Bruce Currie: How can America pay for things the people want? With ease

For the Monitor
Published: 2/17/2019 12:30:45 AM

A Green New Deal and single-payer health care are finally getting the attention they deserve, thanks in part to the efforts of newly elected members of Congress like Alexandria Ocasio Cortez, who’ve pushed these issues front and center.

They want the nation to get serious about global warming – which more accurately should now be called climate catastrophe. But, as with single-payer health care, a rejoinder is often: “How will we pay for it?”

The short, snarky answer for both is: “The same way we’ve paid for our $6 trillion forever wars in Syraqistan, because taxes didn’t pay for them.” So bear with me – a longer answer follows.

Fiat currency

When Dick Cheney famously said that Ronald Reagan proved that “deficits don’t matter,” he was right – though for the wrong reason. Deficits don’t matter because the United States is a sovereign nation with a fiat currency – one not backed by gold or silver but declared as legal tender by “fiat,” and backed by the full faith and credit of the federal government.

The federal government does not run like a household. It can never go broke – contrary to the claims of deficit hawks – from whom we hear most often when Democrats are in charge.

Congress can authorize spending as much money as it wants or needs – effectively creating money from thin air. Skeptical? As Alan Greenspan told Paul Ryan in a congressional hearing back in 2005: “There’s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody.”

But wait, there’s more.

A corollary to the fact that all money first comes from the government is that taxes do not, and cannot, pay for government spending. The spending comes first. Just as a quarterback must first throw the ball before a receiver can catch it, the government must first “spend” money into the economy before taxpayers, like receivers, can throw it back, i.e., pay their taxes.

Moreover, government spending does not have to be paid back, because it is “spent” into the economy to use for the purchase of goods and services.

Think of an account ledger with two sides – what the government “spends” into the economy is exactly balanced by the money the economy uses to function: It’s an investment in the nation and its people. Treating the spending as debt is an accounting artifact, nothing more.

In fact, taking money out of the economy to pay back this debt can be counterproductive, because shrinking the money supply drastically can lead to recession.

The tax equation

Federal taxes have two main functions: 1) they serve to maintain the currency’s value, since taxes can only be paid in dollars and, 2) taxes (and tax cuts) can be used to control the money supply, or to redistribute money within the economy.

We’ve had over four decades of tax cuts that effectively redistributed income upward to the 1 percent, and we know how that has worked out for most Americans. A proposal to implement higher marginal taxes on the rich now has broad support.

In 2019, what one thinks of raising or lowering taxes is determined by whether one thinks highly concentrated wealth in a democratic republic is a good thing or a bad thing.

The Founders did not think entrenched, hereditary wealth and a growing rentier class of landed gentry was a good thing. Our own history shows that the republic survived and thrived with far more progressive tax rates in the 1950s and ’60s, when the top marginal rate was over 90 percent.

If this talk about money and debt sounds too good to be true, that’s because it upends neo-liberal dogma that markets should rule everywhere, which is what we’ve been told since the 1970s.

Blind faith in laissez-faire economics has promoted capital flight, crafted unfair trade agreements, legislated unions into irrelevance, destroyed the blue collar middle-class, created monopolies in health care, pharmaceuticals and communications, grown a financial sector too big to fail, and caused a disparity between rich and poor greater than in any other advanced democracy.

Modern Monetary Theory

The understanding outlined above of how a sovereign nation with a fiat currency works isn’t too good to be true. Instead, it’s how money works in the real world and is the gist of Modern Monetary Theory, or MMT.

While MMT is currently “hot” and has a growing number of adherents from within the economics profession, it’s not really new. MMT’s understanding of money, credit and debt can be traced back at least to Alexander Hamilton’s 1791 “Report on Manufactures” and to the writings of John Stuart Mill.

Today, one of MMT’s best known proponents is Stephanie Kelton, who served as economic adviser to the Bernie Sanders campaign in 2016.

Higher taxes on the rich by themselves won’t “pay for” single-payer health care, or a Green New Deal, or cover the $6 trillion we’ve spent so far on wars in the Middle East since 9/11. But it isn’t necessary to “pay for” this spending. We can debate the wisdom of having spent $6 trillion on permanent war. Just as we can (and should) debate the need for a single-payer health care system or the need to address global warming with a Green New Deal.

With a sovereign currency, what this nation chooses to spend money on should be removed from any discussion of how a program should be paid for. Congress can authorize such spending at any time. Inflation is never a concern, so long as sufficient goods and services are available to purchase with the money spent into the economy.

In fact, government spending that invests in new infrastructure, more efficient buildings and transportation, and in better health care for all, has a multiplier effect that spending on war does not. The benefits of such spending are concrete and tangible to all of us, because they ripple through the economy in ways that spending on wars cannot.

Much of this spending is on things that the private sector will not or cannot do, because it’s on things that aren’t profitable – like roads and mass transit, or retrofitting buildings for greater energy efficiency. The return on investment may be too risky, or too many years away.

And thanks to “shareholder value theory” popularized by Milton Friedman, U.S. corporations have become risk-averse – more interested in stock market manipulations than in long-term investment.

Spending priorities

Contrary to critics, government spending doesn’t drive out private spending. Instead, such spending creates opportunities for new investment by the private sector.

For example, nearly all of Apple’s iPhone features exist thanks to basic research funded by the government. In effect, such spending is investing in the future for the next generation of Americans. We’re “paying it forward.” By contrast, conservative ideas that seek to limit and shrink government spending are akin to consuming the seed corn a farmer needs to plant next year’s crop. Only a strong central government, with a fiat currency, is capable of spending on the scale needed to address the effects of global warming, or provide single-payer health care.

How the federal government spends its money tells us what our elected officials think are important priorities. Those priorities are influenced by voters, and can change (or be made to change). The twin crises of decline in quality of life and impending climate catastrophe can only be met by strong central government spending for a sustainable future.

Despite the increased power of dark money lobbyists, informed citizens in our democratic republic can still demand that government spending serve the public interest.

As FDR famously told supporters seeking reform: “I agree with you, I want to do it, now make me do it.”

(Bruce Currie lives in Concord.)

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