by Rodger Malcolm Mitchell, www.nofica.com
The one, simple economics question that determines whether someone knows WTF they are talking about.
Have you ever read an economics textbook or treatise?
If so, you might have been dazzled, or impressed, by the number of mathematical formulas, the charts, the graphs, the abstruse language. No science offers more dizzying complexity than does economics, “the dismal science“.
Please share this article – Go to very top of page, right hand side, for social media buttons.
And yet . . .
And yet, it all can be boiled down to one simple question, the answer to which opens up the entire subject like a bright ray of sunshine on a foggy morning. That question is:
What is the difference between federal government finances vs. state/local government finances?
It’s a question that separates the wheat from the chaff, so to speak, the knowledgeable from the pretenders.
Consider the common phrase “taxpayer dollars.” You see it often, usually in the context of some government spending. But which government?
If the author is referring to a state or local government, the phrase may be apt. But it never is appropriate when referring to federal government spending.
The federal government does not spend taxpayer dollars. Never. Not ever.
The answer to the question, the fundamental difference between federal government finances and state/local government finances is:
The federal government is Monetarily Sovereign; state/local governments are monetarily non-sovereign.
Almost everything in economics, every true statement, and every false statement is related to that one basic truth.
What does it mean? It means the federal government is the issuer of the U.S. dollar, while state and local governments (and you and me) are merely users of the U.S. dollar.
As the issuer, the federal government creates dollars at will. It creates at will, all the laws that govern the supply and value of the dollar. The issuer never can run short of dollars and has absolute control over the exchange value of the dollar.
The issuer of the dollar does not need to obtain dollars from any outside source. Having the unlimited ability to create dollars, it does not borrow them nor does it need to levy taxes in order to obtain dollars.
What erroneously is termed “borrowing” when referring to the federal debt, actually is the acceptance of deposits into federal security (T-bill, T-note, T-bond) accounts. The so-called federal “debt” is the total of those deposits, the purposes of which are to:
- Provide a safe, parking place for unused dollars and
- Help the Fed control interest rates.
The purpose of federal “debt” is to stabilize the dollar.
The purpose of federal taxes is to help control the economy by taxing what the government wants to limit and by giving “tax breaks” to what the government wants to encourage.
Thus, neither taxing nor accepting deposits into T-security accounts, provides spending dollars to the federal government, which has the unlimited ability to create spending dollars at the touch of a computer key.
Even if the federal government collected no taxes and accepted no deposits into T-security accounts, it could continue to spend, forever. The same cannot be said of state/local governments, which rely on income in order to spend.
Recently I saw an article titled How are U.S. taxpayer dollars spent? by David Roos. It contained such lines as:
Your federal income tax dollars help to pay for the items on the federal budget. The money the federal government borrows to cover the budget deficit is what creates the national debt.
I love the Tax Receipt Calculator on WhiteHouse.gov. It’s highly informative and not a little shocking to see exactly how my tax dollars are spent.
Why don’t all Americans receive a similar receipt when we file our taxes? If the corner store gives me a receipt with my pack of Slim Jims, shouldn’t the federal government give me a receipt for my generous (if compulsory) contribution to the national piggy bank?
Wouldn’t it be nice to receive a kindly written thank-you note from the IRS attached to a detailed receipt of how every cent of our tax dollars would be spent that year.
According to How Stuff Works.com,
“Dave Roos is a freelance journalist who has contributed hundreds of articles to HowStuffWorks since 2007, with a specialty in personal finance, economics, and business.”
It is truly sad to have a specialty in so mething you know so little about, for Roos’s entire article, including the title, demonstrates a profound ignorance of economics. He does not understand the differences between federal finance and state/local government finance.
Federal taxpayer dollars are not spent. They are destroyed upon receipt. They disappear from any money-supply measure.
That’s right. Those precious dollars you work so hard to obtain, and then are forced to send to the federal government, are destroyed as soon as they hit the Treasury. That is why no one can answer the question, “How many dollars does the federal government have.” The best answer is, “Infinite.”
By contrast, state/local taxes are spent. They first are deposited into a bank and later are distributed into the economy, all the while remaining in that money measure called M3.
Sadly, Mr. Roos is not alone in his misunderstanding of Monetary Sovereignty. For instance:
Why Governments Levy Taxes, By: Mark Kennan, Reviewed by: Sari Luciano, BS, Accounting/Business, Updated December 04, 2018
Governments provide a variety of services to the people they serve. In order to pay for these services, the government levies taxes on the citizens and companies who benefit from these services. The government must also make payments on any money borrowed to sustain operations.
And:
Why We Pay Taxes. Since 1950, individual income taxes have been the primary source of revenue for the U.S. federal government.By Sarah Pruitt
Together with payroll taxes (used to fund social programs like Social Security and Medicare), income taxes amount to roughly 80 percent of all federal revenue, and are the essential fuel on which our government runs.
And:
Taxes, which are the main source of federal, state and local government revenues, pay for buildings, public education, highways, airplanes, rockets, road signs, and the salaries of millions of government employees.
Without taxes there would be no governments. Taxation is one of the several ways by which governments raise money to pay for the goods and services that they are called on to provide. Governments lack the major sources of revenue available to other sectors of the economy and must therefore rely on taxes to finance the majority of their expenditures.
The list goes on and on. Similar articles can be found everywhere, Yet not one sentence in the above examples is correct.
The federal government does not levy taxes to pay for federal services. It creates new money, ad hoc, to pay for whatever it wishes. Payroll taxes do not fund Medicare and Social Security.
The U.S. government does not borrow money. It has no need to. The federal government (unlike state/local governments) has no need for revenue of any sort.
Not only does the government not borrow, but it should not lend. “Lending” implies repayment, which the government does not need. If, for instance, the government wishes to encourage college attendance, it should not have a student loan program. It should have a student gift program.
President Obama: Washington Has to Live within its Means, 9/19/2011, By Colleen Curtis
Summary: The President’s plan for economic growth and deficit reduction offers a balanced approach to get our fiscal house in order, based on the values of shared responsibility and shared sacrifice
The President’s plan will enable Washington to live within its means, something Americans across the country have been doing for years. And the balanced approach means that no one group has to bear the burden alone. It means that everyone – including millionaires and billionaires – has to pay their fair share.
Obama’s knowledge of economics was abysmal. Deficit reduction guarantees recessions and depressions by taking growth dollars from the economy.
“Fiscal house in order” implies reducing federal debt, which simply stated, is the dreaded austerity, that has claimed the lives of many economies.
Red line: Federal Debt changes. Vertical gray bars: Recessions. Relative debt reduction leads to recessions which are cured by relative debt increases.
And rather than “shared sacrifice,” how about shared prosperity, as a better alternative.
And so far as “live within its means,” Obama confuses federal finance with personal finance. While you and I must live within our means (i.e. spend no more than our incomes), the federal government has no “means” to live within. The federal government’s “means” is infinite.
Why then, do we see headlines like this?
Newsweek
Stimulus Check Update as House Republicans Block $2,000 Plan, Trump Golfs, Khaleda Rahman
The COVID-19 relief deal remains in limbo over Christmas after House Republicans rejected President Donald Trump’s demand for $2,000 stimulus checks on Thursday, while the president spent the day golfing in Florida.
Why do Republicans block the $2,000 stimulus?
Given that:
- The federal government has an infinite ability to create dollars
- Federal taxpayers do not fund federal spending, and
- The private sector has a desperate need for dollars,
Why is the GOP reluctance to spend?
(Econintersect caveat: Many Democrats have the same tendency.)
Yes, there are the GOP’s political considerations of not wanting to help the poor, and preferring to help the rich, but additionally, there is the belief (excuse?) that federal finances are no different from personal finances.
The public doesn’t understand the simple difference, and the GOP exploits that ignorance.
Contact your Senator or Representative to demand a $2,000 stimulus check (or better yet, Social Security for All). You will be met with the fake unaffordability issue.
Your Senator or Representative may or may not know the difference between federal financing and state, local and personal financing, but he/she makes the tacit assumption that you are ignorant about it.
That same assumed ignorance applies to arguments about Medicare for All, free college for all, and to every other debated federal expenditure.
Simply keep in mind that:
- The federal government can afford anything. It never can run short of dollars. It is the sovereign of dollars.
- Taxpayers do not pay for federal spending.
- The federal debt is not a burden on anyone. Lack of income is a burden on the populace
- Federal finances are nothing like state/local government, and personal finances. The federal government is Monetarily Sovereign; state/local governments are monetarily non-sovereign.
Try to find candidates who understand the differences, and vote for them, or teach the ones you are stuck with.
.
