTILIZE THE MMT WHOSE PROCESS YOU DESCRIBE..
Perhaps I had not been more clear but MMT is an operational description of the finances of a monetarily sovereign country that issues its own currency based solely on the full faith and credit of its gov’t. One may deny that the Philippines, for example, is not operating on MMT principles but you cannot deny that the Philippines is an issuer of its own currency. Whether it uses the freedom and flexibility attendant to its sovereign status is a matter of political – and often irrational – choice.
“COUNTRIES THAT TRIED TO SHORTCUT THE PROCESS OF MONEY CREATION BY SIMPLY PRINTING CURRENCY HAVE FAILED MISERABLY AS IN THE CASE OF GERMANY IN THE EARLY 20’S AND ZIMBABWE RECENTLY AND THE JAPANESE HERE DURING THEIR OCCUPATION…”
Dang, and I thought I’ve already addressed this same bogeyman from the Zimbabwe case.
The Weimar Republic, established just after the end of World War 1, was forced into bankruptcy by the victorious powers by requiring it to pay war reparations that was judged exorbitant even by then young British economist John Maynard Keynes. The reparations requirement, combined by the fledgling effort to build a republic damaged by war led to the ruinous hyperinflation. Like the Zimbabwe case, it was fueled by a general condition of scarcity.
I’m pretty sure it will be hard to cite a stable, economically productive country in modern times that experienced the problem of hyperinflation. It’s always Zimbabwe and the Weimar Republic.
John Maynard Keynes described the situation in GERMANY IN HIS The Economic Consequences of the Peace: “The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. The various belligerent Governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance.”
MICAH OH MICAH…NO I WON’T UNLEASH MY THUNDER.
KINDLY READ THE ENTIRE PIECE WHOSE LINKS I HAVE PROVIDED BELOW ON THE CORRECT INTERPRETATION OF CHARTALISM OR MMT…
SIMPLE FORMULA — FIAT CURRENCY BACKED UP BY TAX REVENUES/GOVERNMENT REVENUES/LOANS…
THE FFG. ARE EXCERPTS FROM THE LINKS—-
http://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic
http://en.wikipedia.org/wiki/Chartalism
“The hyperinflation episode in the Weimar Republic in the early 1920s was not the first hyperinflation, nor was it the first one in Europe, or even the most extreme inflation in history (the Hungarian pengő and Zimbabwean dollar have both been more inflated). However, as the most prominent case following the emergence of economics as a scholarly discipline, the Weimar hyperinflation drew interest in a way that previous instances had not. Many of the dramatic and unusual economic behaviors now associated with hyperinflation were first documented systematically in Germany: order-of-magnitude increases in prices and interest rates, redenomination of the currency, consumer flight from cash to hard assets, and the rapid expansion of industries that produced those assets. German monetary economics was then highly influenced by Chartalism and the German Historical School, and this conditioned the way the hyperinflation was then usually analyzed.”[28]
“The cause of the immense acceleration of prices that occurred during the German hyperinflation of 1922–23 seemed unclear and unpredictable to those who lived through it, but in retrospect was relatively simple. The Treaty of Versailles imposed a huge debt on Germany that could be paid only in gold or foreign currency. With its gold depleted, the German government attempted to buy foreign currency with German currency,[10] an action equivalent to selling German currency in exchange for payment in foreign currency, but the resulting increase in the supply of German marks on the market caused the German Mark to fall rapidly in value, which greatly increased the number of Marks needed to buy more foreign currency.
This caused German prices of goods to rise rapidly, increasing the cost of operating the German government, which could not be financed by raising taxes because those taxes would be payable in the ever-less-valuable German currency. The alternative was some
combination of running a budget deficit and simply creating more money, each of which increased the supply of German currency on the market and reduced that currency’s price. When the German people realized that their money was rapidly losing value, they tried to spend it quickly.
This increase in monetary velocity caused still more rapid increase in prices, creating a vicious cycle.[37] This placed the government and banks between two unacceptable alternatives: if they stopped the inflation this would cause immediate bankruptcies, unemployment, strikes, hunger, violence, collapse of civil order, insurrection, and revolution.[38] If they continued the inflation they would default on their foreign debt. The attempts to avoid both unemployment and insolvency ultimately failed when Germany had both.”[38]
“Chartalism is the theory that money originated with states’ attempts to direct economic activity rather than as a spontaneous solution to the problems with barter, and that fiat currency has value in exchange because of sovereign power to levy taxes on economic activity payable in the currency they issue.”
OUR OWN BSP SHOWED IT’S MMT POWER BY PRINTING NEW PESOS TO BUY AND INCREASE OUR DOLLAR RESERVES….BUT OUR DOLLAR RESERVES BACK UP THE VALUE OF OUR CURRENCY. ……
ECUADOR RECENTLY ABANDONED THEIR FIAT CURRENCY IN FAVOR OF THE U.S. DOLLAR…
HK’ DOES NOT HAVE A CB BUT HAS A HARD PEG TO THE U.S. DOLLAR. NO FOREX EXCHANGE RULES..
ALL COUNTRIES ARE AWARE OF MMT BUT THE RIGHT INTERPRETATION AND FORTUNATELY NOT YOUR INTERPRETATION…
WE MAINTAIN THROUGH THE BSP A NOT SO HARD PEG TO ALLOW A LITTLE FLEXIBILITY…WE DO NOT HAVE THAT SOVEREIGNTY ANY LONGER AS WE HAVE OPENED OUR CAPITAL ACCOUNT.
PRC MAINTAINS A VERY NARROW PEG WITH FOREIGN COUNTRIES AND HAVE STRICT FOREX CONTROLS ON THEIR CAPITAL ACCOUNTS…HENCE THEY KEEP THEIR MONETARY SOVEREIGNTY…
BY THE WAY TO UNDERSTAND THE IDEA OF VELOCITY .. IF BY CHANCE WE KNOW THAT GAS PRICES WILL RISE BY 50% NEXT WEEK, THIS WILL DRIVE DEMAND VERY QUICKLY AND IN A FEW DAYS GAS SHORTAGES WILL ENSUE…
I’m happy to know that you’ve bothered to read the primer on chartalism. It looks like we’re making some progress here.
MMT also has an active blogsite, New Economic Perspective (NEP), with open forums and regular article contributions from its proponents such as Stephanie Kelton, Randall Wray, Scott Fullwiler, and others.
http://neweconomicperspectives.org/
.
FROM WHAT YOU FIRST EXPOUNDED, YOU WROTE THAT MICAH’S MONETARY THEORY, IMPOSING TAXES IS NO LONGER NECESSARY SINCE SOVEREIGN STATES HAVE THE POWER TO CREATE THEIR OWN CURRENCY…
HOWEVER THE POWER OF FIAT CURRENCY DERIVES ITS POWER FROM THE POWER OF A STATE TO IMPOSE TAXES…
MICAH’S MONETARY THEORY AS YOU HAVE STATED MEANS NO MORE TAXES NECESSARY…
WHICH IS WHICH MICAH?????
DO YOU UNDERSTAND WHAT YOU WRITE????
“FROM WHAT YOU FIRST EXPOUNDED, YOU WROTE THAT MICAH’S MONETARY THEORY, IMPOSING TAXES IS NO LONGER NECESSARY SINCE SOVEREIGN STATES HAVE THE POWER TO CREATE THEIR OWN CURRENCY…”
Dang again, and I thought I couldn’t have made myself more clear.
This is what I’ve stated : for a monetarily sovereign gov’t, spending is not constrained by income or borrowing. Taxes do not pay for gov’t spending. Here again is Beardsly Ruml’s summation of what taxes are for :
1. As an instrument of fiscal policy to help stabilize the purchasing power of the dollar;
2. To express public policy in the distribution of wealth and of income, as in the case of the progressive income and estate taxes;
3. To express public policy in subsidizing or in penalizing various industries and economic groups;
4. To isolate and assess directly the costs of certain national benefits, such as highways and social security.
For Warren Mosler, it all boils down to controlling aggregate demand :
The federal government taxes to regulate what economists call“aggregate demand” which is a fancy word for “spending power.” That means that if the economy is “too hot,” then raising taxes will cool it down, and if it’s “too cold”, cutting taxes will warm it up.
Taxes aren’t about getting money to spend, they are about regulating our spending power to make sure we don’t have too much that cause inflation, or too little which causes unemployment and recessions.
I hope that is plain and clear to you now.
“HOWEVER THE POWER OF FIAT CURRENCY DERIVES ITS POWER FROM THE POWER OF A STATE TO IMPOSE TAXES…”
Soldier on brother, you’re almost there.
LOL….
yOUR OWN WRTING;
”To be fair, this is a myth that is so pervasive even here in the US and the MMT guys have a hard time disabusing the minds of policy makers as well as tenured academic economists. It bears repeating this simple fact : a monetarily sovereign gov’t does not need an income in order to spend. The practice of collecting taxes and/or borrowing is a remnant of the gold standard days when the spending and borrowing ability of the gov’t is limited by the finite amount of gold in its possession. When a sovereign gov’t has gotten off from the gold standard (such as the Philippines, I assume) that constraint is removed.”
I WISH JOEAM COULD PASS THIS TIDBIT TO HIS FRIENDS IN GOVERNMENT AND TELL THEM THAT THIS DRIVE TO INCREASE TAX REVENUES IN ORDER TO HAVE MORE MONEY TO SPEND IS LUDICROUS.. MICAH’S MONETARY THEORY SAYS THIS IS SO… IN SPITE OF DOZENS AND DOZENS OF CASES OF HYPERINFLATION THAT OCCURRED WHEN IT WAS TRIED—— WE CAN POINT TO HYPERINFLATION AS ONE OF THE DRIVING FORCES THAT DROVE THE FRENCH REVOLUTION…
• “The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple the mind is repelled. With something so important, a deeper mystery seems only decent.[56]”
– John Kenneth Galbraith writing in ‘Money: Whence it came, where it went’
(1975).
MICAH JUST GOOGLE HYPERINFLATION AND CASES OF IT…
THE VERY REASON GOVERNMENTS STARTED THE SERIES OF ACCOUNTS KNOWN AS NATIONAL INCOME ACCOUNTS OR GDP WAS PRECISELY TO MEASURE ECONOMIC ACTIVITY IN MONETARY TERMS…
“I WISH JOEAM COULD PASS THIS TIDBIT TO HIS FRIENDS IN GOVERNMENT AND TELL THEM THAT THIS DRIVE TO INCREASE TAX REVENUES IN ORDER TO HAVE MORE MONEY TO SPEND IS LUDICROUS.”
Yup, you could say that again. Ludicrous, preposterous, mad, insane, idiotic, nonsensical, crazy.
Why would an entity that is the sole sovereign issuer of its own currency (counterfeiters will be hounded and punished) ever need to collect those same currency back for it to spend?
Pause. Stop. Think about it for a second.
Tax money are being destroyed, literally, upon receipt. If a taxpayer here in the US
brings his cash directly to the payment office, the IRS used to throw that cash in the incinerator. Now, with concern abut the environment, they just use the shredder.
Taxation in the modern economy has a different purpose. Spending is not one of them.
Does that sound counter-intuitive?
Yes it is.
“IN SPITE OF DOZENS AND DOZENS OF CASES OF HYPERINFLATION THAT OCCURRED WHEN IT WAS TRIED”
Dozens and dozens of cases? Really? Where? In the modern times?
You’re not going to say Zimbabwe and Weimar Republic again, are you?
“WE CAN POINT TO HYPERINFLATION AS ONE OF THE DRIVING FORCES THAT DROVE THE FRENCH REVOLUTION…”
In case you haven’t got the memo yet, there’s a reason there’s the word “modern” in Modern Monetary Theory.
That essentially means in the year of our Lord, after the gold standard (AGS).
It’s not called post-Keynesian for nothing.
It’s interesting that you quoted Kenneth Galbraith because his son, James Galbraith, a distinguished economics professor at University of Texas-Austin is a recent convert and proponent of MMT.
“MICAH JUST GOOGLE HYPERINFLATION AND CASES OF IT…”
I did, actually, and in all the cases you refer I noticed three commonalities :
One, lack of political stability.
Two, lack of economic dynamism.
Three, did not actually practiced MMT prescription.
Score zero for hyperinflation bogeyman.
“THE VERY REASON GOVERNMENTS STARTED THE SERIES OF ACCOUNTS KNOWN AS NATIONAL INCOME ACCOUNTS OR GDP WAS PRECISELY TO MEASURE ECONOMIC ACTIVITY IN MONETARY TERMS…”
We know that already. What’s your point?
Explaining MMT on The Thom Hartmann Show :
Peter Schiff Austrian Kooks Should Listen To Stephanie Kelton Talk About MMT :