Chances are, most of what you’ve learned about taxes and the economy is wrong. In fact, the key principles at work in our economic system are very different from what we’re taught.
If you find you’re one of those who’s been misled, it’s not your fault. A system such as ours – where eight individuals control as much wealth as half of all humanity – can only be maintained with force and deception. As the industrialist Henry Ford is said to have opined, “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
It’s commonly believed that:
• Today’s money has intrinsic value. (It doesn’t.)
• Taxes fund government spending. (They don’t.)
• Automation inevitably threatens jobs. (It doesn’t have to.)
• Federal budget deficits must saddle future generations with debt. (Not so.)
In fact, to fund needed social programs – like free national healthcare, free education, jobs for all, a reduced work week with no reduction in pay, cleaning up the environment, rebuilding infrastructure, converting the economy from fossil fuels to renewables, and more – the federal government could simply print more money. Wait a minute, you say, it can’t be as simple as that! But read on. The enormity of the deception promoted by those at the top is that funding human needs really is that simple.
One of the biggest misdirections of all time is expressed in the well-known aphorism: “Money doesn’t grow on trees.” While it’s true that wealth doesn’t grow on trees, money and wealth are not the same thing. Money itself is available in whatever quantity society needs.
For What It’s Worth
What makes something valuable is the labor and raw materials that go into producing it. Something can be very useful – such as the air we breathe, for example – but if no labor is required to produce it, it can’t be bought or sold. (The very few exceptions for air, such as devices to inflate tires, and oxygen bars only serve to underscore the general rule.) Once you realize that the machines and raw materials that go into the production of new items were themselves created/extracted/refined with human labor, it’s clear that the intrinsic value of any class of items for sale is fundamentally reducible to the human labor it takes to produce them. Lots of things provided by nature – air, water, sunlight, fertile soil – are very useful, but only items that require human labor to produce have “value” in the sense that they can be bought and sold for a price.
Monopoly Money
Historically, labor of one kind was exchanged for an equivalent amount of labor of another kind. So, if a peasant needed to have a horse shod, he/she would be required to provide the raw materials to the blacksmith and work the smith’s fields for the time it took to shoe the horse. This labor-for-labor exchange could be awkward and limiting, so a universal equivalent in the form of money was invented. The earliest forms of money were items that had real intrinsic value – cattle, rare shells, precious metals, etc. This worked because the value assigned to these early forms of money was linked to the labor required to produce or acquire the currency itself.
But you can only carry so many cows in your pocket. Eventually symbolic, or fiduciary, currency was invented. While this paper money was initially linked to a promise of exchange for a certain amount of precious metal, in time that connection was dropped. Today, US dollars and the money of most other nations is purely symbolic, fiat currency. A dollar is worth what everyone believes it to be worth. The only difference between US dollars and Monopoly money is that the former is officially sanctioned by the US government and the latter is not.
Half a Paycheck
Humans are productive creatures. Since the invention of agriculture some twelve thousand years ago, the average person produces more value in a working day then they alone could possibly consume in that time. Due to an explosive growth in productivity, it takes only two hours of work today to produce the amount of wealth it took ten hours to produce in 1947. Today, after four hours of effort, a typical worker has produced enough value to cover her own salary. The rest of the day the worker produces wealth that he or she never sees. The capitalists keep this surplus and call it profit.
Wealth Creators
So, contrary to the lie promoted by the super-rich, the true wealth creators are working people (the 99%), not bosses, investors, bankers or hedge fund managers. Like the slave masters, feudal lords, kings and queens that preceded them, the 1% today are parasites who produce nothing but live off the wealth produced by the rest of us. A typical person works for a wage or a salary that compensates them for, at most, half of the value their labor creates. Ever since humans could produce more in a day than they could consume, our history can be understood as little more than the struggle over who controls the monumental surplus wealth produced by the 99%.
This has some important implications.
If money has no intrinsic value and the labor of everyday working people is the engine that produces wealth, what is money for? Money is the lubricant that keeps the engine of today’s economy going. Money is to the economy what a catalyst is to a chemical reaction. Money facilitates exchange and allows us to transcend the barter system: it allows anyone to exchange one thing of value for another thing of value.
Today, new money can be generated physically, by printing additional paper, or electronically, when the government or a private bank issues a new loan. While banks as well as the Federal Reserve can issue loans and thus create new dollars, the money supply is controlled in various ways at the federal level. (Throughout, we use the shorthand “print new money” to refer to the creation of both physical and electronic dollars.)
Monetary policy determines the amount of money in circulation and the points at which money is injected into or removed from the economy. Money might be added to the economy to expand existing programs or launch new ones. Money might be removed from the economy to control inflation or to bias a particular policy choice as, for example, when a heavy tax is imposed on the wealthiest individuals to counter economic inequality.
Taxes Schmaxes
While taxes can be used to influence policy, they don’t fund federal spending. This may seem counterintuitive at first, but it’s obvious when you think it through. When the very first tax was collected, where did people get the money to pay it? Since the federal government controls the printing of money, it’s inescapable that the government had to first distribute money before it could be collected in taxes. In this chicken-and-egg problem, there is no ambiguity as to which came first. Government spending has to precede any tax collection! This, of course, is the opposite of what we’re told. We’re told by Democrats and Republicans alike, even by social liberals like Bernie Sanders and Alexandria Ocasio-Cortez, that the federal government can only spend what it has already taken in; that launching new programs, like enhanced Medicare for All or free college education, requires funding from new taxes or the reallocation of scarce resources from other programs. This is a lie. All we need to do to fund these and other useful things is print more money.
This is exactly how our military is funded. Though it benefits primarily the military-industrial complex and the top 1%, the military budget is increased every year without raising any new taxes to cover it. They just print more money. The military budget was increased by $82 billion for 2019 over 2017. At the same time, taxes were cut by $1.5 trillion, chiefly benefiting corporations and the rich.
Franklin Delano Roosevelt understood all of this. When his administration passed the original Social Security legislation, it included a new payroll tax – a paycheck deduction working people are all too familiar with today. But when FDR was challenged by advisor Luther Gulick as to the necessity for the tax, he had this to say,
“I guess you’re right on the economics. They are politics all the way through. We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program. Those taxes aren’t a matter of economics, they’re straight politics.”
Roosevelt is admitting that the payroll tax isn’t needed to pay for Social Security. Tying it to the bill was a purely political maneuver.
In a remarkable 1946 article, Beardsley Ruml, then chairman of the Federal Reserve Bank of New York, put it like this (emphasis added):
“The necessity for a government to tax in order to maintain both its independence and its solvency is true for state and local governments, but it is not true for a national government…
“The United States is a national state which has a central banking system, the Federal Reserve System, and whose currency, for domestic purposes, is not convertible into any commodity. It follows that our Federal Government has final freedom from the money market in meeting its financial requirements. Accordingly, the inevitable social and economic consequences of any and all taxes have now become the prime consideration in the imposition of taxes. In general, it may be said that since all taxes have consequences of a social and economic character, the government should look to these consequences in formulating its tax policy. All federal taxes must meet the test of public policy and practical effect. The public purpose which is served should never be obscured in a tax program under the mask of raising revenue.”
Since taxes don’t fund federal spending, and since wages and salaries working people receive represent only a portion of the full value their labor produces, no tax on working people can be justified economically or morally. All taxes on average working people – from income and payroll taxes, to sales and property tax – can and should be abolished. These taxes aren’t needed to fund federal spending. As it stands, taxes on working people only serve to exacerbate economic inequality by siphoning a greater portion of the wealth produced by working people up to those at the top.
What about taxes at the city and state level? Cities and states can’t print money to cover needed programs but, here too, taxes on working people are neither justified nor necessary. Many of the programs now considered the responsibility of state and local governments could be – and in the past have been – funded by the federal government. This includes programs for health, education, transportation, infrastructure, parks, recreation and more. Limiting federal revenue sharing with state and local governments is a policy decision, not an economic necessity. As a report by the Congressional Research Service shows, revenue sharing has remained essentially flat since the 1970s despite a steady increase in productivity and national wealth.
The Real Budget
So, what ultimately determines the public programs we can afford to fund? What are the practical limits to public spending? Money isn’t the limiting factor, because the government can generate as much money as needed whenever it’s needed. The real limiting factors are labor and natural resources. These are the things we really need to budget.
There are only so many working age adults and only so many hours in the day. Ultimately, we can undertake as many programs and projects as we have labor and resources to cover. We’ve already seen that each working person produces more value than they get paid. So, it follows that everyone employed in socially useful work increases society’s overall wealth. And if there is more work to be done than people to do it, we can always encourage immigration. Like everyone else, immigrant workers employed on socially useful projects produce more wealth than they themselves could possibly consume.
Like any other budget, the allocation of labor ought to prioritize those jobs and programs that society needs and values most. Where resources are limited, less crucial applications should take a back seat to programs that most benefit the needs and welfare of the majority. And how do we pay for all these programs, materials, supplies and labor? Print money.
We can also free up lots of labor by no longer squandering it on things like advertising, war and the military. More than $230 billion is spent in the US each year to convince us to buy things we neither need nor want. More than $700 billion is allocated for war spending in 2019.
What About Inflation?
Printing money to fund socially useful programs is not inflationary. When available labor is applied to socially useful projects, it generates new wealth. The money added to the economy to fund these projects is counterbalanced by the new value created.
The amount of money needed to be circulating in the economy is affected by the rate money changes hands (velocity of currency) and the total wealth/size of the economy. Still, it’s difficult to get monetary policy exactly right. What if too many dollars are added to the economy despite the best oversight and policy intentions? Simple. Extract some money from the economy with taxes. But not just any taxes. As we have seen, the only just taxes are those that reinforce worthy political policy, such as taxing the wealthiest to reduce income inequality.
Jobs for All
Once you understand that socially useful labor increases society’s overall wealth, that any untapped labor could be applied to a long list of needed projects and improvements, and that employing this untapped labor in useful endeavors could be funded by simply printing money, it becomes clear that unemployment is completely unnecessary. There is no material reason why we could not guarantee a good paying job to everyone.
If, by some happenstance, every needed commodity was already being produced; if every product and service necessary for the complete, universal realization of life, liberty and the pursuit of happiness was taken care of; and yet, there were still some people without work, we could simply reduce the work week to share the available work among all. Reducing the work week to thirty hours without any reduction in pay – or 30-for-40 as it’s sometimes called – not only guarantees useful, well-paid employment for all, it also allows us to reduce the frenetic pace of work as automation increases.
Of course, while there is no material reason that prevents all of this from being possible, there are political obstacles. Capitalist profits would take a hit if 30-for-40 were implemented, and full employment would strengthen the position of working people vis-à-vis the employer class. In the end, we will have to decide which is more important: the right of capitalists to make obscene profits, or the right of the majority to lead productive and fulfilling lives.
Federal Debt Scam
But doesn’t the federal government have to borrow money in order to fund budget outlays? No, it doesn’t. Elaborate means are used today to make it appear that the government must rely on funding from outside sources rather than simply printing its own money. Our government has outsourced this crucial function to the Federal Reserve. Created in 1913, ostensibly to rationalize currency nationally, the Federal Reserve is a gift to the big banks and the richest of the rich. While the U.S. government could generate interest-free money whenever it wants, the oligarchs controlling our government have instead privatized this function, handing it off to a consortium of for-profit banks. These banks add money to the economy by issuing loans, and then charge fees and interest to the government. It’s a classic sinecure and wealth transfer scheme. The effortless task of adding numbers to a ledger to create money has been handed off to powerbrokers in the private sector. This enriches the powerful at the expense of the public, with no benefit to the public for the expense incurred. The whole setup makes as much sense as paying a private company to pump air into the atmosphere for us to breathe.
Those at the top profit from this arrangement in multiple ways. In addition to overt wealth transfer and allowing private banks to make public policy decisions, there is deliberate obfuscation of the financial system. The simplicity of government funding and printing money is hidden behind layers of administration, debt obligation and bureaucratic misdirection. The intent is to hide from the public the true power and straightforwardness of public financing.
Harvard economist John Kenneth Galbraith put it this way,
“The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple the mind is repelled. With something so important, a deeper mystery seems only decent.”
The Bottom Line
The principle that a country like the U.S. can spend money that it hasn’t collected in taxes is known as Modern Monetary Theory. You can read lots more about MMT here and here and here.
What this all adds up to is that money is no object. The federal government could print all the money required to finance any needed projects and priorities. Our ability to implement new programs and improve existing ones is limited only by the materials and labor available for the task. Every person able to work could be productively employed at union-scale wages. To guarantee jobs for all, we could reduce the workweek to thirty hours (or less) with no reduction in pay. We could free up mountains of labor and resources by eliminating wasteful, unproductive pursuits, like advertising and the war machine. We could instantly eliminate the federal deficit with the stroke of a pen or a few computer keystrokes, moving numbers from one account to another and simply printing more money. Spoiler alert: There are some who might be hurt by this process, but it’s not me or you or most of the people we know; it’s those at the very top of the economic pyramid.
The next time a politician says we have to balance the federal budget or insists that new taxes or budget cuts are required to pay for healthcare, environmental cleanup, education or any other social improvements, understand that either they’re a fool or they’re playing you for one.
And by the way, the economic concepts described herein are a key part of what socialists stand for. Supporters of capitalism will offer any number of phony excuses why these ideas are not practical in the here-and-now. A great way to tell real socialists from pretenders is to ask where they stand on these economic questions. Some well-known figures today – Bernie Sanders and Alexandria Ocasio-Cortez among them – would score poorly on such a test.
Notes
1. The Finance, Insurance and Real Estate (FIRE) sector is an exception. Until 1993, most measures of GDP excluded this sector. Today, financial services are sold for a price even though the FIRE sector extracts rather than adds value to the economy. Also note that the price for which something sells and its intrinsic value are not the same thing. Land is provided by nature but can be sold for a price because its availability is naturally and artificially limited. But barring exceptional circumstances (such as shortages and monopoly price fixing), the price of a commodity will fluctuate about its value.
2. The individual Eurozone countries, lacking the ability to issue additional national currency, are an important exception to this rule.
3. For federal revenue sharing, see the GDP column of Table 3 here. For productivity, see here.
4. This is redolent of the practice that allows large corporations to extract fresh water from public waterways at little cost to the company, only to sell it back to consumers in bottles at a healthy markup.