By J.D. ALT
Let’s imagine pulling together a group of enlightened economic planners to create an American budget for, say, the years 2020-2024. What might they come up with? To begin with, how might they even go about thinking about how to create an American budget?
It’s not so obvious as, for example, the way the Congressional Budget Office might go about it. The CBO would begin by tallying up how much money America’s government will have to spend in the years 2020-2024. Then they’d allocate those projected dollars to various pots of spending—with some calculation about what the spending needs will be for each pot. In the middle of this exercise, they’ll discover that the spending needs for the pots far exceed the number of dollars they’ve projected America’s government will have to spend. So, they’ll tweak the tax revenue numbers, projecting that economic growth in this or that sector will generate more tax collections for the government, and they’ll search for a bevy of cost-savings the government can garner by eliminating “wasteful” spending. Then they’ll repeat the allocation exercise and discover the projected available spending dollars are still far short of what they’ve calculated the pots will demand. Thus they will next have to calculate how many dollars the American government will have to borrow to make up the short-fall—and will have to further calculate how much that borrowing will add to the “national debt,” and how many years (projected into a distant future using imagined numbers for economic growth and future tax-rates) will it take for America to repay the debt. Then they’d publish all these numbers and Congress would blanche and fall into chaos and confusion. The political party out of power would declare the party in power to be “fiscally irresponsible,” driving the nation to bankruptcy, and the arguing would begin over which pots should be reduced or eliminated. Another day in the life of American politics courtesy of the Congressional Budget Office.
So, how would our group of enlightened economic planners tackle the problem differently? First, because we’re imagining they’re “enlightened” (meaning they fully understand how modern fiat money works), they’d realize it is incorrect—even illogical—to begin with a calculation of how much money the American government will have to spend. The American government, they understand, is constitutionally authorized by law and the Federal Reserve Act to issue fiat currency as necessary to meet the spending needs of both private commerce and the federal government. The pertinent budgeting question, then is not whether the necessary fiat dollars can be issued, but what precisely are they to be spent on? This makes the process of creating an American budget a much more interesting and useful task than what the CBO habitually assigns itself.
Here’s how I imagine the new process might proceed:
STEP 1: The first analysis and decisions are about what we—as a collective society represented by the federal government—need to accomplish: What pressing challenges do we confront? What dangers do we face? What opportunities lie at our doorstep? The list of broad categories might go something like this (in my opinion; feel free to generate your own list):
- Mitigating climate change
- Developing and deploying zero-carbon energy strategies and technologies.
- Plan and implement new afforestation programs.
- Management analysis of existing forests and rainforests to maximize carbon sequestration.
- Adapting to climate change
- Plan and implement an equity-replacement program for properties threatened by sea-level-rise.
- Develop sea-level-rise relocation and replacement strategies.
- Plan and implement water-supply security, preservation, and allocation strategies.
- Develop and implement agricultural adaptation, crop diversity, and food-security strategies.
- Develop and deploy Emergency Transitional Housing solutions.
- Restoring and rebuilding natural ecosystems
- Develop and deploy strategies to preserve and reestablish ocean habitats and fishery stocks.
- Preserve and reestablish wetland habitats.
- Reclaim and restore industrial and mining waste-sites.
- Plan and implement rain harvesting programs to reverse desertification of natural landscapes.
- Rejuvenating America’s education system
- Implement tuition strategies to remove debt from post high-school education.
- Plan and deploy a universal pre-K day-care system.
- Plan and implement a national, Grade 2 “reading-assist” program.
- Establishing comprehensive Retirement and Housing Assistance
- Plan and implement a national “Life-Share” house-mate program for retired persons.
- Develop and implement a national co-housing assistance program.
- Establish a national retirement housing co-op.
- Repairing and rebuilding critical local, regional, and national infrastructure
- Contract to immediately repair all bridges identified by the ASCE.
- Contract to immediately replace all lead-based community water-systems.
- Develop and implement electric-grid security strategies and technologies.
- Develop and build a national electric-vehicle charging grid.
- Redefining “work” in preparation for the AI and automation revolution.
- Plan and implement a job guarantee program.
- Design and implement an “art and artisanship” curriculum for public schools and community colleges.
STEP 2: Next, our group would evaluate which of these challenges, dangers, or opportunities are likely to be met by the natural interests and operations of profit-making enterprise—and which of them (because they don’t lend themselves to making profits) are likely to be ignored.
STEP 3: Taking the national “to-do” items which analysis has determined will likely be ignored by private commerce, the next step would be to determine what real resources will be necessary to undertake and accomplish each of them. How much and what kind of labor will be required? How much and what kind of materiel and technology?
STEP 4: Taking the list of required resources, our group would then ask: Are the resources described available within the borders of the United States? Or, to be more specific to the issue at hand, are they available to be purchased with U.S. fiat currency?
STEP 5: If the answer is “yes,” our group would then issue a formal proposal that the U.S. Congress (1) authorize the U.S. Treasury to issue treasury bonds, as necessary, for the purchase of the said real resources; and (2) direct appropriate government agencies to develop specific spending strategies to marshal the resources to pursue the goals of each stated item on the “to-do” list.
A simple example:
Imagine that one of the challenges our group identified in STEP 2 was this:
- 25% of American children are failing to learn to read by the end of their second grade—and therefore will begin, in the third grade, to relentlessly fail in the U.S. education system, resulting in unnecessarily high levels of social dysfunction and loss of American productivity. This is not a challenge that profit-making commerce is going to undertake to meet, nor is it one that existing school funding can stretch to cover.
Next, we ask: what are the real resources necessary to provide the special assistance necessary to bring those children up to reading level at the end of grade two? We might calculate as follows:
- There are 92,858 elementary schools in America, each with a second-grade class of children learning to read. Let’s say there’s 24 students on average in each class, and 6 are struggling to read, falling behind, and in need of special one-on-one tutoring, say an hour a day per child.
- This creates the need for a unique kind of work-force: people capable of tutoring who are available and willing to provide their services for only one hour per school-day. Who might that worker/tutor be?
- A likely candidate is a high-school student, tutoring 1 hour after each school-day @ $20/hour, to make $100/week spending money. Call them the “Read-Assist-Corp”.
- Each of our second-grade classes would require six RAC tutors, generating a need for 557,148 high-school students/year, earning $100/week for 36 weeks/year. (=$2B/yr.)
- It seems plausible those high-school students are, in fact, available and would be willing to provide the tutoring services in exchange for U.S. fiat dollars. Therefore:
We issue a formal proposal that Congress (1) authorize the U.S. Treasury to issue bonds as required to pay annually up to $2 billion in wages to the RAC program; and (2) that the funds be paid directly, each month, to the participating elementary schools.
Thus, we have created an American budget for ensuring that every school child enters the third grade able and happy to read—and is therefore highly likely to engage in constructive learning in grades 3-12 and beyond. The budget has been calculated to be $3,600 per struggling second-grader, or approximately $2 billion per year. And the budget has been funded—as our enlightened group of economic planners knows—without the necessity of increasing taxes or borrowing dollars from the profits of private commerce. The budget has been funded by the sovereign government’s legal mandate to issue fiat currency.
A lot of people will ask: But is it worth it? To which the answer is: worth what? Is rescuing the education and future careers of half a million American children worth the hours spent by the high-school students in mentoring them? I would think the proper answer to that is not only emphatically YES, but that the high-school tutors, themselves, will have learned and received as much life-affirming energy as the second graders they helped. So, what’s the complaint? If, on the other hand, the question is meant to ask: “is it worth all those dollars?” then the asker obviously doesn’t understand what “money” represents—or what, in fact, is its only purpose.
We could quibble about this or that budget item, but overall I like your budget and especially the process used to come up with it. But why this qualification: “our group would then issue a formal proposal that the U.S. Congress (1) authorize the U.S. Treasury to issue treasury bonds, as necessary, for the purchase of the said real resources….” Does this proposal merely reflect the current Federal Reserve system that, inter alia, links new money to new bond debt, or does it have some intrinsic purpose in the greater scheme of things? Various MMT economists have called for the elimination or drastic revision of the entire central banking system, deeming it clumsy, extraneous, and obfuscating–an artificial barrier that blocks the direct flow of fiat money to meet pressing human and environmental needs, while also serving to reinforce the deceptive “household” view of federal finance.
Other than the law that Congress has made that says we have to issue bonds, is there an economic reason why we have to issue bonds? Could you explain what that economic reason is?
This explanation is bound to be very enlightening.
There’s no economic reason why we have to issue bonds. It’s done for three reasons: historically that’s one way Governments protected their gold supply under a gold standard (bond sales drained convertible currency out of the economy; this reason is obsolete, of course); legally because of the laws you refer to (spurious); and as a reserve drain that allows the Fed to control the Fed Funds rate. If Treasury bond sales didn’t drain reserves from the banking system then the interbank interest rate on reserves would permanently go to and stay at zero, making conventional monetary policy impossible.
This effect of bond sales was demonstrated by Quantitative Easing, where the Fed bought trillions in Treasuries and flooded the banking system with reserves. It was functionally the same as if the Treasury had not sold them.
Doesn’t fiat currency by its very nature lead to inflation of basic goods (health care, energy, housing & education)? Seems to me that the ever increasing wealth & income inequality we suffer from is a direct result of such inflation (coupled with stagnant wages).
Such have been the consequences of fiat money manipulated in the dark by the PTB. As I see it, MMT is the discipline devoted to bringing the reality of fiat money into the light and explaining how it might be used otherwise to control inflation and facilitate economic health and balance. MMT, I don’t believe, sees any “inherent nature” in fiat money other than its creation by sovereign spending decisions, which makes it a powerful instrument for good or ill limited only by existing resources and political will. On the federal level in a currency-issuing country, we can afford either guns or butter, or both, simply by making decisions to purchase them. Going far beyond the field of economics, it’s the existential freedom–the extraordinary human agency–revealed by MMT that is breathtaking.
Some increase in the amount of money is necessary for a growing economy. There are actually productive investments being made that increase the productive capacity of our economy. Certainly the government can insrease the supply of money to meet the increasing size of the economy without necessarily creating inflation. Of course it is much more complex than that, but this simple fact should help you disconnect fiat currency from inevitable inflation.
Newton Finn, Steven Greenberg:
You both seem to be asking the same question: Why does the planning group issue a formal recommendation that Congress authorize the Treasury to issue bonds, as necessary, to cover the government’s payments to the reading assistants? My question back is: what would you have them do instead? The only alternative I can think of is to suggest that Congress should write, pass, and gain the President’s signature on legislation which authorizes the Federal Reserve to issue new fiat currency and deposit it, as necessary, directly in the Treasury’s spending account to meet the spending commitments Congress has authorized the Treasury to undertake. After that was accomplished, then, the planning group could recommend that Congress authorize the spending to cover the payments to the reading assistants. That path may be possible, but I have real doubts it could or will happen within the 10-year time-frame we have to position ourselves to mitigate and adapt to climate-change. The whole point of the last several essays I’ve written goes directly to your comments: Why obsess over the elegant, efficient ways modern fiat currency “could” be managed. The point is, it WORKS RIGHT NOW—and there is a method for its operation that is functional within the existing framework of laws. All we have to do is stop telling ourselves it’s “fiscally irresponsible” to do so.
I understand and appreciate your approach, J.D., but how do the vast majority of voting citizens come to this realization, so long as federal spending is artificially linked to federal debt which increases in ever-scarier numbers, thereby reinforcing, consciously and unconsciously, the false household model of the federal economy? Do we not need to attack this false model at its very source, the deceptive linkage of sovereign money to debt, in order to overcome it ASAP? Is not a frontal assault on a lie a more effective refutation than appearing to play along with it, even with the best of intentions? When I have been able to get friends to watch Stephanie Kelton’s “Angry Birds” video, most of them easily grasp the essential point about fiat money, which is all we need to have grasped in order to summon the political will to put it to necessary and appropriate use.
Thanks for the clarification, that there is no economic reason that says we have to sell bonds. If we could remove that rule that we have to sell bonds, that would free up another policy tool that could be used to control the economy as needed. It is a tactical decision as to whether or not you want to fight for that additional degree of freedom. I’d be a lot happier if there were a word or two in the plan that made it clear that the selling of bonds is just because that’s the way we have always done it. The sooner we make it clear that bond sales are not necessary, the sooner we may be able to recover from this fairy tale. If we keep up the pretense about bond sales, it may be another 100 years before we can get to that stage of reality.
Here is my suggested change to the wording. My addition is in bold.
I don’t think my suggestion puts an undue burden on the explanation.
Time I stopped pussyfooting around. Elsewhere, I’ve mentioned my puzzlement over “issuing bonds” rather than “spending money”.
I’m imagining that talking about “bonds” rather than “money” is a rhetorical move to sidestep the people who will always scream “PRINTING MONEY! INFLATION! GAAAH! ZIMBABWE!”. They never scream this about issuing bonds. Everybody loves issuing bonds.
So I guess we are using the notion that all money is a promise, an IOU, and that every dollar circulating obligates the government in the same general way that every dollar in issued bonds does.
Therefore we can pay for government purchases with bonds that:
a) are bearer bonds
b) pay no interest (optional, but, why would they need to pay interest?)
c) but not c. I was going to say “have an instant due date”, but if they’re bearer bonds, and tradeable, then it doesn’t matter. They come due (in the most formal sense) on tax day, just like our present national fiat money does. In the meantime people can swap them around in the market to do what they want.
The difference from present-day bonds is that the owners would pay for these, not in money, but in goods, services, labor, or anything else of value that the government needed to get.
If I’m right, this clears my confusion. If I’m wrong, then I’m off the beam in some other way
My understanding, Mel, is that spending money by a sovereign currency-issuing nation is the exact opposite of issuing bonds. The former, by governmental fiat, puts money into the economy. The latter, by purchase from the private sector, takes money out. That’s why, for me, the purported linkage of the two by central banking operations is a constant source of confusion and obfuscation. It goes hand in hand with the false idea that taxes fund spending, when the opposite is actually the case. It’s only the federal spending that creates the money either to pay taxes or buy bonds. If we shy away from this fundamental point we risk losing the liberating clarity of MMT.
Mel, I don’t think it has to be that complicated. This essay builds on previous essays which considered the issues you’re talking about. http://neweconomicperspectives.org/2018/08/the-explicable-mystery-of-the-national-debt.html#more-11306 and http://neweconomicperspectives.org/2018/11/future-dollars.html#more-11341 The perspective I’m proposing is that U.S. treasury bonds “contain” future U.S. fiat dollars which are issued along with the bond. Whether you imagine those fiat dollars are in the bond from the beginning—but are only extractable when the bond matures—or whether you imagine the fiat dollars are put in the bond when they’re extracted at maturity, it amounts to the same thing. In either case, the Federal Reserve is authorized to create the necessary fiat dollars—i.e. it happens automatically, it doesn’t require an act of Congress. The future fiat dollars “contained” in the bond are traded for “current” fiat dollars which the Treasury then spends to undertake the efforts decreed by Congress. These undertakings are generally things that private commerce is not interested in, or capable of, doing. This is what is already happening. The ONLY difference that I’m proposing is that we stop visualizing it as the government “borrowing” fiat dollars, and then having to “pay them back” at some point in the future.