My previous post, “Reaffirming the American Covenant,” met with more skepticism than approval or disapproval. This is understandable, given the dysfunctional state of the United States government. A recent article in the Washington Post cites “one of several ongoing projects by political scientists that have registered a weakening of democratic values in the United States in recent years… that has accelerated precipitously under President Trump.” The study concludes that “Only 1 in 5 democracies that start down this path are able to reverse the damage before succumbing to full-blown autocracy.”
One of the major challenges in restoring democracy in the U.S. is the myth that we can’t afford the “new bill of rights and responsibilities” required to reaffirm the American Covenant. That it would simply be too costly to secure the equal rights of all to life, liberty, and the pursuit of happiness. Admittedly, I have proposed a bold agenda of political rights and government responsibilities, which is described in more detail in my previous post:
· Right to enough safe, appealing, and nutritious food
· Right to a safe and comfortable residence
· Right to clean air and water and a healthful environment
· Right to sufficient health care to restore and maintain health
· Right to sufficient education to participate fully in a democratic society
· Right to employment sufficient to provide a livable income
· Right to a minimum basic income for the elderly, disabled, and self-employed
· Right to protection from economic exploitation
These rights are already confirmed as government responsibilities by current government appropriations related to these purposes. However, if accepted as rights, the government will be responsible for ensuring “specific outcomes” in these areas, regardless of expenditures—rather than “specific appropriations,” which limit expenditures. Such programs are currently called “entitlements”—a term that has been denigrated, perhaps intentionally, to suggest special privileges or undeserved benefits. A more appropriate term is “mandatory” spending, which means a government obligation or responsibility. Interestingly, military spending is commonly called “mandatory,” while Social Security and Medicare are called “entitlements.” The basic question is “How can the government pay the economic costs of fulfilling an open-ended responsibility to secure these newly acknowledged rights equally for everyone?”
First, a responsibility to secure these rights does not imply a government responsibility to ensure that everyone has “as much and as good” food, housing, air, water, environment, health care, education, income and protection from exploitation as anyone else. The majority of the people in the U.S. have far more of these essentials than is necessary to participate fully in a society. As I pointed out in a previous post, anyone who has an opportunity to participate fully in society has an equal opportunity to pursue real happiness. Governments need not provide the economic essentials for those who have the innate ability and have been given an opportunity to secure these essentials without government assistance. The specific levels of government benefits required to fulfill these responsibilities must be determined through the political process, as it is for other rights. However, it is critical to our democracy that the government accept the responsibility of securing these “rights” as “mandates”—as open-ended responsibilities rather than discretionary budget allocations.
Second, and contrary to widespread misconception, the U.S. government has the ability to pay for any level of mandatory spending that is deemed necessary to fulfill its responsibilities. A popular myth is that “the government must manage its budget the way households or businesses manage their budgets.” While this is true of state and local government budgets, it is not true for the U.S. government’s federal budget. The federal government has the unique ability to create “new money” to cover its budget shortfalls. As a result, a “federal budget deficit” is very different from a household being unable to cover its expenses or a business operating at a loss. Also, the “national debt” is very different from debts of households or businesses.
The U.S. government can, and does, create as much money as needs to meet its financial obligations. Contrary to claims otherwise, the government doesn’t have to depend on collecting taxes or borrowing money to meet its financial needs. The federal government could also create enough money to pay off the national debt, if it chose to do so. Much of the national debt represents obligations the government owes to its self, for example, future payments of Social Security and Federal Retirement benefits. The only limits to the U.S. government securing the rights essential for life, liberty, and the pursuit of happiness is the productive capacity of the natural and human resource upon which the U.S. economy ultimately depends for its productive capacity.
The U.S. Treasury Department creates new money by simply crediting or adding deposits to its account at the Federal Reserve or FED. The FED is made up of 12 regional banks that collectively serve as the “nation’s central bank.’ The FED uses this new money to either purchase Treasury Bills (T-Bills) or to create new deposits that serve as reserves for commercial banks in the Federal Reserve System. Technically, T-Bills represents loans to the U.S. Treasury by the FED (or by other banks or commercial investors), which are added to the “national debt.” Since the new money the FED uses to purchase T-Bills is created by the Treasury, purchases of T-Bills by the FED are more accurately described as means of accounting for the new money that is created and made available for government spending. When the government spends the new money from its FED account, it puts the new money in circulation.
The FED can also use new money to create deposits in its affiliated commercial banks. This allows the commercial banks to create new money in addition to the initial deposits, by making bank loans that are deposited by borrowers, spent, and redeposited—over and over. Banks are only required to keep about $10 in reserve, or on deposit, for each $90 they loan out. This multiple lending and spending process can add as much as $1,000 of new money for each $100 in new reserves allocated by the FED. The resulting bank deposits are just as valuable as cash and are considered part of the money supply. As a result of this process, called factional reserve banking, the vast majority of new money is created and put in circulation by commercial banks rather than by the federal government.
Only real difference between government creating and spending new money in the public sector and commercial bank creating, lending, and spending new money in the private sector is whether public or private benefits result from the “first round” of spending. After the first round of government spending, the resulting deposits by spending recipients, the new loans made available by those deposits, and further new spending and redeposit activities all take place in the private sector of the economy.
The first round of government spending creates jobs in the public sector, just like first round spending in the private sector creates jobs. With the exception of the military, government spending probably creates more jobs than private sector spending, per dollar spent. After the first round, all additional jobs are created by lending and spending in the private sector. This first-round government "deficit spending" doesn’t “crowd out” investments in the private sector, but instead makes even more new money available to the private sector. Even after a fraction of each transaction is returned to the government as taxes, about 25% on average, each new dollar of government spending provides more than two dollars for private sector spending. This process is described in detail in a new book, The Deficit Myth, by economist Stephanie Kelton.
The government can also “destroy money,” or make money out of circulation, by reducing government spending with no offsetting reduction in the national debt. The government can also instruct the FED to destroy money through the commercial banking system by raising interest rates to reduce demand for loans, or more dramatically, by raising the reserve requirement for loans. The FED destroys money by tanking it out of circulation, when it “sells,” rather than buys, T-Bills or other government securities. It can also destroy money in the private sector and create money in the public sector by selling T-Bills to commercial banks or private investors to make money available for government spending. The government can also move money from the public sector to the private sector by reducing spending and instructing the FED to “buy” T-Bills to pay down the national debt.
The nation’s “foreign debt” is nothing more than an accounting of foreign money on deposit with the FED. The foreign debt increases whenever the FED sells Treasury securities to foreign governments, which takes U.S. dollars accumulated by foreign governments out of circulation and makes the money available to the U.S. government. Foreign governments buy Treasury securities to earn interest on their deposits. The interest on T-Bills and other securities returns a fraction of the money from back to foreign governments and private sector investors. Taxing and spending provide the government with means of removing money from specific individual and commercial sectors of the private economy to allow the government to create new money through spending in specific sectors of the public economy. Taxes are more important in tapping specific sources of funding to provide general and specific government benefits than in balancing the federal budget.
This is not an economic theory. It is simply the way the government creates money and regulates the amount of money in circulation. If the government puts too much new money in circulation, it will cause “inflation” or an increase in prices. There will be too few workers to hire, inadequate economic infrastructure, and insufficient raw materials and natural resources to add enough additional production of things to buy with the new money. As a result, instead of creating jobs and providing new benefits, prices of everything will simply go up. The results in “price inflation,” which if not managed carefully, can spiral out of control. Within these limits, the U.S. government can create enough money to meet any responsibility the American people are willing to give it.
The good news is that government spending to secure the “new bill of rights” would increase the productive capacity of the national economy. Nobel Prize economist, Amartya Sen, argues that “real human 'freedoms' such as political freedoms, economic facilities, social opportunities, transparency guarantees, and protective security” not only increase quality of life but also add to the productive capacity of economies. Sen also stresses the need to abolish 'unfreedoms', including poverty, undernourishment, poor economic opportunities, systematic social deprivation, neglect of public facilities, and intolerance." A society that is well fed and housed, lives in a clean and healthful environment, receives adequate health care, is well educated, is assured of a good paying job and a livable income in their old age is not only a happier society, but also a more economically productive society.
Sen’s work echoes the words of George Washington more than 200 years earlier: “There is no truth more thoroughly established, than that there exists in the economy and course of nature, an indissoluble union between virtue and happiness, between duty and advantage, between the genuine maxims of an honest and magnanimous policy, and the solid rewards of public prosperity and felicity.” When everyone has the freedom to participate fully in society, it will have more than enough economic capacity to secure liberty and justice for all.
The economic capacity of the earth’s resources is limited but is more than sufficient to meet the economic essentials for the pursuit of happiness by all. Once the economic essentials are met, there are no limits to the ability of people to improve their happiness and well-being through more positive relationships and a greater sense of purpose and meaning in life. As societies recognize the potential rewards of caring and sharing, they willingly accept their responsibility to care for the earth and to sustain its ability to meet the needs of future generations. Caring and sharing are not sacrifices; they are virtues that make our lives better.
Ultimately, it is not a question of whether we can afford a new bill of rights and responsibilities to reaffirm the American Covenant. We simply can’t afford to do otherwise. The truth is self-evident. We are all endowed by our Creator with the unalienable and equal rights to life, liberty, and the pursuit of happiness. Our democracy is slipping away. It would not be a sacrifice for any, but a privilege for all, to join the nation's Founders in a “pledge to each other our Lives, our Fortunes and our sacred Honor” to secure the blessings of liberty and justice for all--for ourselves and our posterity.
John Ikerd