The Myth About Federal Funding that Thwarts a New, More Benign Society

Getting right to the point, in regard to taxation and budgeting at the Federal level, common wisdom holds that:

  • When proposing any new Federal program, the first question must be: “How will we pay for it?”
  • (… and its corollary) Any Federal program or initiative is constrained by, and limited to, what funding can be raised through taxation.”

On first glance, virtually everyone affirms this. Yet in thinking it through for only a few seconds, an absurdity becomes apparent: when asked where money originates from, most people will say “It’s printed by the government” (an oversimplification, but close enough.) Yet if so, when the federal government needs to fund a new program, why must it shake down or come hat-in-hand to citizens and businesses for the revenue to do so?

In brief, it doesn’t. This is a mis-perception arising out of a common misunderstanding about the way modern money works.

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If you are unfamiliar with the way today’s money system operates, you may find the following difficult to believe: At the Federal level, the primary purpose of taxation is not to “fund the government”, it is to retire debt. Come April 15th (or July this year) when you send money to the IRS, the IRS thanks you very much, then the bulk of the dollars go into a shredder (or a “dollar graveyard” as MMT theorist Stephanie Kelton states it (1).

How can this be? The funding myth persists for several reasons:

1) It is hard for people to see past their immediate experience. At the personal, local, county, and state level, none of these entities have the authority to “print” money, so must depend upon wages, taxes, loans, grants, and the like for funding. Moreover, any of these entities can get into trouble if there is too great a disparity between revenue and expenses. It is easy then, to unconsciously (and falsely) project these considerations onto the Federal government as well.

2) Centuries of conditioning have taught us to equate monetary instruments with value: “a one hundred dollar bill is the same as $100 of gold”. There is only a finite amount of gold in the world, so if you spend some ‘here’, it has to be taken away from ‘there’. It is as though in times long past, the government found a pile of money and dumped it into the economy. And now that fixed amount persists in perpetuity, sloshing around the country, as we fight, compete, trade, and steal to get a piece of it.

Yet the above is an inaccurate, often destructive analogy for the nature of modern debt-based money. Here is a better analogy: Money is like the ecological water-cycle. Rain falls and flows through the watershed, bringing life to plants and people, eventually reaching the ocean, where it evaporates to form clouds, so the cycle can repeat. Rain does not fall once, whereupon plants and people then have to fight over it for the rest of the Era. If local ecosystems had to compete, and “billionaire” watersheds could hoard up far more water than they could ever need or use, the living planet would eventually perish.

It is the same principle with debt-based money. The Treasury and Federal Reserve collaborate to form monetary “clouds” that rain into the financial ecosystem through loans and federal spending, It is then supposed to flow (not “trickle”) down through banks, businesses large and small, employees, and the general citizenry.

However, this kind of money can’t remain in the system forever, otherwise the “flood” of inflation would occur when the next rainfall of dollars is spent into the economy. So the old dollars must eventually flow to the IRS “ocean” (or Kelton’s “dollar graveyard”) to be retired, so that the new issuance cycle can begin.

Yet how to draw the old money out of the system? Ideally, it would come from the pools where it is least needed — sitting relatively idle in the accounts of corporations and private citizens who have reserves far beyond any practical need or use. But, no surprise, the ultra-wealthy are reluctant to give up any significant portion of the wealth that enables them to remain ultra-wealthy — whether they have use for it or not.

So what is the alternative? Send the bill to average citizens and businesses in the form of an income tax. And sell it with the myth that we are funding a Federal government that is perpetually starved for cash and on the brink of bankruptcy.

The perversity of this arrangement is rarely discussed. Our stated national values prize hard work and industry. So why do we effectively punish the same with a monetary fine in the form of an income tax? The harder you work, the greater your fine. Rather than dis-incentivizing work, you would expect we’d instead want to discourage the underproductive hoarding of funds that are needed to run the economy.

In view of the above, there is a simple policy that I believe would solve 90% of our social, economic, and political problems: phase out the income tax and replace it with a progressive wealth tax. No need to waste more precious decades in futile political battles for rights and regulations on dozens of fronts. Implement the above and watch most everything else fall into place rather naturally.

To be clear, this is not about punishing the rich — everyone above the poverty line would contribute something on a progressive basis. The point is that such expense should be borne by those who are benefiting from the system, in order to keep that system running. It should not be applied in such a way as to hobble those who are still struggling to “make it”.

Although the above proposal is simple, admittedly it would likely encounter World War III-level resistance from the parties who benefit from the current system — and who largely sit in the driver’s seat of current society.

Yet, having a clear understanding of where we currently are, and a vision of where we need to go next, is always the first step.

Accordingly, imagine a society without poverty, despair, and desperation. One where everyone enjoys at least a basic level of comfort, security, dignity, and has access to education, healthcare, and economic opportunity. Imagine the positive effect this might have toward mitigating social problems like crime, domestic violence, addictions, xenophobia, depression and other psychiatric problems.

Imagine also the beneficial effects for the climate and greater ecosystem if the incentive to incessantly compete, exploit, over-consume, and over-accumulate were relieved.

What thwarts such an ideal world? It is the widespread failure to recognize that money today has evolved in nature. It is no longer an object of actual value but instead functions simply as a transferable coupon that entitles the bearer to a certain amount of goods or services.

The critical difference is that, while there is a finite amount of physical value in the world, coupons can be printed in whatever quantity is required to match need, demand, and supply. If you doubt this, I refer you current Fed Chairman Jerome Powell’s remarks in a recent CBS 60-Minutes interview (regarding Fed response to COVID-related economic disruption):

“Well, there’s a lot more we can do. […] we’re not out of ammunition by a long shot. No, there’s really no limit to what we can do with these lending programs that we’ve got.”

In other words, today, money need no longer be an obstacle to running a healthy, robust society that serves the needs of all of its members. All that is required is the transition from a prehistoric understanding of the meaning and purpose of wealth. No longer a “thing” to possess, to confer status, it is better conceived as a dynamic resource that can catalyze and support the next step upward for all of human society.

A better world is available today. It only takes a change in perspective.

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(1) “The Deficit Myth — Modern Monetary Theory and the Birth of the People’s Economy” Stephanie Kelton, Hachette Book Group, 2020

Originally published at https://www.dailykos.com on August 1, 2020.