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Four Facts vs. Anti-Government Group Think

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Fact One:  America CAN afford more education for its young, more care for its aging and infirm, better infrastructure, reduced fossil-fuel use, preparations for global warming, and many other things that polls show most of us need or want.  Claims that the government is broke and must live within its means are political fables.

Fact Two:  The federal government IS NOT like a family, company, or state as its critics say.  It issues the dollars that the rest of us use.  As the sole source of dollars, it can never run out of them, be unable to pay its bills in them, or be forced into bankruptcy by creditors. 

Fact Three:  The federal deficit IS NOT a problem as government opponents claim.  The government issues new dollars into the economy by spending more than it receives from taxes.  The deficit is the number of new dollars the government issues in a year and is a measure of growth, not weakness.

Fact Four:  The American Dream WILL NOT come true for most middle- and lower-income people until enough citizens and leaders recognize these facts and act on them.  But most political contributions come from those who profit by suppressing the facts in order to exploit the public and the environment. 

So let's look at the facts.  The Constitution authorized Congress to establish the dollar as the national currency, which it did in 1792.  Dollars flow through the economy and around the world like blood, enabling countless exchanges and transactions.  Just as a child needs more blood to become an adult, the economy needs more dollars to grow.  And just as blood lost from a wound must be replaced, dollars sent to other countries to pay for importing more than we export must be replaced.  The government issues new dollars as the economy needs them. 

Economists who study the dollar flows have formulas that show how the size of the US economy, the international balance of trade, and the need for new dollars are directly related.  Because the economy often needs more dollars to grow, deficits are normal and have existed in about two-thirds of the years since George Washington's first term.  The formulas show that if government doesn't issue new dollars now, the economy will shrink.

To repeat, the government issues new dollars by running deficits or spending more than it receives from taxes.  Years ago when the value of the dollar was linked to gold and the government ran deficits, it had to get more gold and sometimes that presented a problem.  The dollar is no longer linked to gold but the lingering fear of deficits is fanned by those who want to shrink the government. 

Obviously, the government can't issue, or in the pejorative term "print", unlimited amounts of dollars without inflating wages and prices.   Inflation is controlled by taking some dollars back with taxes.  And this is a critical point: today--the primary function of taxes is to prevent inflation.  The government does not need taxes in order to pay its bills.  Since the government issues dollars, it never has to get them from others.  Others get them from it. 

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Despite these facts, anti-government types keep asserting that like the rest of us, the government can't spend beyond its means; that it must raise taxes to pay for the things that most Americans say they want the government to do; and that more deficits will lead to runaway inflation.  That sounds reasonable and it feeds a national group-think.  But it is completely false.

In the simplest terms, regulating the economy is a bit like driving a car.  To speed it up, we must increase deficits and add more dollars, which is like pressing the accelerator.   To slow it down, we must remove dollars by increasing taxes, which is like stepping on the brakes.   To modify what the government does, we can change its mix of programs, which is like turning the steering wheel.  Safe driving requires using all of three properly.   

There is no more reason to fear runaway inflation than a competent driver fears a speeding crash.  But if, like a car, the economy slows down or changes direction too quickly, it can go into a skid.  A novice driver who hits the brakes and tries to steer out of a skid has just the wrong reactions and compounds the skid.  The anti-government group-think reaction that called for reducing the deficit and austerity programs when the economy started to skid a few years ago was just as wrong.  Fortunately, that was avoided enough to avoid compounding the skid.   

Much of the media and many political leaders reinforce the group-think.  They tell us not to use the accelerator when the economy slows down, never to brake harder with more taxes even if inflation is likely, and to steer as little as possible by cutting programs including the safety net.  That never worked before and they don't explain how it can work now.   

Those who want the government to solve problems that neither individuals nor the free market can solve must counter the group-think with the fact that the government must issue new dollars to make the economy grow.  That is not likely to produce inflation as long as millions of people want jobs, most incomes are low, and much of the country's productive capacity is idle.  This is the opposite of what government opponents want the public to believe.  

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The issue comes down to this: either the anti-government claim that government is like everyone else and must get dollars before it can spend is correct, or it is not.  If it is not, as the facts show, then the anti-government agenda has no factual basis and should be ignored.  This is a black-and-white distinction and sound policies cannot be based on a gray-area compromise.

Today, the ideologically-inspired group-think prevails, so the budget debates and most elections are just noise and wasted energy.  As long as this goes on, millions of people will continue to suffer, critical human and physical investments will not be made, and the economy, which has barely recovered from the Great Recession, will remain stunted.

For many readers, the facts will seem counterintuitive.  It will take time and thought before the light goes on.  That is partly because the ideas are new to most people.  There is much controversy among economists, particularly about the details.  But leading economic thinkers and financial managers have accepted the basics and apply them in their work.  These include Martin  Wolf, the senior economics writer of the Financial Times, Jan Hatizus, the chief economists of Goldman Sachs, and others.

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Retired civil servant (Executive Office and Commerce Department), big systems analyst, writer, presenter, consultant, author -- What If Boomers Can't Retire? How to Build Real Security, Not Phantom Wealth.

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We can't expect to govern well if we don't underst... by Thornton Parker on Friday, Mar 21, 2014 at 11:06:07 AM
You're promoting the Modern Money Theory fallacy ... by Derryl Hermanutz on Saturday, Mar 22, 2014 at 3:08:59 PM