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posted on 13 September 2016

The Charade

by J.D. Alt, New Economic Perspectives

My last essay, "A Perfect Example," elicited six thoughtful and compelling questions from a reader with the moniker "MadcapMongoose." They deserve an equally thoughtful response, which I've been trying to formulate, off and on, these past many weeks. Each formulation I come up with, however, seems to be missing a larger and deeper issue that I keep getting glimpses of. So, with apologizes to Mongoose, instead of answering him (or her) directly, I'm going to try to mine the topic obliquely to see if I can get at that deeper vein.

The essay in question dealt with a specific proposition for "direct sovereign spending," - that is to say, spending by the federal government which is paid for by the issue of fiat dollars "out of thin air" rather than by the collection of "tax dollars." Mongoose's questions outlined a multitude of difficulties and issues that arise with the idea of doing that, and he (or she) wondered why MMT always seems to ignore or avoid them. I can only speak for myself here, but I believe the communicators of MMT, while they're aware of these kinds of issues and difficulties, have been focused on a different task: trying to instill a larger awareness of the fact that "direct sovereign spending" is something that is practically and rationally even POSSIBLE.

Yes, of course, everyone realizes and acknowledges that sovereign nations which issue their own fiat currency can, technically, "print money" and spend it - but the vast majority of economic minds, especially in the western capitalist democracies, also view this possibility with something akin to a rational and moral horror, as they would view, say, the idea of burning down a house to get rid of the cockroaches. Part of the reason for this abhorrence is the myth that the practical result of "printing money" is, inevitably, the economic chaos of hyper-inflation. (This in spite of the fact that historical analysis demonstrates that the root causes of hyper-inflation - the infamous Weimar Republic or Zimbabwe, for example - have not been caused by "money printing" but, instead, by the collapse of the production capabilities creating things for the money to buy.)

Another - and substantial - part of the psychological-economic anathema to the idea of "direct sovereign spending" seems to be a residual brain-circuitry from the era of the gold-standard - when printed money had to stand for some fixed amount of actual gold and, if it didn't, the "printed money" was a fake. This is a mind structure that requires there to be in the world, at any given moment, a fixed amount of "money" that everyone must compete to have a share of. The idea of creating actual, "real" money out of thin air is simply not a possible reality - just like the alchemist's dream of making gold out of lead is an ephemeral fantasy.

So there are real cognitive disconnects involved here. But I think it goes deeper than that, and I believe if we are ever, as a society, going to take full advantage of the pure, sovereign, fiat money system we actually have been using for the past half century, we have to understand what that deeper issue is - and, most important, whether or not there is a way to overcome it. A possibility I'd like to explore here is that underlying our insistence that the federal government has to collect tax dollars (or borrow them) in order to have dollars to spend is an elaborate and elegant charade which has evolved to protect our bedrock values as individuals (private property and free-enterprise) against the coercive power of the state - a power we granted (with significant reluctance, no doubt) the day we signed our social contract.

This charade has evolved to become an intricate form of social cooperation, supported by a complex, institutionalized, set of operations, measurements, social norms, and code words specifically designed to accomplish one primary goal: to keep the federal government perpetually short of spending power and, therefore, perpetually constrained in what it can undertake to impose upon our individual freedoms. To acknowledge that the state, in fact, actually creates the money we use - and therefore has no need, for the purpose of spending, to collect it back from us as taxes - would potentially unleash a monster that we fear (with real, historical, justification) might put us in chains. Unfortunately, in a functioning democracy, that monster is ourselves, and what we lose in keeping it encumbered is our ability to undertake an enormous range of cooperative tasks - activities and projects which would not only provide us with huge collective and personal benefits, but would, by the acts of doing them, enable us to employ every able-bodied person (and many disabled persons, as well) in work that is useful, interesting and, most important, payable of a living wage.

But no, we cannot do anything so rational. To protect ourselves against possible enslavement we must carefully perpetuate The Charade. Specifically, to maintain the goal of keeping the state in the position of having to collect our tax dollars in order to have dollars to spend, it is necessary to view the workings of money, itself, in a very specific (and peculiar) way: Dollars, we must believe, are created by the act of doing something that generates a profit - that is to say, the doing of something that is repaid, in return, with more dollars that were expended in the doing of it. Therefore, if you are to have a dollar to buy something with, you must earn that dollar by working for (or owning) some business venture that earns a profit. There is no other way a dollar can be created for you to earn. ("Non-profit" ventures are a confusing misnomer because they must, in fact, earn enough dollars to meet their expenses. In this sense they differ from a profit-oriented business only in the quantity of dollars they seek to earn.)

The consequence of this charade (in addition to making the collective government beholden to private business for its spending money) is that something which needs to be done, but which doesn't earn enough profit to repay the dollar cost of doing it, cannot be undertaken - unless money which previously has been earned through a profitable effort is "given" to it (either in the form of taxes or charity). The idea of "direct sovereign spending" to undertake the task is a non-starter because, in order to protect our individual freedoms, it cannot be permitted that dollars are created anywhere but in the private sector through the profit-making actions of business ventures. (The fact that dollars "arise" in the private sector through the direct actions of the Federal Reserve - a collective institution appointed by the federal government - is ambiguously "hidden" by the institutional complexities of the money-creating transactions. In other words, ambiguity aside, it is the SOVEREIGN NATIONAL GOVERNMENT which creates the dollars, as they are needed, to make good the profits of private enterprise.)

The necessity of having to maintain - or at least not spoil - this charade is what prevented Bernie Sanders from actually launching his revolution. How could the federal government pay for all the things Bernie said he wanted to make happen? How could it collect enough taxes? How much would it have to borrow from the private sector economy to undertake his laudable projects for the collective good? More to the point, how could Bernie persuasively tell the American people that, in actual fact, the federal government could just CREATE the dollars as needed - WITHOUT collecting more taxes or borrowing a single penny? And how could he make the case that doing so would NOT have to endanger personal freedoms by unleashing a massive government take-over of society - but that , in fact, the very process could transfer federal power to local communities?

Last October, as Bernie's presidential campaign was starting to catch on, to amuse myself, I wrote a speech that I thought he might find useful to give. Here are some excerpts:


If I'm a "social democrat" then I have to be able to tell you what a "social democracy" is. Does "social democracy" mean having a huge federal bureaucracy that regulates, manages and controls everything we do? That promulgates reams of stipulations and rules about how we do our business? I believe not. I believe, in fact, that a true and effective social democracy means the exact opposite: a SMALL federal bureaucracy and a LARGE network of local communities that spend federal dollars to build the community services and infrastructure THEY decide they need. Anyone who claims or implies that Bernie Sanders is advocating that America become a socialist state that owns all the industries - and rules, regulates, and employs all the people - has it exactly backwards. I, Bernie Sanders, believe the primary purpose of the state, the strategic mission of the federal government, is to empower the basic units of our social fabric: our households, communities, and local economies. Big businesses and corporations can take care of themselves, and have much to offer and contribute - but it is only by nurturing the health and vigor of the basic units of our society that we can, in fact, create a more perfect union. And this is not a task that big business, pursuing corporate profits, is disposed or interested in undertaking.

Is this position anti-corporate? Am I anti-big business? Only a fool would think or say so. American corporations and businesses which are producing real goods and services - and more power to them - require for their success, above all else, customers with the means to buy those goods and services. And who are those customers? They cannot be any other than the basic units of the social fabric we've been talking about: our households, communities, and local economies. This is why we are fooling ourselves if we believe that we, as a sovereign nation, cannot or should not pay our households and communities to undertake the things they need to accomplish. And why should we severely limit that support because politicians and economic pundits tell us there isn't "enough money" - when, in fact, our Federal Reserve system creates, out of thin air, trillions of dollars every year to make good the profits of our capitalist system? Yes! It's true! Where do you think the dollars come from when, at the end of every business day, America's bank accounts are bigger than the day before? Why should we not use that same ability to create money for the "social profits" that will come if we pay our local communities to create the services and infrastructures they need? If we create dollars, at the bat of an eye, to pay for the profits of the car industry, why shouldn't we create dollars to pay towns and neighborhoods to provide their children with pre-school learning and day-care centers? If we create dollars to pay for the profits of a middle and upper-class house-building industry, why shouldn't we create dollars to pay local communities to build the affordable housing needed by families still trying to climb the economic ladder? All of these payments - profit-making AND not profit-making - accomplish the same thing: they pay people wages to produce particular goods and services that other people need. Why, then, do we say that one is good and the other bad? One is possible and the other is not? Why do we limit ourselves, as a sovereign democracy, to creating money ONLY for those goods and services that generate a profit?

Maybe it's not too late for Bernie to make this kind of speech. People are still listening, and Hillary can't seem to think of any way to get voters interested or excited. If Bernie did, and people started to listen seriously to the message (i.e. "direct sovereign spending" is not only possible, but is actually a rational thing to embrace and plan for) then the kinds of questions raised by MadcapMongoose, I'm certain, will eventually get worked out.

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