New Sense—Common Sense

By J.D. ALT

The principal dilemma of the progressive cause is that it has allowed a bedrock conservative premise to go so long unchallenged; indeed the progressives themselves have either overtly or implicitly agreed with the premise, making it virtually impossible for them to effectively advocate their goals:

PREMISE: The money for federal government spending must come from the Private Sector, either through the collection of taxes and fees, or government borrowing.

This belief seems to derive from the instinctive logic of Common Sense—the same logic that causes us to believe that if we hold up a rock and let go, it will drop to the ground. How else could a federal government get money? It is the people, after all, who work and earn money. Federal governments only spend money. How else could a federal government possibly have any money to spend, except by borrowing from or taxing the people who earn it? This is what sovereign governments have always done, and what they will always continue to do. The irrefutable sensibility of this logic is simply overwhelming.

This premise, and the Common Sense logic behind it, is used by the conservatives to guide the public discourse inevitably towards certain conclusions which form a narrative about how the federal government should be managed:

1. First and foremost, the premise gives reason to want to keep the federal government as small as possible. The smaller the government, the fewer things it does, the less money it will spend and, it follows, the less money it will need to collect in taxes. Lower tax rates mean the people get to keep more of the money they earn, rewarding rather than penalizing their efforts.
2. A smaller government, spending less, will have to borrow less from the Private Sector. This means more capital will remain in the Private Sector, available for investment in the businesses and entrepreneurial ventures that actually create jobs and grow the economy. It also means future generations will have a smaller debt to repay—and fewer taxes will have to be collected to pay off that debt.
3. The premise leads one to believe that if a government spending program is beneficial—as, for example, the federal interstate highway program, or the social security system—it is essential to set up such a program as a trust fund with a legislatively mandated income stream to cover the costs. Thus, highways are paid for by gasoline taxes. Social Security is paid for by payroll taxes. This inherently limits the tax dollars that will be collected—and prevents the federal government from borrowing to make up any shortfall. If the income stream supporting the trust fund falls short, the program, by law, must be curtailed to align with the income available
4. The premise causes one to focus attention on the measurement of certain things which otherwise would be of little interest. For example, one must be extremely cognizant of the difference between the amount of money the federal government spends and the amount it collects in taxes. Because the logic says this “deficit” must be financed through borrowing from the Private Sector, it becomes a measure of the failure to keep government small, and a measure of the threat to future financial stability. (If the deficit becomes too large, the Private Sector could not earn enough money to pay off the debt—the tipping point of economic collapse.)
5. The premise also leads one to be mistrustful of the sovereign central bank, and creates a longing for hard currency—money convertible to gold. This is because fiat currency (paper money not pegged to the value of gold) is subject to manipulation by the central bank, allowing the federal government to “pay” its debt by printing money and creating inflation—in effect, stealing from the Private Sector by devaluing the currency.
6. Finally, and most unfortunate, the premise forces one into a position of callous indifference to human suffering. Because there is clearly NOT enough money in the Private Sector to finance relief for all those in need, one must stiffen up to the fact that the suffering is unavoidable. This is made ethically manageable by imagining those in need as people who have simply not tried or worked hard enough; or who failed to help themselves by living unhealthy lifestyles. Minimizing federal government aid to those in need is justified by the notion that doing more would steal their freedom and turn them into dependents of the state.

This conservative narrative is a drum-beat the progressives have great difficulty counteracting. The primary reason for this difficulty is because the progressive position embraces exactly the same fatal premise: federal government spending must be paid for with dollars obtained from the Private Sector, either through taxes or borrowing. Given the fact that progressives hold this belief with the same irrefutable Common Sense logic as the conservatives, it is impossible for them to avoid the same conclusions that inevitably follow. The best they can do is simply adjust the narrative to allow a federal government that is somewhat larger, a bit more proactive, a modicum more compassionate. Thus, the progressive arguments focus on:

1. Increasing taxes on the wealthy (who can easily afford to pay more taxes without negatively impacting their lifestyle) in order that the federal government can have a little more to spend.
2. Making the case that federal spending for the right things is actually an investment that will pay dividends. Spending on education, for example, will create a more productive workforce that will benefit Private Sector entrepreneurs.
3. Making the case that federal spending for even more of the right things, such as research and development, will actually assist the Private Sector and help it grow the economy, ultimately generating a net gain in tax revenues that will help the government reduce its deficit.
4. Making the case that government workers, paid with tax dollars, provide private citizens with real services that they need and benefit from.
5. Declaring that a minimum safety net providing assistance to those in need is not something that is optional in a modern society—it is ethically essential.

These modest responses to the conservative drumbeat are pathetically inadequate and ultimately ineffective. Instead, the progressives ought to be blasting forth with both barrels, firing at the fatal premise itself. Everything they want to achieve—universal health care, full employment, free pre-k through community college education, affordable housing and home-ownership, free after-school and day-care programs, sustainable green-energy systems and smart electric grids, modern public transit systems—all these things and much more are entirely feasible because the basic premise that underlies the conservative narrative, and the progressive’s dithering response, is demonstrably false.

To see this, let’s return to the Common Sense logic we began with: People earn money. The federal government spends it. Therefore the federal government has to tax or borrow from the people to get the money it spends. But Common Sense has left out something important: Where does the money come from that the people earn in the first place? If we add that to the equation, the picture changes in a surprising way: The money that people earn, it turns out, is created by the sovereign government itself. In the modern U.S. economy, this is paper fiat money that is issued by the Federal Reserve as the legal exchange currency of the Private Sector. And what is central to the progressive’s cause is the little understood and seldom discussed fact that to get this fiat currency into the Private Sector—where the banking industry can leverage it with loans, and businesses can use it to make payrolls, and households can earn it for their daily transactions—the sovereign government first has to spend it.

Let’s give a moment here for Common Sense to process this information. This is not being proposed as a new way to do business and run the monetary system. It is, in fact, the way the U.S. monetary system—and all modern monetary systems throughout the world—are operating right now. Money is no longer printed as the representative of a fixed amount of gold or silver locked away in a vault. Money is created by a sovereign nation as a living “stream” to support the exchange economy of its people. To get the dollars into the Private Sector exchange economy, the sovereign government has to spend the dollars it creates. This spending takes many different forms: The federal government directly purchases goods and services and assets from the Private Sector—enabling the Private Sector to earn the dollars; it issues entitlement checks to retired and disabled citizens, enabling them to be active consumers; it pays interest on treasury bonds—which are the “savings accounts” the Federal Reserve provides the Private Sector as a way of managing and balancing reserves in the banking industry.

When the federal government levies taxes, it removes dollars from the Private Sector—and it does this primarily to prevent the build-up of excess inflationary dollars in the system. On its face, taxes are NOT collected because the federal government needs the dollars for spending, since it is capable of creating fiat dollars any time it needs them—and since it has to spend the dollars before they’re available for anyone to pay taxes with. In the same way, when the federal government sells bonds to the Private Sector, it is NOT because it needs to borrow dollars so it has them to spend. Taxes and bonds are tools for managing the monetary system; they have nothing to do with “financing” federal spending.

If this is true—and I, for one, believe it has been shown to be irrefutable by a growing list of economists—what becomes of the conservative’s bedrock premise, and the conclusions and narrative that so logically follow it? What we seem to have now is this:

 NEW PREMISE:  The sovereign government issues fiat dollars and spends them into the Private Sector, giving the banking system a franchise to leverage the dollars with loans to entrepreneurs and businesses, enabling the entrepreneurs and businesses to create jobs and citizens thus to earn dollars.

 What does Common Sense make of that premise?

1. Does it still make sense that government should be as small as possible? That it should spend and do as little as possible? If so, Common Sense can see it is the Private Sector that will be starved of dollars, the people deprived of the opportunity to earn money.
2. If the federal government isn’t selling bonds because it needs to borrow money, is it really removing investment capital from the Private Sector? And who is actually benefiting from those bond sales? Is it possible the Private Sector actually wants to buy the sovereign’s bonds because it is a safe way to earn interest while money is parked, waiting for a more entrepreneurial investment?
3. Is the federal government really running out of money to make Social Security payments, or is the legislatively mandated trust fund simply reaching the limits of its actuarial mathematics? Is there really not enough federal money to repair the highway system and its bridges—or is the highway trust fund simply inadequate to meet the developing needs? Common Sense can now see these kinds of trust funds are just arbitrary limits that once got established and now need to be revisited—or eliminated entirely.
4. Does calculating the difference between what the federal government spends and what it collects in taxes (the “deficit”) measure anything meaningful? If the sovereign doesn’t have to borrow from the Private Sector to “make up” the deficit, what does the deficit mean? Common Sense can see now it doesn’t mean anything at all; it is simply a number—like the total number of points scored in the history of baseball.
5. Does it make sense to mistrust the Federal Reserve and long for a return to the gold-standard? How difficult is it, in a transparent democracy, to require the Federal Reserve to avoid creating inflation, and to monitor the steps it takes to accomplish that goal? As far as the central bank “printing money” to pay off federal debt, Common Sense now can see that’s not even a sensible proposition, since the “debt” is merely a “savings account” the Federal Reserve provides the Private Sector. And going back to the gold-standard? Why would we ever want to return to a situation where the amount of exchange currency in our Private Sector is dependent upon the amount of metal that can be dug out of the ground in a foreign country?
6. Finally, is it really necessary to stiffen up against the suffering in our nation by pretending the people suffering somehow deserve it? Isn’t it possible to actually do something? Not just some little thing, some “safety net” gesture, but a big thing that would actually make a difference? Because Common Sense can see now quite clearly: it is no longer meaningful to frame this issue as a burden on tax-payers. It is not. And surely it could be argued that nothing would be more broadly stimulating to the economy as a whole than paying people to build and learn and teach themselves out of ignorance and poverty.

Does this mean the federal budgeting process itself becomes meaningless? That the federal government can simply spend dollars without restraint? Actually, it means the opposite: unlimited power requires the most careful and reasoned restraint possible. Federal spending has consequences, and those consequences should be analyzed and debated with great care. But it should be noted how different that debate would be from the one we’re having now: Instead of arguing about which national program we can no longer afford, we’d be debating which national program should be expanded, why it should be expanded, how it should be expanded; we’d be debating about what we want to become, rather than about who’s to blame for what we cannot be.

So what are the progressives waiting for? Why not summon a trumpeting fanfare: Common Sense has a NEW sense, and it tells us we actually do have the dollars necessary to make the world we live in a whole lot better for everyone.