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Taxes and Federal Debt Don’t Fund JACK

Yeah, I said it.  Below is information that you won’t learn from mainstream economics either because they fail to understand our Modern Monetary System or they intentionally want to keep us in the dark about it.  BTW, there is only ONE person currently in congress or a candidate for congress that understands that taxes and federal debt don’t fund JACK.  More on that below.

Our modern monetary economy is based on a fiat currency system where the federal government has a monopoly over the issuance of the dollar.  It can issue checks or electronically credit bank accounts without fear of running out money or bytes of information - IT CREATES ‘IT’ (last IT being US Dollar).  It creates it out of thin air or bytes of information.  There is NO intrinsic value to the dollar.  The one thing supporting the dollar is the requirement that taxes and other financial transaction with federal government must be done with U.S. dollars (and not gold or chickens). 

A sovereign country that issues its own currency - like the U.S. - is NEVER constrained by revenue.  Why?  Because IT CREATES ‘IT’.  There are other constraints on government spending such as inflation or supply of real resources to purchase. 

Consider this - when was the last time you heard the federal government say: “we are running out of money for war in Afghanistan we better stop.”  Or how about the Wall Street bail out - do you think that someone Treasury Department ever stopped to check if there was enough tax revenue to cover the trillions of dollars that went to Wall Street.

The President issues a budget for the upcoming fiscal year which reflects his/her budget priorities (including tax plan) to congress.  The House Appropriations Committee and Senate Budget Committee review it, discuss it, amend it and eventually approve it.  Full congress votes on it and sends it back to President for his/her signature or veto.  That’s it. It is NEVER revisited again.  This is very different from state and local governments who are currently struggling to fund their budgets with shrinking revenues and as a result are forced to amend their budgets during the budget year.  Why the difference?  You got it - federal government CREATES ‘IT’.

You, I, most state and local governments and, yes, businesses cannot spend without having revenue/income to support it.  Federal government is NOT like us.  Warren Mosler, independent candidate for U.S. Senate for Connecticut, explains it this way (from his book “Seven Deadly Innocent Frauds of Economic Policy”):

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 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.

If federal government CREATES ‘IT’ or is just a score keeper the bottom line is the same - federal government doesn’t need taxes or even federal debt to fund JACK. 

So why does it tax or issue debt?  First, taxes, again from Warren Mosler:

Taxes create an ongoing need in the economy to get dollars, and therefore an ongoing need for people to sell their goods and services and labor to get dollars. With tax liabilities in place, the government can buy things with its otherwise-worthless dollars, because someone needs the dollars to pay taxes.

U.S. dollar is a tax-driven currency.  The need to pay taxes and conduct other transaction with the federal government creates the demand for dollars. The effect of taxes in our modern monetary system is NOT to fund government spending but to extract money or aggregate demand from our economy - yes, to slow the economy down.  A problem arises when government spending doesn’t match the level of taxation (or the extraction of money/aggregate demand from economy) this in effect can cause a drag on the economy and possibly a recession.

As for federal debt, the reason why government issues it is not very obvious - but again, federal debt doesn’t fund JACK.  Government spending is not constrained by revenue or the need for debt financing.  Current budget deficit is about $1.3 trillion and the amount of federal debt outstanding is close to $13 trillion.  There is something more going on then funding spending or deficit but what? 

There are two possible explanations for this: one is technical and other is ideological.  Hold on tight (from Prof. Bill Mitchell):

In a technical sense, when there are deficits bank reserves are growing and banks will try to get rid of these reserves by lending them on the overnight interbank market. The competition for funds drives the interest rate down to whatever support rate the central bank pays on overnight reserves. The problem is that the banks cannot eliminate the system-wide reserve surplus created by the deficits. If the system is left alone the central bank will lose control of its target interest rate.

As noted above there are two things the government can do to retain control over its monetary policy stance. It can offer an interest-bearing asset in place of the reserves – that is, sell the banks government bonds (that is, “borrow”) or it can pay the target interest rate on overnight reserves. The second option is currently being used in the US for example.

The technical reason for issuance of federal debt is to manage short-term interest rates.  As for the ideological reason:

...governments borrow much more than is needed to fulfill the liquidity management function of the central bank. So then we have to understand the ideological nature of government borrow and its intrinsic lack of utility other than to provide corporate welfare to lazy bond investors.

The overwhelming sentiment of the business community and the conservative nature of our political system (and its participants) leads to a largely anti-government swell of opinion which is continually reinforced by the media – the “debt-deficit hysterics”. The neo-liberal expression of this over the last three decades has overwhelmingly imposed massive political restrictions on the ability of the government to use its fiscal policy powers under a fiat monetary system to ensure we have full employment.

We now accept very high unemployment and underemployment rates as a more or less permanent feature of our economic lives because of the political constraints imposed on government.

So while there was a major shift in history after the collapse of Bretton Woods, the logic that applied in the fixed exchange rate-convertibility days is still being imposed despite the economic fact that it does not apply in the fiat currency era.

As a result, governments imposes voluntary constraints on themselves for political reasons? The neo-liberal macroeconomic reasoning that you read about in the newspapers is really the sort of reasoning that prevailed in the days prior to fiat currency. The shift in history renders most of the textbook economics outdated and wrong, in terms of how they depict the operations of the fiat monetary system.

Professor Mitchell offers up two ideological reasons to issue federal debt: 1) it’s basically a corporate subsidy to Wall Street and 2) the dominant economic consensus or theories (which are very conservative or neo-liberal) are based on a monetary system that doesn’t exist today.  With fiat currency system the federal government doesn’t have to issue debt - it doesn’t fund JACK.

Professor Mitchell is on to something with the dominant pro-Wall Street and neo-liberal economic consensus.  The reason why we won’t learn about how our modern monetary system really works in mainstream economic classes or hear in traditional media about it is because there is a LOT at stake - both in terms of careers and money.  What better reasons to keep us in the dark!

Further reading:

**Seven Deadly Innocent Frauds
**Elephants Everywhere

As mentioned above, there is only ONE person currently in congress or a candidate for congress that truly understands our modern monetary economy.  Warren Mosler is that one person who can bring this understanding to Washington.  He has a plan to address our current economic situation and he is running as an independent.  As we know all to well, Senate campaigns are very expensive and any little bit helps.  I encourage you to check out his website (and even ask him a question via email).  If you agree with what he has to say, want someone in Washington who understands our Modern Monetary Economy and can spare several bucks - please contribute.  If contributions are not your thing but want to volunteer - here is the link for that.

Thanks and Good Luck.