America’s Main street economy versus the Wall Street By Duane Catlett July 29, 2013 Independent Record
There is no connection today between Wall Street (the financial industry) and the Main Street economy (jobs and disposable family income) as evidenced by the fact that the stock markets are at an all-time high but job growth remains stagnant. In this economy, those jobs that are being created tend to be lower paying with fewer benefits than the jobs that are being lost through Congressional budget cuts, and most destructive of all the wealth gap continues to accelerate.
The big question is “why this is happening and what must we do to reclaim the post-WWII position America held for four decades as the most prosperous country in the world?”
Politicians, analysts, and media pundits provide all kinds of rationale for high unemployment rates, low paying jobs, lack of adequate funding for our public institutions, and municipalities facing bankruptcy. Almost all of the reasons given to explain these observations, and especially the lack of good paying jobs, are wrong.
A new branch of economics called Modern Money Theory (MMT) emerged early in the 1990s that perfectly explains this divergence between financial markets and main street economy. It also foretold the euro zone crisis and the recent 2008 Great Recession. It additionally explains why the Fed’s Quantitative Easing (QE) program has been insignificant in stimulating the economy while continuing to accelerate the wealth gap.
MMT is actually not a theory and it has no political ideological basis. It is an objective study of modern (fiat) money and the way a sovereign country with its own fiat currency works. It has nothing to do with big government versus small government, and it has everything to do with our government functioning effectively as our forefathers intended using the mandated financial tools at their disposal.
Warren Mosler, a former hedge fund manager who made his billions from these insights, challenged the economics profession that the U.S. would be far more prosperous if we stopped basing our fiscal and monetary policies on theories designed for a country whose currency was still tied to the gold standard.
Today, tens of thousands of professionals in academia, finance, business, and government also champion Mosler’s insights that our fears about the national debt and deficit are the result of a failure to understand how modern money works and that lack of understanding is holding back progress on all economic fronts in America.
Recently, the mainstream media has begun to take notice of MMT and is beginning to print articles about the economy discussed in a MMT framework.
While the actual details of how the United States government’s financial management system works are complex, MMT describes the government’s basic financial management framework in a way that is simple and straight forward that most of us can understand.
n The U.S. government’s finances are nothing at all “like a family sitting around the kitchen table working its budget” as has been metaphorically described by countless politicians.
n The U.S. dollar is not tied to a commodity. It is only a medium of exchange backed by the strength and power of the United States economy.
n The U.S. government’s financial management system consists of two components, fiscal and monetary.
Effective financial management requires that both the fiscal (spending and taxes) and monetary (interest rates and monetary operations) parts of the government work together in sync.
Congress is solely responsible for the fiscal part. It literally puts U.S. dollars into the main street economy by its spending and taxing directives and policy decisions. To be effective, Congress must put the dollars where it is needed and in the amounts needed, coupled with effective tax policies, to reach its economic and societal objectives.
The Federal Reserve Banking system (the Fed) is responsible for the monetary part. As the central bank of the U.S. government, it manages the federal government’s financial balance sheet. The U.S. Treasury and all states and commercial banks, both foreign and domestic, that want to do business with the U.S. government must have an account at the Federal Reserve Bank.
The Fed is the most misunderstood part of the U.S. government’s financial management system, and its power is greatly exaggerated. It is only the U.S. Congress that has the power to create jobs and stimulate growth in the main street economy.
The Fed does have the authority to change the supply of reserves in the commercial banking system by exchanging reserves with Treasuries on its central bank financial balance sheet as it is currently doing with its QE program. This action by the Fed does have great influence on the stock markets by changing the supply of reserves in the banking system (the financial industry). But, increases in bank reserves do not make it into the general economy until or unless banks give loans to credit worthy customers in the private sector of the economy. Therefore, the Fed’s QE action artificially inflates Wall Street while doing nothing to grow the main street economy that we all depend upon.
Real job creation and main street economic growth comes only from U.S. government deficit spending at times when the private sector is not producing enough jobs to generate disposable income in family budgets.
Just as the Fed is the “lender of last resort” for commercial banks if they need reserves to balance their capital accounts, the U.S. Congress must be the “job creator of last resort” for our economy. For the United States to regain its status as the most prosperous and socially mobile country in the world, Congress must create a modern work program similar to FDR’s New Deal Programs of the 1930s.
Duane Catlett lives in Clancy. He is a retired career PhD scientist who has managed multimillion dollar programs during his career. In retirement he has become a serious student of macroeconomics and the role of government in our economy.
From The Helena Independent Record Helena, Montana