Question: Should governments spend only what they collect in taxes?
Publication Month: June 2011
“Common sense” seems to tell us that just as we as individuals get in trouble if we spend more than we take it, so it must be with governments. Many believe that the ever growing federal debt is so large that our descendants will be in very serious difficulty because of it. As I write, people with this understandable concern are threatening to prevent the government from increasing its debt.
Those who believe in balanced budgets differ with respect to taxes. The Republican Party now makes an absolute principle of keeping taxes, especially on corporations and the rich low. This, of course, requires massive reduction in government expenditures. This will stress the social fabric perhaps irreparably. The Democrats are in general willing to raise more in taxes to maintain programs that are important for the poor and the middle class, but in the current climate, nationally and in most states, programs in education, health, and welfare are being slashed. Only military and security budgets are sacrosanct.
The problem would be eased if people understood money and finance better. The reality is that in a growth-oriented economy it is acceptable and even good for government to spend more than it receives. In fact, if it does not do so, our nation will go into a serious recession. Let me try to explain this.
Most of what we call money exists only electronically as loans or credit. The ability of individuals and businesses to borrow money is a fundamental part of our economic system. If the total amount of money remains constant, then the principle of debts can be repaid. But if there is no increase in the supply of money, there will be none for paying interest. Of course, interest must still be paid; so either there will be bankruptcies or there will be less money for other purposes. Banks will be less willing to lend. Interest rates will rise. In other words, to maintain what we have considered a healthy economy, the money supply has to grow. The government increases the money supply by borrowing more than it repays. As long as the economy is growing and the amount borrowed by the government is not excessive, this is not inflationary.
This does not mean that the growing debt is without problems. Although there is no expectation that the debt will be paid, there is no higher priority for the national budget than payment of interest. If interest payments grow faster than the economy, this can be unsustainable.
Fortunately, the U.S. government does not pay interest on what it borrows from the Federal Reserve. Unfortunately, in recent years a larger and larger part of annual borrowing is from other countries. Payment of interest on these debts worsens the balance of trade.
The Federal Reserve is a privately-owned central bank. If it were nationalized, the government would be free to act in its own interest instead of that of the great financial institutions that own the Fed. It could then simply spend money into existence. Fixing the nation’s decaying infrastructure could be done without fear of inflation or adding to interest payments. Indeed, the nation could buy back its debts. Dennis Kucinic has introduced legislation to this end, but we know that Congress is unlikely to follow his lead.
Control of our government by the financial sector is too complete to allow serious discussion of nationalizing the Federal Reserve. Currently the Wall Street banks can cause enormous crises and benefit from them at the expense of the rest of the nation. Neither Congress nor the administration dares to object.
Control by banks is less tight at the state level. State officials are not as dependent on Wall Street to finance their elections. Hence, discussion of creating state banks is beginning. In a dozen state legislatures, bills are being discussed to take this action. Since North Dakota has a state bank, there is no question about practical possibility or constitutionality. Since North Dakota is not experiencing the fiscal crises that affect so many other states, there is little question of the desirability of states having banks. Of course, opposition to state banks will be well financed and highly organized once other states seriously consider following the example of North Dakota.
Do these reflections on public finance have anything to do with process thought? My first exposure to finance and money creation was from a Whiteheadian economist, Herman Daly. So to that extent there is a connection for me. But my other teachers in this field, Stephen Zarlenga and Ellen Brown, are not process thinkers. Fortunately, the facts can be studied by anyone who wishes, and they can be convincing without regard to one’s metaphysics.
Still, there are connections. Currently many Americans and also many legislators assume that what would be bad for individuals must be equally bad for the nation. There is real danger that at some point Congress will refuse to raise the debt ceiling. Process thought is one of the intellectual movements that teach us that societies have properties and characteristics that their individual members lack. Accordingly, it opens us to learn about these properties, and thus about the debt of a nation, in its own terms, rather than simply assuming that “common sense,” based on individual experience, suffices.
Process thought also encourages us to think historically. To understand what is now going on requires knowledge of how it came to be this way. We see the need to know the history of money, for example. This sets us against the deep-seated habits of mind encouraged by the general understanding of economics among economists. Economics since the eighteenth century has minimized history in favor of “laws” that are taken to be analogous to those of physics. This a-historical perspective has led economists to pay little attention to the changes involved when finance overwhelmed industry. While the public still looks to economists for guidance in matters of finance, few of them have given to the issues of finance the separate and distinct attention that these require.
Zarlenga and Brown are not economists. Once again, process thought prepares us to accept guidance from those not recognized as authorities within the discipline. We have learned that the assumptions of most academic disciplines were formed in the seventeenth century. Those fully socialized into these disciplines are often not our best guides.
Obviously, we will not deduce from process metaphysics the answer to our question about government spending. But if the glasses we wear are informed by process thought, we will be more open to the work of those who can guide us now. Openness to the historical facts is badly needed today.