Money Flow paradigm

The Money Flow paradigm recognizes that people are our most essential economic resource in both production and consumption. They are motivated to enhance their self-worth through activities that give them a sense of purpose. Money flow is a key ingredient in both production and consumption activities. In order for people to be fully employed and to fully benefit from economic activity, money must flow efficiently and effectively to everyone throughout the economy.

Just as a healthy body requires that blood flows throughout the body so that no part of the body is deprived of adequate blood for any length of time, money must flow to everyone so that they can contribute to the best of their abilities in production and consumption. However, as George Cooper made clear in his book “Money, Blood and Revolution,” just as the heart is essential to blood flow throughout the body, government is essential in the free enterprise system to keep money flowing to all corners of the economy including to people in the inner cities and distance rural communities.

We have failed to appreciate the central and essential role of government in maintaining a healthy economy through proper money flow. The many variations of neoclassical, monetarist, Keynesian and other economic paradigms have seen the role of government as primarily passive with only occasional need to intervene in response to unanticipated economic instability. None of these earlier paradigms see government as continuously monitoring, adjusting and guiding the flow of money.

Our failure to recognize the proper role of government has led to the dangerous and distorted money flow that is undermining productivity and economic growth and leading to cycles of economic instability and collapse. In particular, large amounts of money are accumulating in financial markets and company coffers due to a highly distorted money flow that directs a disproportionate amount of money to wealthier individuals and corporations. This wealthy savings bubble is one of three bubbles recognized by the Money Flow paradigm.

The second bubble is the middle class debt bubble where credit card debt, mortgage debt, student loan debt, home equity debt as well as health care and other unexpected costs have created a situation where workers are unable to buy back the goods and services they are producing without the help of government. To keep money flowing and avoid financial collapse, government engages in unpaid for tax cuts and unpaid for expenditures that lead to the third and final bubble: the federal debt bubble.

The Money Flow paradigm sees the income and wealth inequality as an inherent problem in the continuous transitioning from a variable cost (e.g. unskilled labor) economy to a fixed cost (e.g. physical and human capital) economy that is greatly exacerbated by “pay-to-play” politics that rigs the rules and regulations in favor of special interests. As technological change speeds up, with millions of blue collar and white collar jobs being automated, the central role of government as the heart of the free enterprise system is ever more important.  Government can no longer wait until disaster strikes, but must anticipate and continuously proactively intervene in the economy to maintain adequate money flow to all parts of the economy. This is the key message of the Money Flow paradigm.

For additional details see 2018 paper presented at 2019 American Economic Association conference in Atlanta, GA:
https://www.aeaweb.org/conference/2019/preliminary/paper/FT7A95eS

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The author has agreed to forgo his book royalties so that the full purchase price ($24.95) will go into the student scholarship fund when purchased through Avila University Press at the link:  https://www.avila.edu/aupress/optimal-money-flow-by-lawrence-c-marsh

Exactly what would happen if federal debt got very big?

The cash in your wallet used to be government debt. What the government owed you before 1971 was an ounce of gold for $35.  In 1971 President Richard Nixon took the United States off of the gold standard. Now the government owes you absolutely nothing for $35 or any amount of money. If you are nervous about using money that is backed by nothing, don’t use it.

Question: But what about US Treasury bills and bonds? Doesn’t the government owe you for the principal and the interest on those bills and bonds?  Answer: they owe you the interest payment, but if you want to redeem any of those bills and bonds, you go into the New York financial markets and sell them for whatever price they are currently selling for.

Question: Does that mean that the government never has to pay back the debt that it has issued?  The answer: as long as there is a market for government bills and bonds, the government doesn’t have to worry about it. As long as there is someone else willing to buy the debt, then it isn’t a problem.

Question: How do we know when a government debt problem might be developing? Answer: when people start losing faith in government debt, the interest rates on government debt will begin to rise.  Safe and secure debt offers a low interest rate. Risky debt requires that the issuer pay a high interest rate. If the interest rate on government debt starts rising above that offered on corporate bonds, then it would be time to start worrying, mainly because the government would need to sell more and more debt to get the money to pay the interest rate on the increasing debt load. It is very unlikely that the government would let this get to the point where they couldn’t keep up. In an emergency the Federal Reserve would monetize some of the debt (buy up enough of it to alleviate the crisis) to bail out the government just as it bailed out the banks on Wall Street in 2008-2009.

Question: What if there was a situation (such as the current situation) where wealthy people and wealthy corporations had a huge amount of money in the financial markets and there were no reasonable real investment opportunities (except maybe overseas) so the money just drove up stock and bond prices and drove down interest rates? Answer: Yes, this is the current situation. There is a huge amount of money in the financial markets that is sitting idle. Corporations are using the money they get to issue stock buybacks and increased dividends and driving up stock and bond prices. Right now the chances that the interest rates on government debt are going to spike are next to none. It is definitely not an immediate problem. The inflation that has resulted is primarily in stock and bonds, which are not well represented in the market basket of goods and services that the government uses to generate the consumer price index (CPI), because most consumers don’t own many stocks and bonds.

Question: But what if the government went wild by issuing a huge amount of government debt? Answer: that would be a problem, because eventually all market interest rates would start to rise and private investment would be choked off. This is what is sometimes referred to as “crowding out.” But a moderate amount of “crowding out” is not a bad thing if the money is being used for important public investments such as infrastructure repair and other important priorities that voters have determined are more important than what the private sector would spend the money on. The term “crowding out” is prejudicial in that it implies that private spending is good and government spending is bad, but that is not always the case. Some reasonable amount of government spending is needed.

Question: What if the government issued the debt but didn’t spend the money?  Answer: Although the chance that this would happen is absolutely zero, it is an interesting question. It would mean that the government was reducing the money supply. Controlling the money supply is supposed to be the responsibility of the Federal Reserve. But if the treasury department did it the effect would be the same as the Fed purchasing securities in the financial markets. It would reduce the money in the economy and slow the economy, and, if extreme enough, cause a recession.

The real question is how much money is flowing through our economy and where is that money going? Right now, there is too much money flowing into Wall Street and too little money flowing to the people on Main Street. The people on Main Street don’t have enough money to buy back and goods and services they are creating so the federal government has to use deficit spending to make up the difference to keep the economy from falling into a recession. The problem is that the wealthiest one percent don’t spend enough of their enormous fortunes, and they put so much money into the stock and bond markets in New York City that there aren’t enough investment projects to use all that money. In others words, the wealthy have a low marginal propensity to consume and make financial investments that trigger increased dividends and stock buybacks, but not enough real investment in the real (Main Street) economy. The Wall Street economy has become more and more separated from the Main Street economy. Deficit spending is here to stay until we correct the money flow problem where too much money is flowing to the wealthiest people and biggest corporations on Wall Street and too little money is going to everyone else back on Main Street. Of course, if too much money flowed to Main Street, it could trigger real inflation in the real economy and not just stock and bond inflation on Wall Street. I will leave the inflation discussion for another column.

Lawrence C. Marsh is professor emeritus in economics at the University of Notre Dame and author of the 2020 book “Optimal Money Flow: A New Vision on How a Dynamic-Growth Economy Can Work for Everyone.”

The “Inflation Dilemma” and How to Solve It

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Fiscal conservatives claim that President Biden’s $1.9 trillion stimulus proposal surely will lead to excessive inflation. However, in Congress the recently proposed Public Banking Act opens the door to a new policy tool that could quickly and painlessly stop excessive inflation in its tracks were it to develop. 

Economists such as Stephanie Kelton in her book “The Deficit Myth” argue that although we must avoid excessive inflation, deficit spending is not inherently a problem. The key point in her argument is that interest rates have remained low.  Low interest rates make larger deficits manageable because they keep interest payments on the debt low.  Moreover, low interest rates are a sign that investors have not lost faith in the soundness of U.S. Treasury securities. Although the interest rate on 10-year government bonds has risen to around 1.5 percent, it has not yet approached levels that would be of any real concern.

But already we have seen the prices of gasoline, lumber and some foods rising significantly. What if President Biden’s $1.9 trillion COVID stimulus package were to push us into an upward inflationary spiral? Biden supporters argue that this is unlikely, but what if it did?  Would the Federal Reserve have the policy tools to stop excessive inflation quickly without throwing the economy into recession?

In the past the Federal Reserve has stopped inflation by significantly raising interest rates in the New York financial markets. Most notably in the early 1980s after inflation soared to 13.5 percent, Chairman Paul Volker led the Federal Reserve to raise rates and throw the economy into a deep recession. Could the Biden stimulus bring this upon us once again?

The key to solving this problem is in understanding “The Inflation Dilemma.”  The fundamental cause of excessive inflation is when too much money is chasing too few goods which drives up prices. In the face of excessive inflation, high interest rates are needed to encourage consumers to divert more of their money to savings to earn the higher interest rate and, therefore, cut back on unnecessary expenditures.  This reduces the demand for goods and services.

However, at the same time, low interest rates are needed to encourage producers to supply more goods and services to help drive prices back down. Businesses would like to respond to excessive demand by supplying more. But high interest rates discourage them from borrowing the money they need to add another line of production. 

When faced with rising prices, we need to cut back on demand and raise supply.  Raising interest rates enables the former, but discourages the latter. This inflation dilemma can be overcome only by providing high interest rates for consumers, motivating them to increase their savings and reduce demand, and at the same time providing low interest rate to companies to increase supply.  

The Public Banking Act opens up the opportunity to solve this inflation dilemma.  From 1910 to 1966 the post offices throughout the United States offered banking services. You could go to any post office to cash a check or set up a savings account.  A resumption of these services as currently proposed in the Public Banking Act would be particularly beneficial to low-income, disadvantaged people, who, after a job loss, car accident or uninsured medical emergency, need to borrow money but have to go to loan sharks, pawn shops or “cash now” opportunists and end up paying high interest rates. Under the Public Banking Act they could apply for a small loan at a relatively low interest rate at any post office. 

But the Public Banking Act could also serve to defeat the threat of excessive inflation and solve the inflation dilemma. Limiting postal savings accounts to individuals based on their Social Security numbers and placing a limit on how much of the savings in their accounts could earn interest, the accounts could offer a high interest rate when excessive inflation threatened. Limiting interest payments to accounts with $10,000 or less would keep wealthy individuals from transferring large amounts of money to these savings accounts from the private banking system. At the same time, the Federal Reserve could keep interest rates low in the New York financial markets enabling both the payments on the federal deficit to remain low and encouraging businesses to employ more workers, not less, as they expanded supply in the face of rising prices. Thus, the inflation dilemma would be solved by offering consumers high interest rates to reduce demand and businesses low interest rates to increase supply. The combination of less demand and more supply could slow or stop price increases without entering a recession.

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Please provide your insights and comments on The Inflation Dilemma and How to Solve It.
Lawrence C. Marsh is Professor Emeritus in Economics at the University of Notre Dame and author of the 2020 book: Optimal Money Flow: A New Vision on How a Dynamic-Growth Economy Can Work for Everyone
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You can donate the entire purchase price of the book to student scholarships by buying a hard-bound copy of the Optimal Money Flow book at the Avila University Press website at:  https://www.avila.edu/aupress/optimal-money-flow-by-lawrence-c-marsh  
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For a limited time (21 days) listen to Optimal Money Flow for free on your smartphone or computer courtesy of your local public library via Hoopla at:  https://www.hoopladigital.com/artist/7090137015 
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Please provide your insights and comments on “The Inflation Dilemma and How to Solve It” at:
https://sites.nd.edu/lawrence-c-marsh/ 
_________________________________________________
To sign up for this free monthly Money Flow Newsletter =>  click here.
_________________________________________________
For additional details see the Optimal Money Flow book website at:
http://optimal-money-flow.website or my 2018 paper presented at 2019 American Economic Association conference in Atlanta, GA:
https://www.aeaweb.org/conference/2019/preliminary/paper/FT7A95eS___________________________________The full purchase price ($24.95) will go into the student scholarship fund when purchased through Avila University Press at the link:  https://www.avila.edu/aupress/optimal-money-flow-by-lawrence-c-marsh
Link to my Notre Dame webpage

Minimum Wage Promise and Pitfalls

One aspect of the minimum wage that has been widely ignored is not the impact on overall employment, but on the actual low-wage workers themselves. The question that has been largely ignored is what happens to low-wage workers who are not as good as alternative workers who do not enter the labor force to displace the low-wage workers until the minimum wage is raised?  

Think of a local McDonald’s where at a low minimum wage the workers may not be those with the best social skills. They may not get along well with their colleagues or be very nice to the customers. They do only the minimum required to keep their jobs. Not all low-wage workers have poor social skills, but for obvious reasons workers with poor social skills are over-represented in low-wage jobs. 

Then the minimum wage is raised. A stay-at-home parent may decide that the increased pay makes it worthwhile for them to work when their children are at school. Elderly retired workers may be willing to come back to work when offered higher pay. A college student may decide that the wage is high enough to make it worthwhile to take that McDonald’s job after all. Workers with better social skills may get along better with one another and with the customers, and they may be more willing to pick up trash in the parking lot and keep the restaurant looking nice by cleaning and straightening chairs, etc.  

What the debate about the minimum wage is missing is an analysis of what happens to the original, low-quality workers when better workers show up? With the higher minimum wage, it may be worth the while of the higher-quality workers to enter the labor force and take the jobs away from the low-quality workers. But the low-quality workers are the very ones that need the most help.  

We are fooled into thinking that the minimum wage has no effect when the level of employment does not fall. McDonald’s may employ just as many people for just as many hours as before. But the low-quality workers may have lost their jobs nonetheless. Yet these are the workers who typically are the poorest and need the most help.  

The problem is that we tend to analyze one economics policy tool at a time. But there are times when two tools need to be used in concert with one another to solve a problem. When you try to tighten a bolt and it just goes around and around without tightening, you take a wrench to hold the nut while you use the screwdriver to screw in the bolt. In the same way it is sometimes necessary in economics to use more than one tool at a time. Raising the minimum wage may work well if at the same time unemployment insurance is increased to help the lowest-quality workers.  

From the supply-side point of view, giving money to unemployed workers just encourages them to remain unemployed. But demand-side economics sees workers differently. From the demand-side point of view, more money going to unemployed workers is a good thing, especially if it causes them to hold back on taking a job until a higher wage is offered. The unemployment insurance check helps ensure that workers will not sell out for too low a wage. Even in the absence of a union, a higher unemployment insurance payment can lead to higher wages relative to profits.  

When aggregate demand is too weak relative to aggregate supply, higher unemployment payments will help divert the money flow from the financial markets where it piles up inflating stock and bond prices and depressing interest rates to money flowing to workers who have higher marginal propensities to consume than the investors on Wall Street. When demand is weak, Wall Street investors can’t find real business projects to invest in. In such circumstances diverting profits to worker paychecks through a combination of a minimum wage increase and an increase in unemployment insurance helps create real business opportunities by increasing the demand for goods and services. This produces a healthier economy with greater economic growth from which we all benefit. 

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The Deadweight Loss of Christmas (revisited)

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Economics is about the efficient allocation of resources. But gift giving is anything but efficient. From a purely transactional point of view, wouldn’t Uncle Jim be better off if you just handed him $50 than spending that $50 on another ugly sweater for him?  Why guess what the other person wants?  Perhaps a $50 gift card from Walmart might work, but what if what Uncle Jim really wants is not sold at Walmart?  Instead, what if you just give him $50 and he gives you $50?  Wouldn’t that be the most efficient gift exchange of all? 

Joel Waldfogel presented and analyzed this problem in the December 1993 issue of The American Economic Review in an article entitled: “The Deadweight Loss of Christmas.” For close relationships such as a good friend or significant other, the loss of efficiency from gift giving may average about one-tenth of the value of the gift; whereas, for more distant relatives or friends, the loss of efficiency may average closer to a third of the value of the gift. 

It is clear that social relationships are different from economic relationships. The problem is that economics students are taught to view the world from a purely transactional point of view. This doesn’t mean that we don’t care about other people, but just that economists don’t generally consider “intent” as important. But it is important. Meaning may be imbued into a gift by virtue of the fact that the gift-giver meant well, even if the gift was not optimal to the recipient given the amount paid for the gift. Gift giving is associated with good intent, but behavior can also be distorted by bad intent. Having your car dented in a hail storm is much less upsetting that someone denting it with a hammer. 

How about all those great Thanksgiving dinners your mother-in-law made in years past? As you left, did you give her a tip, or pull $50 out of your wallet to pay her for the great meal? People who are trying to build or strengthen a relationship don’t want to be simply paid off for their efforts in some sort of quid pro quo manner. Social (noncognitive) skills are often more important than technical (cognitive) skills in navigating the real world. Unfortunately, most economic textbooks in the past have tended to ignore such considerations.

Economists create a fantasy world where everything is about money and market relationships. In the past economics professors have tended to ignore aspects of life that cannot be measured or understood in terms of money. But this ignores the most important relationships of all. The problem boils down to prediction. Neurologists frequently point out that the primary purpose of the human brain is prediction. In primitive times knowing what to expect in different circumstances was often a matter of life or death. Even today, accurate prediction is often the key to success or failure. If people are motivated by things other than money, then an economic prediction methodology based primarily on money may lead us seriously astray if people tend to deviate from gaining the highest monetary return because they are willing to sacrifice money for other less tangible and less measurable objectives. 

Remember over this holiday season, that it is not the gift that counts, but the thought behind it that matters. (And that there is sometimes more truth in old cliches, than in that Principles of Economics textbook.)

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Lawrence C. Marsh is Professor Emeritus in Economics at the University of Notre Dame and author of the 2020 book: Optimal Money Flow: A New Vision on How a Dynamic-Growth Economy Can Work for Everyone
_______________________________________________
You can donate the entire purchase price of the book to student scholarships by buying a hard-bound copy of the Optimal Money Flow book at the Avila University Press website at:  https://www.avila.edu/aupress/optimal-money-flow-by-lawrence-c-marsh  
_______________________________________________
For a limited time (21 days) listen to Optimal Money Flow for free on your smartphone or computer from here:  https://www.hoopladigital.com/artist/7090137015 
_________________________________________________
Please provide your insights and comments on the Deadweight Loss of Christmas (revisited) at:
https://sites.nd.edu/lawrence-c-marsh/ 
_________________________________________________
To sign up for this free monthly Money Flow Newsletter =>  click here.
_________________________________________________
For additional details see the Optimal Money Flow book website at:
http://optimal-money-flow.website or my 2018 paper presented at 2019 American Economic Association conference in Atlanta, GA:
https://www.aeaweb.org/conference/2019/preliminary/paper/FT7A95eS___________________________________The full purchase price ($24.95) will go into the student scholarship fund when purchased through Avila University Press at the link:  https://www.avila.edu/aupress/optimal-money-flow-by-lawrence-c-marsh

Should the income tax be replaced with a progressive consumption tax?

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Conservatives love to complain about the income tax. They say that taxing income undermines incentives and suppresses innovation and economic growth. Why should you work hard if the government is just going to take away a substantial portion of your hard-earned income? 

Instead, some propose the so-called “Fair Tax” which replaces all personal federal taxes with a national sales tax. To raise comparable revenue such a tax would need to be about 30 percent of the pre-tax price. Such a tax would be very regressive. In other words, it would take a much higher percentage of income from low income people than from high income people. Such a tax would be certain to draw the ire of the working class and middle class and be a nonstarter politically. So forget about the “Fair Tax” which imposes tax on purchases directly.

But what about a progressive consumption tax?  This tax would allow all earned income to be nontaxable as long as it went directly into savings and stayed in savings. It would be essentially an unlimited traditional individual retirement account (IRA). In other words, you could put your earned income directly into a savings account, buy certificates of deposit or stocks and bonds without paying income tax.  However, any withdrawal of money from any of these forms of savings would be progressively taxed annually at rates higher than the current income tax rates. Basically, as under the current income tax, you could probably cover a modest monthly rent and essential food expenditures while paying little or no tax. However, a high flying life style of buying exclusive properties, frequently eating out at the most expensive restaurants, and traveling around the world on costly vacations would cost you an arm and a leg in tax payments, because it would require withdrawing a lot of money from your savings. 

In theory there could be some real advantages to a progressive consumption tax. First, it would not undermine work incentives as much as the income tax, at least not directly. It would encourage frugality. You could earn a lot of money and not pay a penny in tax as long as you saved most of it. Since wealthy people have more money than necessary to meet basic needs, they often purchase items that do not involve producing more goods, such as in buying exclusive real estate or rare artifacts such as famous paintings. Their motivation is more in displaying their relative wealth and in accumulating more wealth than other wealthy people. A consistently and evenly applied progressive consumption tax would reduce absolute wealth but not relative wealth so their incentives would not be undermined by a progressive consumption tax. A progressive consumption tax would not bump anyone from their position on the Forbes list of wealthiest people unless they consumed relatively more than their peers. 

Second, a progressive consumption tax would encourage savings. Certainly, getting people to save more would help reduce the severity of recessions. Instead of cutting back dramatically on expenditures with a reduction in overtime pay, a reduction in work hours generally, or a temporary layoff, people could draw on their savings to maintain their basic expenditures when the economy slowed.  Moreover, with more money saved, they would have a more secure retirement. Overall, this would certainly serve as an automatic stabilizer and keep the economy from experiencing deep recessions.  

All this sounds good. If a progressive consumption tax was applied in the decades after World War II when interest rates on savings were higher and consumer demand was very strong relative to aggregate supply, it might have worked, although higher estate and inheritance taxes might have had to be added to maintain adequate revenues.

But there are some serious difficulties with implementing a progressive consumption tax during the current period. In recent decades our money flow has become so distorted that huge amounts of money are being diverted to the financial markets as the wealthy get ever wealthier. In the face of weak consumer demand, most of this money is not going into real investments in our economy, but is instead used to increase dividends and stock buy-backs. So little money is being retained by consumers that they can no longer afford to buy back the value of the goods and services they are producing. The government has had to step in with deficit spending to make up the difference. Stock and bond prices have been driven up, while interest rates have fallen so low that it is hardly worth bothering with a savings account. Under current rates, even a modest level of inflation could significantly reduce the real value of your savings over time. 

What this all boils down to is that to create and maintain a healthy economy, we need to eliminate the tax loopholes and distortions that enable wealthy individuals and corporations from shifting the burden of taxation onto the middle class and pouring huge amounts of money into the financial markets. Instead we need to direct money to working class and middle class people who will actually spend that money on the goods and services they are producing. Higher tax revenues from either a progressive income or consumption tax would enable us to cut back and ultimately eliminate the federal deficit spending. With less money in financial markets, interest rates would rise, which, along with a progressive consumption tax, would encourage people to save more money, which in turn would strengthen our automatic stabilizers in keeping our economy healthy.  

Please add your insights and comments on the potential advantages and disadvantages of the progressive consumption tax below in the comment box.

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Lawrence C. Marsh is Professor Emeritus in Economics at the University of Notre Dame
and author of the 2020 book: Optimal Money Flow: A New Vision on How a Dynamic-Growth Economy Can Work for Everyone. You can donate the entire purchase price of the book to student scholarships by buying a hard-bound copy of the Optimal Money Flow book at the Avila University Press website at:  https://www.avila.edu/aupress/optimal-money-flow-by-lawrence-c-marsh  
For a limited time (21 days) listen to Optimal Money Flow for free on your smartphone or computer from here: https://www.hoopladigital.com/artist/7090137015 

How to get on Bernie Sanders’ list of millionaires and billionaires

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You used to be able to afford a good retirement from a guaranteed pension earned on the job. In the decades following World War II there was a strong demand for workers in industrial jobs and the building trades. Unions were strong representing as much as 35 percent of our workforce. Unions had countered the power of companies to control block of jobs and drive down wages. By unionizing workers, wages moved back up closer to what would have been the equilibrium wage under free and fair competition. Under the Theory of the Second Best, union power countered company power to restore relatively efficient allocation of labor resources in our economy. Our economy’s productivity was rising and wages rose at about the same rate as productivity rose.

But then starting around 1975 all that changed. After the government brought in the military to break the air traffic controllers’ strike, unions began to decline. As revealed in “Optimal Money Flow” the second invisible hand of market power overcame Adam Smith’s first invisible hand of free and fair competition.  Union representation dropped to less than 10 percent of the workforce. Productivity continued to rise, but wages flattened out in real terms after adjusting for inflation. The money that would have gone to workers on Main Street was increasingly being diverted to the financial markets on Wall Street.

You are asking: What does this money flow distortion have to do with becoming really wealthy?  If you are already old, not much. But if you have young children or grandchildren, it is crucial to understanding the system, how it works, and how they could easily make a fortune over time.

It is hard to get rich the easy way (win the lottery), but easy to get rich the hard way (saving and investing every penny you can in the stock market). Capitalism won’t work very well for you if you don’t have any capital. But people have been discouraged from saving money because the flood of money into the financial markets has driven down interest rates. What is the point of saving money if you can’t earn much on your savings? The low interest rates have caused many people to go deep into debt with almost no savings at all. 

It is true that bonds and certificates of deposit, not to mention savings accounts, pay so little that it is hardly worth bothering with them. But what if you save every penny you can and put it into a broad-based stock index fund?  The difference is rather dramatic. With dividends and the rise in stock valuations, it is easy to average around 7 percent per year which allows you to double your money approximately every 10 years. Compound interest comes into play in using your wealth to build even more wealth all by itself. 

But won’t you feel guilty if you have millions of dollars while so many others are struggling to get by with many elderly having to taking jobs at hair salons or fast food joints to get by?  No doubt, you will. Bill Gates and Warren Buffett are suffering from this sense of guilt and have been giving away a lot of money through the Gates Foundation. You may suffer the same fate if you carefully and consistently follow the “get rich game plan” and actually become wealthy yourself.

As long as the wealthy cannot find more lucrative places to put all their ever increasing wealth, the stock market will continue to rise over time. This does not mean a smooth and continual increase in valuations. What is most interesting about the stock market is that it will fluctuate for a while or even drift upward or downward a bit, before making a sudden and unexpected move upward to a new higher trading range. What this means is that trying to play the ups and downs of the market is generally a fool’s errand. Just keep putting money in month after month, year after year regardless of where the market is at, and in the long run you will get an enormous return. 

What does this tell us about capitalism?  After all, in primitive times everything was thought to be owned by God so no one other than God owned anything. For native Americans, the spirit world owned everything. In reality, without the rule of law, the big guy owned everything. If you had a chicken, it was the big guy’s chicken. If you had a pear tree, those were the big guy’s pears. The King, the Pharaoh, the Emperor or the Czar then told us that God had granted them dominion over everything. You could not hunt deer in the forest or take fish from the stream without the approval of the King. 

The direct ownership of capital came about under John Locke’s conception of private property.  Locke’s idea was that you owned your own body so you could gain sweat equity over some resource from the woods by putting your work into cutting a tree branch into a spear and shaping a spear head from a stone. Your work with an object translated into the ownership of capital through sweat equity. This implied that hard work paid off. The incentives drove you to work harder to earn more capital. 

This worked great for a while as long as the craftsmen and craftswomen could afford to create their own tools which became their property as a result of their sweat equity in creating them and working with them. Land on the frontier in America became the farmer’s property through the sweat equity of working that land. But then bigger machines were needed that required more money to obtain than could be justified with one person’s sweat equity. The nobility or aristocracy stepped in to supply the water wheel or factory equipment. The ownership of capital then became separated from the sweat equity of using that capital. You could drive a truck for 40 years and gain no ownership stake in that truck or in the corporation that owned that truck no matter how hard you worked. The incentive structure broke down with no acquisition of capital through sweat equity.

What is the situation today?  You work hard in production, services, retail or delivery and earn no capital and get a rather modest return for your efforts. Those with capital (large portfolio of stocks) might spend a few minutes adjusting their stock portfolio each day, before heading out to the golf course. They are eager for you to work hard every day, so that their stocks will pay higher dividends and rise in value. After all, they have to be able to pay for their yacht, private jet or many vacation homes. Whether you are part of the rich getting richer or poor getting poorer really depends a lot on how little debt (if any) you have and how much stock (hopefully lots of stock) you own.    
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This Excel Spreadsheet shows how your money grows.
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To sign up for this monthly Money Flow Newsletter, go to:  https://optimal-money-flow.website/  Lawrence C. Marsh is Professor Emeritus in Economics at the University of Notre Dame and author of the 2020 book: “Optimal Money Flow: A New Vision on How a Dynamic-Growth Economy Can Work for Everyone.”   
You can donate the entire purchase price of the book to student scholarships by buying a printed hard-bound copy of the book at the Avila University Press website at:  https://www.avila.edu/aupress/optimal-money-flow-by-lawrence-c-marsh  
For additional details see the Optimal Money Flow book website at:
http://optimal-money-flow.website

or my 2018 paper presented at 2019 American Economic Association conference in Atlanta, GA:
https://www.aeaweb.org/conference/2019/preliminary/paper/FT7A95eS


The full purchase price ($24.95) will go into the student scholarship fund when purchased through Avila University Press at the link:  https://www.avila.edu/aupress/optimal-money-flow-by-lawrence-c-marsh

Is Federal Debt Too Big?: Public vs. Private Debt

Click here to sign up for Dr. Marsh’s monthly Money Flow Newsletter.


The cash in your wallet used to be government debt. What the government owed you before 1971 was an ounce of gold for $35. In 1971 President Richard Nixon took the United States off of the gold standard. Now the government owes you absolutely nothing for $35 or any amount of money. If you are nervous about using money that is backed by nothing, don’t use it.


Question 1: But what about US Treasury bills and bonds? Doesn’t the government owe you for the principal and the interest on those bills and bonds? Answer: They owe you the interest payment (coupon value) and the principal at maturity, but if you want to cash out any of your government-issued bills and bonds, just go into the New York financial markets and sell them for whatever price they are currently selling for.


Question 2: Does that mean that the government never has to pay back the debt that it has issued? Answer: As long as there is a market for government bills and bonds, the government doesn’t have to worry about it. As long as there is someone else willing to buy the debt, then it isn’t a problem. The government just issues replacement bills and bonds when the old ones reach maturity.


Question 3: Can’t government debt go bad just like private debt sometimes does? Answer: The analogy between public debt and private debt doesn’t hold up very well. Private businesses can’t print their own money or raise taxes to pay off their debt. Government has powers that go way beyond whatever a business might have. However, a government could get so carried away in monetizing its debt that it causes hyperinflation.


Question 4: How do we know when a government debt problem might be developing? Answer: When people start losing faith in government debt, the interest rates on government debt will begin to rise. A safe and secure debt can offer a low interest rate. Risky debt requires that the issuer pay a high interest rate. If the interest rate on government debt starts rising above that offered on corporate bonds, then it would be time to start worrying, mainly because the government would need to sell more and more debt to get the money to pay the interest rate on the increasing debt load. It is very unlikely that the government would let this get to the point where they couldn’t keep up. In an emergency the Federal Reserve would monetize some of the debt (buy up enough of it to alleviate the crisis) to bail out the government just as it bailed out the banks on Wall Street in 2008-2009.


Question 5: What if there was a situation (such as the current situation) where wealthy people and wealthy corporations had a huge amount of money in the financial markets and there were no reasonable real investment opportunities (except maybe overseas) so the money just drove up stock and bond prices and drove down interest rates? Answer: Yes, this is the current situation. There is a huge amount of money in the financial markets that is sitting idle. Corporations are using the money they get to issue stock buybacks and increased dividends and driving up stock and bond prices. Right now the chances that the interest rates on government debt are going to spike are next to none. It is definitely not an immediate problem.


Question 6: But what if the government went wild by issuing a huge amount of government debt? Answer: That would be a problem, because eventually all market interest rates would start to rise and private investment would be choked off. This is what is sometimes referred to as “crowding out.” But a moderate amount of “crowding out” is not a bad thing if the money is being used for important public investments such as infrastructure repair and other important priorities that voters have determined are more important than what the private sector would spend the money on. The term “crowding out” is prejudicial in that it implies that private spending is good and government spending is bad, but that is not always the case. Some reasonable amount of government spending is needed, even if it replaces private spending.


Question 7: What if the government issued the debt but didn’t spend the money? Answer: Although the chance that this would happen is absolutely zero, it is an interesting question. It would mean that the government was reducing the money supply. Controlling the money supply is supposed to be the responsibility of the Federal Reserve. But if the treasury department did it, the effect would be the same as the Fed purchasing securities in the financial markets. It would reduce the money in the economy and slow the economy, and, if extreme enough, cause a recession.


Question 8: The real question is how much money is flowing through our economy and where is that money going? Right now, there is too much money flowing into Wall Street and too little money flowing to the people on Main Street. The people on Main Street don’t have enough money to buy back the value of the goods and services they are producing so the federal government has to use deficit spending to make up the difference to keep the economy from falling into a recession. Deficit spending is here to stay until we correct the money flow problem (remove tax loopholes and inappropriate subsidies, etc.) where too much money is flowing to the wealthiest people and biggest corporations and too little money is going to everyone else.


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Lawrence C. Marsh is Professor Emeritus in Economics at the University of Notre Dame and author of the 2020 book: “Optimal Money Flow: A New Vision on How a Dynamic-Growth Economy Can Work for Everyone.”


Many public libraries throughout the United States allow a free 21-day access to the audio book version of “Optimal Money Flow” via Hoopla. Listen to it for free at: https://www.hoopladigital.com/title/13557352.


You can donate the entire purchase price of the book to student scholarships by buying a printed hard-bound copy of the book at the Avila University Press website at AUPRESS.


For additional details see the Optimal Money Flow book website at http://optimal-money-flow.website/. or my 2018 paper presented at 2019 American Economic Association conference in Atlanta, GA: Marsh Money Flow paper.


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The full purchase price ($24.95) will go into the student scholarship fund when purchased through Avila University Press at AUPRESS.


Link to my Notre Dame webpage http://sites.nd.edu/lawrence-c-marsh/home/.


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Money Flow Paradigm

Click here to sign up for Dr. Marsh’s monthly Money Flow Newsletter.

 

The Money Flow paradigm recognizes that people are our most essential economic resource in both production and consumption. They are motivated to enhance their self-worth through activities that give them a sense of purpose. Money flow is a key ingredient in both production and consumption activities. In order for people to be fully employed and to fully benefit from economic activity, money must flow efficiently and effectively to everyone throughout the economy.

Just as a healthy body requires that blood flows throughout the body so that no part of the body is deprived of adequate blood for any length of time, money must flow to everyone so that they can contribute to the best of their abilities in production and consumption. However, as George Cooper made clear in his book “Money, Blood and Revolution,” just as the heart is essential to blood flow throughout the body, government is essential in the free enterprise system to keep money flowing to all corners of the economy including to people in the inner cities and distance rural communities.

We have failed to appreciate the central and essential role of government in maintaining a healthy economy through proper money flow. The many variations of neoclassical, monetarist, Keynesian and other economic paradigms have seen the role of government as primarily passive with only occasional need to intervene in response to unanticipated economic instability. None of these earlier paradigms see government as continuously monitoring, adjusting and guiding the flow of money.

Our failure to recognize the proper role of government has led to the dangerous and distorted money flow that is undermining productivity and economic growth and leading to cycles of economic instability and collapse. In particular, large amounts of money are accumulating in financial markets and company coffers due to a highly distorted money flow that directs a disproportionate amount of money to wealthier individuals and corporations. This wealthy savings bubble is one of three bubbles recognized by the Money Flow paradigm.

The second bubble is the middle class debt bubble where credit card debt, mortgage debt, student loan debt, home equity debt as well as health care and other unexpected costs have created a situation where workers are unable to buy back the goods and services they are producing without the help of government. To keep money flowing and avoid financial collapse, government engages in unpaid for tax cuts and unpaid for expenditures that lead to the third and final bubble: the federal debt bubble.

The Money Flow paradigm sees the income and wealth inequality as an inherent problem in the continuous transitioning from a variable cost (e.g. unskilled labor) economy to a fixed cost (e.g. physical and human capital) economy that is greatly exacerbated by “pay-to-play” politics that rigs the rules and regulations in favor of special interests. As technological change speeds up, with millions of blue collar and white collar jobs being automated, the central role of government as the heart of the free enterprise system is ever more important.  Government can no longer wait until disaster strikes, but must anticipate and continuously proactively intervene in the economy to maintain adequate money flow to all parts of the economy. This is the key message of the Money Flow paradigm.

For additional details see the Optimal Money Flow book website at:
http://optimal-money-flow.website

or my 2018 paper presented at 2019 American Economic Association conference in Atlanta, GA:
https://www.aeaweb.org/conference/2019/preliminary/paper/FT7A95eS

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The author has agreed to forgo his book royalties so that the full purchase price ($24.95) will go into the student scholarship fund when purchased through Avila University Press at the link:  https://www.avila.edu/aupress/optimal-money-flow-by-lawrence-c-marsh

Why Doctors and Nurses Should Not Ignore Anecdotal Evidence

Randomized trials may not be definitive even when they show clear and indisputable evidence of both a statistically significant and practical difference between the average in the treatment group and the average in the control group. Statistically significant randomized trial results are not always useful to a doctor or nurse when there is substantial practical variation within the treatment group. That is why a statistically significant randomized trial is not definitive proof of causation. Think of a situation where the randomized trial ignores gender. What if a treatment works really well for men but actually does a little bit of harm to women with no benefit. The “average person” may do fairly well with the treatment and even show statistically significant improvement. But the “average person” does not exist. There are only men and women in the trial. The “average person” represents no one. The solution is to use control variables (such as gender) in a randomized trial in order to zero in on the subsets within the treatment group in order to sort out who will really benefit from the treatment and who will not benefit. This means using regression analysis (or analysis of covariance) on data from randomized trials. Hopefully, the new generation of doctors and nurses understand this and are not led astray by “highly significant” results from some randomized trials. This opens the door to the use of anecdotal evidence as useful in alerting a doctor or nurse that the results of a particular randomized trial may not be definitive for some types of patients.