Health care, the environment, education, law and order, the military, jobs, social security....we have so much to do! How will we pay for it all? The deficit is killing us!
All of that is true, except for the last statement. The deficit is NOT killing us.
Stephanie Kelton's "The Deficit Myth" is a welcome and clear explanation of how our government pays its bills. And how does the government pay its bills? The simple and straightforward answer of course is that when Congress authorizes X dollars for Y projects, the Treasury prints X dollars to pay for Y projects.
Our Constitution authorizes our Congress to instruct the US Treasury to create dollars whenever it needs to pay a bill. Period. End of story. Most of us know that and are comfortable with that idea. And since 1971, when President Nixon took us off the gold standard, those dollars have no relation to gold or any other commodity. The US Treasury simply creates the dollars out of thin air. It can create dollars for the next thousand years, and the system will work just fine.
The hue and cry arises when the taxes that the government receives don't equal the X dollars that Congress has spent. We think that is a problem, and this is where we are misinformed. The revolutionary idea that Stephanie Kelton (and Warren Mosler before her) so clearly explains is that our government's expenses and the taxes we return to the government have no relation to each other. Our government's expenses DO have a close relationship with inflation, but they DO NOT have a relationship with taxes.
This idea that expenses don't relate to taxes is going to take some getting used to. The idea that the government can create trillions of dollars out of thin air without causing "the system" to collapse is going to take some getting used to. Read Ms. Kelton's book and mull it over. Most of our leaders don't get it, which is extremely disappointing. They are supposed to be taking the time to think about issues like this carefully and thoroughly, and they are failing miserably. Some of our leaders, however, did get it, long before Kelton and Mosler made this idea accessible to the rest of us. Stephanie Kelton writes this about JFK when he was making plans for his moon-shot speech fifty-nine years ago:
There was a time when our political leaders had this figured out. For example, President John F. Kennedy sought the expertise of Nobel Prize-winning economist James Tobin, who served as an advisor to Kennedy's 1960 presidential campaign and then as a member of the president's Council of Economic Advisers. Tobin recalls JFK asking, "Is there any limit to the deficit? I know of course about the political limits....But is there any economic limit?" When Tobin confessed that "the only limit is really inflation," the president replied, "That's right, isn't it? The deficit can be any size, provided they don't cause inflation. Everything else is just talk."
The fact of the matter is that 1) the federal government simply creates money whenever it wants to pay its bills; 2) too much money in the economy is only a problem when inflation occurs; 3) taxes are not used to pay the government's bills; they are used to combat inflation and income inequality.
Why does any of this matter?
For starters, stop thinking the government will run out of money. That is impossible. Physically impossible. The government has been printing money based on thin air for decades and it can keep doing it for the next five hundred years with no problem. It cannot run out of money.
Will the money lose value? As in inflation? Yes! That is definitely possible, and Congress and our leaders will have to pay attention to that as they manage government spending.
Is inflation a problem now? No. The last year we had inflation greater than 4% was twenty-nine years ago in 1991.
What should we consider as we debate what things the government should spend money on? We should consider the needs of our citizens within our free economy. What do they need that the economy is not providing well? For starters, universal health care, a federal job guarantee so our homeless population disappears, public schools run by local governments but funded by the federal government on a per capita basis so that inequality in public schooling disappears, sensible environmental and climate change regulations and incentives so that our Earth does not disappear, a robust social security program.
The list goes on and can change over time. The issues will be whether the program is better suited for the private sector or the government sector, not whether the government sector can pay the bill. The government can always pay the bill. That will never be a problem.
A real problem will arise when we have created more jobs than there are people to fill. Won't that be a wonderful problem to have!! Then, and only then, will we have to cut back on government jobs.
Another real problem will arise when inflation starts to rise. Then we will have to raise taxes appropriately to pull some money out of the economy. Our taxes are used to fight inflation, not to pay for government spending.
Our taxes are also used to smooth the excesses of the private economy. In the 1950's, an average S&P 500 CEO's salary was about 20 times greater than the average worker's salary. In 2017 it was 361 times greater. Progressive tax rates were never designed to pull in more money to pay for government spending. They were designed to discourage people from making outrageous amounts of money. Back in 1950 when someone reached the 90% tax bracket, he ideally thought he might as well share that last million with others in the company since the government was going to take so much of it from him!
We should get rid of regressive taxes on the federal level as much as possible. We don't need FICA or the Medicare tax. If we have a federal business tax, it should be progressive, designed to discourage monopolies.
Our economy is our strength. Our workers are our strength. The free economy works best with a strong government partner. A strong government is a smart government, that asks the right questions. The right questions for the government are, what jobs does the community need that are not being fulfilled by the private sector. The question is not, can the government afford the task. If there are available workers, the government can afford any task.
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