Professor James Galbraith, of the University of Texas, is a powerful speaker and writer/critic of recent economic thought.  Here is a devastating critique of what the financial sector actually did to the American taxpayer, made in a written statement to the Senate Judiciary Committee.

Beezer has on several occasions made attempts at explaining our national budget.  The effort is made because if most citizens don’t understand this budget, then they won’t be able to figure out the right policies.

The following comes from economist James Galbraith, and is part of his testimony before President Obama’s commission on deficit reduction.  The entire testimony is instructive and an easy read.  One of Galbraith’s real strengths is his ability to clearly explain what most economist’s would stumble over in detail.

9. In Reality, the US Government Spends First & Borrows Later; Public Spending Creates a Demand for Treasuries in the Private Sector.

“As noted, the above argument is based on the common belief that the government must borrow in order to spend, and thus that the government faces “funding risks” in private markets. Such risks exist, of course, for private individuals, for companies, for state and local governments, and for national governments such as Greece that have ceded monetary sovereignty to a central bank. But the situation of the United States government is quite different.

The U.S. government spends (and the Federal Reserve lends) in a very simple way. It does so by writing checks — in fact simply by marking up numbers in a computer. Those numbers then appear in the bank accounts of the payees, who may be government employees, private contractors, or the recipients of federal transfer programs.

The effect of government check-writing is to create a deposit in the banking system. This is a “free reserve.” Banks of course prefer to earn interest on their reserves. Thus they demand a US Treasury bond, which pays more interest without incurring any form of credit or default risk. (This is like moving a deposit from a checking to a savings account.) The Treasury can meet that demand, or not, at its option — it can permit, or not permit, the stock of US Treasury bonds in circulation to increase.

So long as U.S. banks are required to accept U.S. government checks — which is to say so long as the Republic exists — then the government can and does spend without borrowing, if it chooses to do so. And if it chooses to issue Treasuries to meet the demand, it can do that as well. There is never a shortfall of demand for Treasury bonds; Treasury auctions do not fail.

In the real world, the government creates demand for bonds by spending above the level drained by taxation from the system. The extent to which those bonds are held locally, or abroad (another common source of worry) depends on the US current account deficit. This also has nothing to do with approval or disapproval by foreign bankers, central bankers, or their governments of American deficit policy. A foreign country cannot acquire a US Treasury bond unless someone outside the United States has acquired dollars to pay for them, which is generally done by running a trade surplus with the United States. And when foreigners do acquire those dollars, then like domestic banks they prefer to earn interest, which is why they buy Treasury bonds.

Insolvency, bankruptcy, or even higher real interest rates are not among the actual risks to this system. The actual risks in this system are (to a minor degree) inflation, and to a larger degree, depreciation of the dollar. However at the moment there is wide agreement that a lower dollar would be a good thing — against the Chinese RMB and now also the euro. So it is difficult to believe that the goal of deficit reduction per se serves any coherent, or presently desirable, economic objective.

We can conclude that there is actually no economic justification for the target of reducing the primary deficit to zero by 2015 or any other date. The right economic objectives are to meet real problems, not those conjured from thin air by economists. Bringing about a rapid end to unemployment, caring properly for an aging population, cleaning up the Gulf of Mexico, coping with our energy insecurity and with climate change are all far more important objectives than reducing a projection of future budget deficits.”

Beezer again.  That Galbraith feels the need to explain this basic bookeeping concept to the commission is truly frightening.  These folks are supposed to know all this already!  Whatever they come out with for recommendations would best be ignored.

Once again, thanks to economist’s view for highlighting Galbraith’s testimony.

Pierre Calame, a researcher and urban planner who is now Secretary General for the Swiss Foundation Charles Leopold Mayer, has proposed an accounting framework that he suggests could lead to sustainable economic systems.  Calame made his proposals before a group of economists and bankers gathered in Paris earlier this year to discuss “Financial and Monetary Issues As the Crisis Unfolds.”

What Calame proposed is contained in a white paper of the meeting authored by American economist, James Galbraith. 

“Calame placed before the group a series of principals for an accounting framework that could lead to sustainable system.  These involved distinguishing between four basic classes of goods.

“Those ‘that are destroyed when shared’–the historical tragedy of the commons, and in our time, most pressingly, the planet itself.  This domain requires the imposition of common regulation, with the goal of preserving the balance between human activity and nature.”   Beezer here: Think the preservation of our global fisheries, which are undergoing sustained depletion due to lack of regulation.

“Those ‘that are divided, when shared, in fixed quantities’–the case of nonrenewable resources, for which use by some precludes the use by others.  These require an accounting framework based in part on principals of justice.  Purchasing power at a given moment is not adequate justification for the using up of resources that, when used, are gone for all time.”   Beezer here:  Think fossil fuels and nonrenewable commodities like copper or other minerals.

“Those ‘that are divided when shared, but reproducible.’   These, like common services and artistic endeavor, are mainly the product of of human energy and skill.  They are the proper domain of the market and of conventional national income accounting, whose purpose is to assure the full utilization of human resources.

“Those ‘that are multiplied when shared.’  These are primarily the fruits of new knowledge, whose production society should encourage (by maximum emphasis on education and research), and whose wide distribution per se serves public purpose and social welfare.

“The Calame framework clearly suggests that the world community should move toward a redefinition of economic accounting standards aimed at placing planetary sustainability on the highest accounting level.  Thus, an activity should be accounted positively if it reduces greenhouse emissions and not if otherwise.  This by itself would induce tax and regulatory revisions that could cause a major reevaluation of industrial activity–movements toward sustainable technologies and away from destructive ones.  Similarly, an international framework incorporating principals of distributive justice would tend to penalize the waste of nonrenewable resources, especially by richer countries, while rewarding a shift toward conservation and renewable energy.

“At the same time, to make life under a sustainable regime supportable, it is essential the human experience not be degraded–that, in fact, it should actually improve.  The key to this is to recognize that there is no operational limit on either the spread of knowledge or the use of human talent.  A critical function of government is to ensure that education, research, and scientific development reach their full potential, and also that the resulting human potential is fully employed.  Achieving the latter, in a sustainable way, in return requires dealing with the unsustainable ecological consequences of conventional growth, and with the destabilization that will occur if commodity markets are left to unregulated market forces…..

“Clearly, events that move all four classes in a favorable direction are unambiguously to be preferred.   Clearly, events that move all four in an unfavorable direction are unambiguously to be avoided.  All other events are ambiguous, and the task of policy design is to fire correctly on as many of the four cylinders–global public goods, nonrenewable resources, human resource use, and the production and sharing of knowledge goods–as possible.  The task of economic statistics then becomes to define measures in each of these areas that permits one to say, with some confidence, whether the movement is, or is not, in the correct direction….”

Beezer again.  This group fundamentally rejects using the current banking/financial intermediation system to effect the recommended changes.  They point out that the current system has fostered “manic and unstable overinvestment (in technology, in housing, and finally in oil) rapidly increasing economic inequality, and a complete lack of progress on the environmental front.”

“The correct approach to increase the level of economic activity and employment should instead consist of measures run through the public sector, the household sector, and the business sector…Banking and finance can play a role in the achievement of these objectives–but only if the regulation to which they are subject directs them toward the public purpose.”

Beezer here.  And here is the rub.  Banking is not going to willingly go back to the classic liberal roles.  The neoliberal elevation of market forces to a position of supra-national power makes any move by governments to rein them back in problematic to say the least.

“A central delimma of globalization is that finances escapes from national systems of regulation far more easily than any other activity.  It is in the nature of financial transactions that they can be relocated instantly, and often clandestinely, in order to avoid the scrutiny of regulators…..As matters stand, even where nominally operating as overseas branches banking institutions are effectively broken into subsidiaries, each operating under local rules, each accounting to the standards of the local authorities, and between them taking every advantage of every form of tax and regulatory arbitrage…Hopes for an effective international safety-and-soundness regime are frustrated by national political considerations.  Countries that provide tax and regulatory havens benefit at the expense of their neighbors.  Countries housing major financial markets refuse cooperation so as not to lose competitiveness with other contending centers.  The multinational banks form lobbies pressing for least-common-denominator regulation, and these are effective partly because they can dominate national political systems and partly because they can play one government off against another.” 

Beezer….Getting this kind of cooperation may not be as impossible as it may seem at first blush.  The global recession has reverberated across central bankers from all larger countries, be they democratic or not.  The issue of mineral and other resource depletion is a common concern.  Country leaders know, possibly much more than the public at large, that the current systems of resource utilization are unsustainable.  They know that if not changed, serious economic if not military clashes are likely.  These changes are not likely to arise from the ground up.  It will take a very fortunate arrival of leadership from across the globe to effect changes that all can accept.