What I am going to imagine here is an argument that a progressive politician (for example, someone associated with a new Biden administration) could make in support of direct government spending to address a serious challenge to our collective well-being. By “direct” government spending I imply spending which is not “paid for” by garnering either the present wages and profits of private commerce (taxes) or the future wages and profits of that commerce (borrowing). Federal spending, in other words, that is paid for simply by the “operations” of modern fiat money. I imagine this political leader writing an opinion essay and then following it up with talking points made over and over—not just to address the crisis in question, but to address every challenge thereafter that requires new federal spending.
“Fiscalism,” as I will use the term, is the sovereign government’s spending budget to provide for the well-being of collective society where that well-being is not or cannot be addressed by profit-making enterprise. This is well understood. It is also well understood that fiscalism must somehow be funded, and that doing so in a “sound” way is what we think of as “responsible” fiscalism. Setting aside for the moment what we imagine “soundness” to mean in this context, the question we must ask ourselves—now that we are confronted with new and rapidly growing challenges to our collective well-being—is this: When what we imagine as “sound” fiscalism prevents us from addressing a major challenge to our collective good, can it still be considered, in any meaningful sense of the word, “responsible”? And, if it is not, is there another understanding of “soundness,” as applied to fiscalism, that can serve us better?
As a quick example, let’s take this year’s unprecedented, climate-change induced wildfires on the U.S. west coast. That these fires constitute a serious challenge to our collective well-being should be evident: In addition to threatening large swaths of the American population, smoke and pollutants from the fires have reached all the way to America’s east coast, while the cost and availability of forest related building materials have sky-rocketed, increasing housing costs across the nation. What is obvious from even a casual observation is that the forest management and firefighting resources which have been hired and mobilized to confront this challenge are now, in the face of weather patterns induced by the climate crisis, woefully inadequate. The capacity of burned out communities to rebuild are also being stretched far beyond the limits of local resources.
I now ask: Do we see “responsible” fiscalism stepping up to do everything possible to put the fires out? Is “sound” fiscalism stepping up to do everything possible to manage the forests on both an emergency and long-range basis to prevent them from bursting, again and again, into uncontrollable conflagrations? Clearly not. What we have instead is finger-pointing, handwringing, and a numb fatalism that seems to have enveloped us like the wildfire smoke itself. What we now have in America is “dysfunctional” fiscalism.
What should be happening—if “fiscalism” is to live up to its stated mission—is the hiring, training, and equipping of a truly formidable “National Guard of the Forest”: However many firefighters it takes, however many 747 tanker jets must be built, maintained at-the-ready, and operated to contain a wildfire within 24 hours of its start-up. This “whatever-it-takes” approach is what we should think of as “functional” fiscalism. However many “forest shepherds” must be paid living wages to tend, nurture, and control-burn the forest ecosystems on a daily basis—this is the functional fiscalism that can and should be funded by the sovereign government. However many dwellings and communities need to be relocated and rebuilt in enclaves protected by fire-breaks and escape corridors, however many high-voltage transmission lines need to be replaced with localized micro-grids, this is the functional fiscalism that ought to be brought to bear. Functional fiscalism is concerned, above all else, with what actually needs to be accomplished to protect the collective well-being—and then steps up to make it happen.
Given the dire circumstances presented to us in the foreseeable future, there is only one reason not to man and equip this formidable National Guard of the Forest—that is if the labor, machinery, technology, and know-how necessary for the task are unavailable for hire. But our dysfunctional fiscalism—guided by political leaders and opinion generating economic “think tanks”—does not even investigate this question of availability of resources because it begins with the misguided assumption that even if the labor, machinery, technology, and know-how are available, the “money” cannot be found to employ them. Congress cannot imagine raising taxes to obtain the new spending dollars; the think-tanks cannot imagine obtaining them by borrowing an even larger percentage of private enterprise’s capital. This calculus—that fiscalism’s money must come from the wages and profits of private commerce—lies at the heart of dysfunctional fiscalism’s failure to address our most urgent challenges.
The irony of this dysfunctional calculus is that if firefighting and preventing wildfires (to continue with our example) were profit-making enterprises, our Federal Reserve System would create all the money necessary to mobilize the necessary manpower and technology to do the work. Profit-making business plans would be submitted to banks, banks would issue bank-dollar loans, the “dollars” would be paid to firefighters, air-tanker manufacturers, and “forest shepherds,”—and the Federal Reserve would issue Reserves, as necessary, to honor the claims those bank-dollars make on the Reserve Accounts of the lending banks. So long as profits are being generated, the “money” is created by the effortless process of keystrokes on electronic balance sheets. So long as everything balances at the end of every business day, so long as the FED holds “acceptable” collateral for each new Reserve it issues, so long as the bank loans are repaid with interest there is no complaint or worry or handwringing about a “lack of money.” This is the way our fiat money system operates, as a matter of course, to fund the efforts profit-making enterprise deems necessary for its purposes.
Deep within this irony we should be hearing a voice telling us there is something profound we’re misunderstanding if, as we stand watching the wildfires blaze across our landscapes and communities and vineyards, we feel helpless simply because we cannot imagine how to make profits by putting the fires out or preventing them—and, short of profits, we cannot imagine how to pay ourselves, whatever it takes, to do the job anyway. In other words, the voice is telling us, there is something deeply wrong, something existentially dysfunctional with our habitual perceptions about money itself. And how can it be that something “existentially dysfunctional” could ever be regarded, in any meaningful sense of the words, as “sound” or “responsible”?
But what could our misunderstanding be?
Again, our clues lie in observing how the U.S. Treasury and the Federal Reserve (America’s central bank, the FED) actually operate to produce and manage the sovereign fiat money system all of us—businesses, households, corporations, and the sovereign government itself—use in our everyday transactions. It is worth the effort to see these operations and understand them before we make assumptions about what they can and cannot do for us.
There is a famous economic trope that says anyone can issue “money,” the trick is getting someone else to accept it as payment for something. This “trick” lies at the heart of what modern fiat money is, and how it functions. Let’s begin with a quick snapshot of the foundational structure:
- Sovereign governments assume the right to levy taxes on their citizens—taxes which must be paid on pain of imprisonment.
- What is important to note is that the government gets to decide what it will accept as a tax payment. And what it decides to accept is the “money” it issues by fiat—by official declaration—hence, its “fiat money.”
- Citizens, and the businesses they own, are then put in the position of having to earn the fiat money the government issues in order to pay their taxes—and, by virtue of this need, the fiat money naturally evolves to become the currency of commerce within the sovereign’s jurisdiction.
What is crucial to see in this fiat money system is that the reason the government collects the taxes is not to acquire money for its own spending, but to enforce the value of the fiat money it issues. Nevertheless, in the act of enforcing the value of its fiat money, the government acquires some portion of what has been issued. If you did not clearly understand what was happening, you could easily make the mistake of imagining the collected taxes were the government’s “revenue”—the money source for its spending. This mistake—this misunderstanding—is reinforced by the fact that the government (since it has the tax-collected fiat money in its account) does spend it to buy some of the goods and services required for the collective well-being. In other words, while it certainly “looks” like the government taxes in order to spend, the first misunderstanding of dysfunctional fiscalism is to believe this is an accurate perception—that after it has spent its “tax revenues” the government is “broke.”
As the historical record makes abundantly clear the tax dollars the government collects—in order to enforce the value of its fiat money—are nowhere close to being adequate to pay for all the goods and services the government needs to buy. In fact, the historical record shows us that, over its lifetime, the U.S. government has spent $27 trillion (and counting) more to support the collective well-being than it has collected in taxes. (This ever-growing number is projected on a digital display on Sixth Avenue in New York City.) The second misunderstanding of dysfunctional fiscalism lies in how we believe the government has acquired and spent those additional 27 trillion fiat dollars—and what, consequently, we believe those additional fiat dollars represent.
If we observe the operations which deposit the additional fiat money in the Treasury’s spending account, we discover they are, in fact, simply a variation on the operations—which we have already touched upon—by which the government’s fiat money is made available for the use of profit-making commerce. Let’s revisit this, now, in a bit more detail.
The U.S. Federal Reserve (the FED) is exclusively given the task of issuing America’s sovereign fiat money. It issues the fiat money in exchange for collateral—something the FED itself decides is of equal value to the fiat money it issues. If you want to start a bank, you give the FED some collateral which it deems acceptable and, in exchange, the FED will deposit “Reserves” (the real U.S. fiat money) in your bank’s new Reserve Account at the central bank. You are now in the banking business, which means to say you leverage those Reserves by issuing and loaning out “bank-dollars” which are claims on your Reserves. The bank-dollars you (and other banks) issue and loan out become the “money” used by businesses and households in everyday commerce. At the end of every business day, those bank-dollars make their claims on the Reserve Accounts at the FED, and the FED issues new Reserves as necessary (in exchange for collateral) to ensure there are enough Reserves to meet all the claims.
These operations of commerce generate profits and wages, and the federal government—to enforce the value of its fiat money—garners some of those profits and wages as taxes. The taxes are paid initially with bank-dollars—which then make their claims on the Reserve Accounts at the FED, causing Reserves to be debited from the banks’ Reserve Accounts and credited to the Treasury’s spending account. The taxes are thus paid (as demanded by the sovereign) with the government’s fiat money, and the Treasury (as an incidental result) has some fiat money it can now use to buy goods and services for the collective well-being.
As we have already observed, however, the Treasury needs to spend many more fiat dollars than it has incidentally collected in taxes. To obtain its additional spending money for the not-profit-making goods and services needed for the collective good, the Treasury initiates, in coordination with the FED, a variation on the Federal Reserve operations we have just observed:
- The Treasury issues treasury bonds which are certificates—backed by the full faith and power of the sovereign government—of future fiat dollars that will be issued (at a particular point down the road) by the Federal Reserve in exchange for the bond.
- The treasury bond thus becomes a collateral which the Federal Reserve will accept in exchange for new Reserves—either immediately (the FED will always accept a U.S. treasury bond as collateral) or in the future when the bond matures.
- For reasons which are inconsequential to our purpose, the Treasury is not allowed to exchange its treasury bonds directly with the FED for Reserves. Instead, it exchanges them first for existing Reserves in the banking system.
- Owners of existing Reserves (banks) or bank-dollar claims on those Reserves (individuals and businesses) are motivated to make this exchange because the Treasury trades its bonds at a discount—giving away more future dollars than it asks in exchange.
- If the Treasury’s spending account requires more Reserves than are voluntarily available in the banking system, the FED initiates a special operation whereby:
- It issues new Reserves and trades them to certain banks in its system for collateral.
- The banks then trade the new Reserves to the Treasury in exchange for bonds.
- Next, the banks trade the bonds to the FED for the collateral first posted.
- The FED now holds the treasury bonds on its balance sheet, and the Treasury holds the new Reserves in its spending account.
- The net result is exactly the same as if the Treasury had traded its bonds directly to the FED in exchange for new Reserves.
These, then, are the coordinated operations of the U.S. Treasury and the U.S. Federal Reserve which deposit fiat money in the Treasury’s spending account over and above what it has incidentally collected in taxes. These are the additional fiat dollars the federal government will use to buy the not-profit-making goods and services required to support the collective well-being. Goods and services like, for example, the labor, machinery, technology, and know-how necessary to establish and mobilize a National Guard of the Forest.
I hope you have had the patience to follow the description of these fiat money operations because, if you have, you will clearly see how and why we can overcome our dysfunctional fiscalism—how and why we can, in fact, begin to address the serious, not-profit-making challenges we face as a collective society.
First, the operations of our newly activated “functional” fiscalism will not require the government to collect additional taxes from the wages and profits of private commerce. Federal taxes remain, first and foremost, the means of enforcing the value of the sovereign’s fiat money. (Secondarily, taxes also create strategic incentives and disincentives in private commerce—discouraging smoking, for example, or encouraging the use of electric vehicles.) Modern fiat money systems require sovereign taxes—but the efforts of functional fiscalism are never constrained by (and logically have no relation to) the level of tax revenues the government collects. To withhold a needed effort for the collective well-being because of an imagined inadequacy of tax revenues in the Treasury’s spending account is, on its face, an absurd and irresponsible position.
Second, the operations of functional fiscalism do not require the federal government to “borrow” fiat money from the capital of private commerce. The Reserves which private commerce voluntarily trades for the treasury bonds are replaced with future Reserves which the FED, as a matter of course, issues—either when it receives the bond as collateral, or when the bond matures. The $27 trillion “national debt” we are told we must repay with future taxes, then, is not a “debt” at all. It is not fiat money that is owed to anybody, nor will it ever have to be “repaid” to anybody. It is simply a measurement of the future fiat dollars the Treasury has issued and spent for the collective good. To withhold federal spending in support of the collective well-being because we imagine it will create an unsustainable “national debt” is, therefore, a profound mistake.
Third, there is no limit to the amount of Reserves that can be created by the operations of functional fiscalism. The limiting factor in buying goods and services for the collective well-being is not how much fiat money the government must spend to achieve a given task or goal; the limiting factor is the availability of real resources for the government to buy—labor, technology, materiel, and know-how. If these real resources are, in fact, available, it is the height of folly to leave them idle because we believe the government is “broke.”
We can now conclude by returning to our earlier question: Is there another understanding of the terms “responsible” and “sound” which we can apply to America’s fiscalism? What is “sound” about watching our forests burn uncontrollably while we incorrectly imagine we haven’t enough money to employ the resources and know-how to prevent it? What is “responsible” about watching our young-adult citizens struggle to get a higher education or professional training, while we incorrectly imagine the money does not exist pay schools and teachers to do the work of teaching them? What is “sound” about a national healthcare strategy that puts millions of American citizens on the threshold of personal bankruptcy—or, worse, on the threshold of chronic illness and disability—while we incorrectly imagine that paying for their healthcare will bankrupt the sovereign government?
I could go on, but I hope the point has been made: The term “sound,” when applied to the fiscalism of sovereign fiat money, has nothing to do with balancing budgets with tax revenues—instead, it has everything to do with employing best-practices to actually meet the challenges we face as a collective society. “Responsible” fiscalism has everything to do with paying ourselves whatever-it-takes—whenever profit-making commerce will not, or cannot, step up to the task—to employ available resources to address the chronic and emergent challenges of our time. What is really “sound” and “responsible,” in other words, is a national policy of functional fiscalism.
- Why do we imagine it is “natural” for the operations of sovereign fiat money to issue new dollars, as necessary, for the use of profit-making commerce—but that it is “unnatural” or even “dangerous” for those same operations to issue new dollars for the not-profit-making enterprise that supports the collective well-being?
- Why are the accomplishments of profit-making endeavors deemed more worthy of our money-creating efforts than the not-profit-making endeavors necessary for our collective good?
- What is the difference between the FED issuing new fiat money to a bank’s Reserve account, in exchange for the collateral of a treasury bond owned by the bank—and the FED issuing new fiat money in exchange for a new treasury bond issued by the U.S. Treasury?
- How can it be deemed “responsible” for a sovereign government to keep available resources—which could be mobilized against serious challenges to the well-being of its collective society—sitting idle and unused for a lack of fiat money to employ them?
- Why do we put a “ceiling” on the issuance of fiat money for not-profit-making public enterprises—but place no “ceiling” on the issuance of fiat money for profit-making private enterprise? Why, in other words, do we put limits on what public enterprise can undertake to accomplish for the collective well-being—but no limits on what private enterprise can undertake for profit?
- “Sound” fiscalism is not about weighing the fiat dollars the government can obtain through taxes against the fiat dollars it needs to spend for the collective good. “Sound” fiscalism, instead, is about evaluating what resources are available to be mobilized for the collective well-being—and then allowing the operations of sovereign fiat money to generate the currency necessary to put those resources to work.