When Man learned the benefits of trading goods, centers of commerce formed, public administration arose, and civilization commenced and progressed. The need for public goods such as roads and defence led to the establishment of government, which, in turn, sired an inveterate and immense problem that economics has failed to resolve down through the millennia. Many erroneously believe that Public Debt is the culprit in this that imperils a community. How wrong they are. The true threat lies in limitless government. To enjoy the full fruits and prosperity of existence Man must discover the means by which a society may restrict government to worthy and valued public expenditures. Such a means has never been found, but it does exist and its discoverer shall have the gratitude of all those inhabiting, thence, a heavenly and brave new world.
Government, having no funds or resources of its own, must commandeer them from others. Unfortunately, there is not presently nor has there ever been a measure with which to confirm that money, industriously earned and carefully accumulated by citizen and corporation, and mechanically seized by authorities, is ever directed to pursuits that bear calculated, salutary and profitable returns for a community and its resident citizens.
Taxation, as old as civilization, served as a partial barrier to reckless and wasteful public expenditure. Taxes, simply fines and penalties imposed upon a community’s inhabitants, were the primary means of raising funds for public expenditure until very recently. For centuries people held debt an evil and surplus a virtue. They commended the superintendents of public institutions when tax receipts ended the year in surplus, and cursed them when accounts brought a deficit. With public borrowing kept to a rigid minimum the revenues of taxation had to suffice for meeting the collective needs of society.
So confined, Government advisors and leaders learned quickly that excessive tax burdens, inflicting great pain upon the people, frequently stirred resentment and animosity. In the extremes of confiscation bloody revolts erupted and endured. Fresh memory of such explosive horrors served to constrain the frivolous spending habits of government officials.
Though this barrier aided in limiting public expenditures, Taxation bears flaws that cost a community dearly. Waste and corruption flourished amid curbed public expenditure. Some estimate 80% of public expenditures go to these twin evils in most modern societies, a huge and impoverishing loss of resources for the people of any nation. As the receipts of Taxation run counter to the public needs of communities tax revenues abound during economic expansion and recede with recession. Thus, public expenditure tends to soar with prosperity and retreat with hardship, robbing the public of a comforting shoulder in harsher times. Most harmful is the deterrent nature of such fines and penalties. Taxation deters one from doing what he normally would do were there no Taxation. The costs in lost economic activity are as incalculable as they are immense.
In the early 20th century a new principle rent the taboo against public borrowing. John Keynes, originally a mathematician, gained influence in sorting through the financial catastrophe that followed the end of WW1 and, subsequently, dominated economic thought during the devastating depression of the thirties. He absurdly blamed ‘lack of demand’ for a nation’s deflated economic state, and erroneously prescribed greater public expenditure through public borrowing, an easy remedy that heartened many, especially those enthused by a ubiquitous and beneficent state. Unfortunately, taxation conjoined with ever expanding borrowing left a legacy of government operating at 40 to 50% of GDP in many nations, spending well in excess of tax revenues in good times and bad.
Complementing the disaster was a significant deterioration in the value of the monetary unit, an unavoidable outcome of printing and unleashing vast sums of money without compensating production of valued goods and services. Some estimates presently put the value of the US dollar at 2% of what it bought in 1960, a fact unknown to most. By long manipulating and muting the official measure of inflation government covertly inflates away the public debt, and pushes residents into more onerous tax brackets and clandestinely imposed tax increases. It is difficult to goad Keynesian partisans into owning the truth and cost of their designedly devious and destructive undertakings.
Even the United States, so thoughtfully constituted and arrayed by the singularly valiant and intelligent efforts of its Founding Fathers and Framers, fell to the beguiling overtures of this seductive monster. In the last 90 years, growth in all levels of government has been unstoppable, rising from an enviable 10% of National Income in 1930 to above 40% at the turn of the century. Keynesian thought permitted encroaching government to spread the infection of greater dependency upon the weak and idle and of penalties and persecution upon the productive. The US Government leviathan, its innumerable arms and departments have become unaccountable to the people it supposedly serves.
We have since gone from bad to worse. If one thought Taxation used in conjunction with cheap money were the end of the most atrocious waste of resources on earth, a derived alternative has arrived to really set us on the Marxist path. In Keynesian money printing operations elevated interest rates compensated partially for the deterioration in the value of money. But in 2007, in the midst of a financial crisis, MMT, what I call Modern Marxist theory, appeared in many western nations and removed even this meager protection.
Keynesian practice had government sell bonds on financial markets to various entities and persons to raise funds for public expenditures. MMT instructs federal authorities to bypass financial markets and drop off its IOUs or bonds at the central bank. Certain wayward minds, especially those guiding central banks, find intelligence in this menacing and maniacal idea.
Pre-Covid, the US Federal Government was spending approximately $4 trillion per year. If the Federal Reserve enlarged its balance sheet by $4 trillion, the action would generate enough reserves at a 10% reserve requirement in one year to support the creation of an incredible $36 trillion in new loans. With the acute expansion of reserves the interest rate offered to savers to defer use of funds should decline to near zero or may turn negative. Currently, total bank loan book value in the US is roughly $17 trillion. It took 200+ years to get there. MMT geniuses wish to offer reserves to accommodate at least 2 times that figure in one year. Year 2 would bring another $4 trillion in reserves. With reserves exponentially enlarged banks never need bid for the carefully conserved funds of judicious savers and, accordingly, market interest rates should remain depressed or even negative indefinitely.
The financial system and economy would come to resemble that found in the old Soviet corpse where money floated about in abundance. There the majority engaged in worthless economic activity whilst a small fraction, perhaps 20% of workers, produced via obsolete equipment and methods needed goods of poor quality. Full employment it was, but only a few employed in productive purpose. A recipe of dearth, scarcity of supply amid immense demand, is what MMT offers to the US. For the past 12 years the Federal Reserve has conducted a partial MMT experiment with expectedly detrimental results. Public, household and corporate debt, asset prices, and inflation have soared with artificially depressed interest rates and poor returns for savers, insurance companies and pension funds.
Japan has employed this corrosive advice for 30 years, leaving that island a financial mess and in steep decline. After impressive growth post WW2 through to the 80’s, Japan experienced a severe recession from which it never recovered. The Bank of Japan and its partners commenced purchases of large amounts of government bonds in the late 80’s, flooding the markets with reserves and greatly depressing interest rates, all in an effort to combat the inevitable outcome of an artificially induced boom. Amid zero or negative interest rates, Japan has suffered 30 years of mal-investment. Firms grow rich from not investing in their businesses. Vast amounts of public debt underwrite projects of dubious value resulting in diminished returns, a shrinking economy, aging population, and low birth rate. Whatever happened to the economic miracle?
The Board of the ECB acted in similar fashion in 2007, flooding the financial markets with reserves as it purchased vast sums of bonds issued by member nations in order to clear imbalances. Today, above 25% of bonds issued by Euro governments are held by the ECB amid zero or negative market interest rates. A common currency is no bar to the ruinous impulses of central bank officials.
MMTers argue government in pursuit of full employment shall apply the economic brakes when inflation stirs, that government shall swiftly mute and squelch its destructive effects.
But has government ever proven itself as wise, prudent and agile as claimed? Have those occupying distant high office surveyed the economic landscape with as much proficiency and clarity as those nearer the action? Truly, government shall run amok as we all now see. Profligate government expenditure with unknown and unbridled facility shall devour the resources of a nation as the Soviet bureaucracy once proudly did for nearly 80 years. The Soviet Union, where bureaucrats imposed unworkable measures on the economy, property, people and society, is exemplary of the ugliness and ruthlessness of despotic minds divorced from reality.
Wanton government is the great menace to civilization. If the US Government continues to imitate the example of brutal, corrupt dictatorships in debauching the monetary unit, none would have much use for it. A multitude of ornate, government issued currency notes soon would decorate crumbling public roads like Venezuelan bolivars.
An economy is not about money. It’s about allocating finite resources to the best, most profitable uses. A nation survives and thrives because the economic system employed provides for its people. The signals for proper and worthy allocation of resources permitting deserved profits issue from free and unrestricted markets, not blind, awkward, monkish, arrogant and diseased bureaucracies. The means to this a glorious end is not concealed and remote, but present and glaringly obvious. Pick away at certain malconceptions in Public Finance and all shall see the great path. But that is another article.
