In many countries around the world, the routine cooperation of the Treasury and Central Bank provides the government with tremendous financial flexibility to mobilize and organize domestic resources. The latest dramatic example of that was the response to the COVID pandemic, but the usual year-in, year-out budgeting process illustrates that more readily. The essential question is not if a monetarily sovereign government can find the domestic money but rather what the budget should be, where should the government intervene? How should it do so? For whom? Are the necessary resources available? In short, defining the public purpose and setting the public policy agenda are the core questions a society must answer; such questions ought to set the way policy discussions are framed and debated. 

Answering these questions should involve as wide a constituency as possible because democracy is not just “one person, one vote;” democracy is about the ability to decide what is voted on. Unfortunately, today, the majority of voters has no influence on selecting the issues to be debated, framing the debates around those issues, or proposing solutions to deal with them. Very few members of the US Congress are workers and the opinion of the majority of the population has virtually no influence on policy adoption. On the other hand, through an extensive institutional network (lobbying, frequent congressional testimonies, key positions in government, advisory committees, think tanks, etc.), corporations have been extremely effective at setting the economic content of the political agenda. They have achieved major deregulatory victories, busted and tamed unions, shrunk the welfare state, and won major legal victories to increase their influence on electoral outcomes. This influence of corporations, and wealth more generally, on US politics is old. The results of this influence have not necessarily been bad for the rest of the population, but only as long as the resulting policy is in line with the economic interests of corporations, the rise of the welfare state is an example of a corporate-driven policy agenda. 

Several tactics have been used to marginalize political participation, such as making political participation costly, fighting unionization, and increasing the difficulty of voting, among others. This piece focuses on one major tactic that has been used to prevent vigorous debates and discussions about the public purpose, namely the taxpayer narrative. Such a narrative strongly influences the policy agenda; it frames issues and debates in a particular way, it restricts possible solutions and it marginalizes the voice of a significant portion of the population. Removing the taxpayers’ money narrative is one step toward improving the inclusivity of the democratic process. 

 

Neoliberalism and government policy: “How will you pay for it?”

The taxpayer narrative is pervasive. It is present in the budgeting process, in the framing of government policies and in daily political life. Issues and debates about the public purpose are all cast in terms of the financials. The first thing asked about a proposed spending policy is “how are we going to pay for it?” and the first question for a proposed tax policy is “how much money will it raise?” A spending proposal that is not budget neutral is dead in Congress. A tax policy that is not expected to generate much revenue is irrelevant, one that generates less revenues than expected is a failure.

Examples abound. Senator Warren’s Ultra-Millionaire Tax proposal starts with the correct premise that there is a very high and growing wealth inequality in the United States. She proposes to set a 2% tax on the wealth of households with $50 million or more in net worth. However, the effectiveness of the policy is not judged in terms of its ability to reduce wealth inequality but rather in terms of its revenue generating capacity: “this small tax on roughly 75,000 households will bring in $3.75 trillion in revenue over a ten-year period.” 

The impending Social Security insolvency is relentlessly pounded on the population, with proposed financial solutions to “save it” ranging from putting money in a lockbox, lowering benefits, to replacing it with private retirement saving accounts. 

In the middle of the 2008 financial crisis, President Obama argued, at a time of a rising fiscal deficit because of plummeting tax revenues, that “small businesses and families are tightening their belts. The government should too” and proceeded to freeze the salaries of government employees. The lack of tax revenues supposedly prevented the government from doing more to help the economy recover. And the pattern repeats for the major policies that most of the US population sees favorably; “We simply don’t have the money, sorry.” 

Fiscal deficits of various sizes have been a normal and sustained state of affairs for decades across the developed world with no obvious negative impact on interest rates, tax rates, future generations, or inflation

Besides shaping and constraining policy proposals in a particular way, the taxpayer narrative is also used to marginalize some voters, to aggravate racist tensions, and to shame welfare recipients. Taxpayers are the responsible, hardworking, reliable members of the population while the others are lazy, dependent and not worthy of participation in political life. The taxpayer narrative frames the government as a Robin Hood who steals from the rich and productive to give to the poor and lazy. It claims that wealthy individuals are more entitled to set the political agenda because they pay for the government’s programs. Utah Senator Mitt Romney expressed that viewpoint during a Republican fundraiser in 2012. It is argued that too much participation of the population in the political process leads to a crisis of democracy, so some portion of the population ought to be excluded. The fiscal deficit myth is a noble lie enabling us to have a civilized society. This is an enduring argument of American politics that can be traced back to the drafting of the US constitution. 

The taxpayer-driven narrative is not only politically reactionary and mentally stifling, but also does not reflect a correct understanding of federal government finances, economic facts, and logic. Household finances is not the correct metaphor to help the public understand the finances of a monetarily sovereign government, and fiscal deficits of various sizes have been a normal and sustained state of affairs for decades across the developed world with no obvious negative impact on interest rates, tax rates, future generations, or inflation despite the widespread doom-and-gloom predictions regurgitated almost daily for decades. Understanding monetary sovereignty means reframing economic debates and policymaking away from the impoverished view of government’s ability to finance its spending  financials and toward concrete societal goals and economic possibilities. Taxpayers and bond buyers are not in a privileged position to set the policy agenda and the government does not depend on them financially to fulfill that agenda. 

 

Reorienting policymaking away from the taxpayer narrative

When the implications of monetary sovereignty are understood, it is pointless to seek to put funds in a locked box for later use, to modify existing programs or to conceive new programs to help save money in order to avoid insolvency. The funds needed are created quickly, as emergency spending to fight wars or to deal with pandemics shows, and insolvency is not financially possible. Finding the money is simply achieved by the routine cooperation of the national Treasury and the (possibly independent) central bank that ensures smooth government financial operations. 

Taking monetary sovereignty into consideration morphs the meaning of fiscal discipline, it does not eliminate the need for such discipline. Instead of an all-consuming concern with balancing the budget, fiscal discipline is focused on meeting the public purpose while dealing with political constraints (finding the votes) and economic constraints finding the non-financial resources).

Governmental bodies such as the Congressional Budget Office (CBO) should score policy proposals based on their inflationary potential and the ability of a proposal to achieve the intended goal.

On the political side, a society must decide for itself, hopefully as democratically as possible, what the public purpose is. It should be evident that, once the financial question is made irrelevant, setting the public purpose becomes a heightened point of contention. The political debate must be oriented toward the intrinsic merits and drawbacks of a proposed policy and on the type of society one wants to build. This does not mean that a government will be overwhelmed with demands. As the diverse experiences of developed democratic societies show, many policymakers and citizens, for a variety of reasons, want less government involvement in the economy or want a narrow involvement. Finding the money is not the hard part; the hard part is defining the “goods” and “bads,” determining what the government should do to deal with them, how it should do it, ensuring broad participation in such discussions, and finding the votes needed. 

As was mentioned above, a major hurdle for policymaking is the availability of non-financial resources to implement the public purpose. A policy proposal needs to be judged not only on the basis of its political merits but also according to its economic feasibility. That means that advisory governmental bodies such as the Congressional Budget Office (CBO) should score policy proposals based on their inflationary potential and the ability of a proposal to achieve the intended goal. The CBO must make an estimate of what is possible given the available human, natural, and physical resources, and determine the pace at which a proposal can be implemented realistically given the current and expected state of domestic resources. 

 

Implementing MMT policymaking: Functional Finance

A monetarily sovereign government must tax, but a tax policy should be set independently from a spending policy. What that means in practice is that tax rates should not be set with the aim of balancing the budget, they should be structured to achieve the public purpose. 

In terms of inflation fighting, the most effective tax structure is one that automatically removes purchasing power when inflationary pressure comes from private spending. Most countries already have strong enough automatic stabilizers on the tax side; they actually tend to be too strong because tax revenues rise very quickly when economic activity picks up. On the demand side, MMT proposes employment stabilizers, such as the Job Guarantee. If a sudden large increase in spending is needed, such as in a major war, taxes are one of the tools that can be used to help limit inflation. 

In terms of reduction in income or wealth inequalities, the first step is to anchor the policy around a well-defined objective; what does “reducing inequalities” mean practically? A targeted percentage fall in the Gini index? Something else? Once this is defined, a tax policy ought to be set with the purpose of having confiscatory taxation not a revenue-generating taxation. At no point is the tax policy approached from the view point of balancing the budget or linked to a proposed spending policy. It is probable that if tax rates are high enough they will not generate much revenue because wealthy individuals are skilled at evading taxation. However, taxation has done its job of fulfilling a public purpose of reducing inequalities as long as taxation on wealthy individuals destroys enough of their income and wealth, leads them to shelter their wealth in a way that is difficult to use, or incentivizes them to increase donations that help those at the bottom of the distribution. If the tax policy does end up generating significant revenues, it is not a valid reason to revise it because tax rates are tied to achieving an inequality reduction target not a revenue target. They should be raised more as long as the inequality-reduction goal has not been achieved, they should be lowered if the inequalities have decreased by more than targeted.

At no point should the setting of tax rates be discussed in terms of, or constrained by, a necessity to balance the budget and paying for other programs.

In terms of limiting climate change by reducing CO2 emission, the first step should be to define precisely what “reduction” means. Climate scientists have provided many reports that estimate the needed pace and size of reduction in CO2 emissions to limit the rise in average global temperature to a given target, say +1.5c. Once the reduction in emission is chosen, the next step is to study what is the most effective type of tax to achieve that goal and what the tax rate should be. Maybe taxing CO2 emissions by the major corporations is the way to go, may be providing tax subsidies to encourage the retrofitting of buildings or the installation of solar panels is a better policy, maybe a combination of these and others tax policies is the most effective to achieve the emission reduction goal, maybe none of them are enough to achieve the desired reduction and other policies should be implemented. The Congressional Budget Office should perform the necessary analysis to determine if a specific tax proposal significantly helps or not in achieving the CO2 emission reduction goal. At no point should the setting of tax rates be discussed in terms of, or constrained by, a necessity to balance the budget and paying for other programs. Once the analysis is done, implementing the policy requires getting the necessary political capital. If that can’t be done, the project must either be shelved or reduced in scope (and the desired emission reduction cannot be achieved). 

A similar logic applies to all government spending, a proposal should be evaluated in relation to the available domestic resources now and in the future. As such, the proper metric is not the financial costs (billions of dollars, trillions of dollars, or otherwise), but rather the percentage of domestic resources that is expected to be allocated to a proposal every year. For example, a Green New Deal proposal may cost one trillion dollars, but using that number to frame the debate as “the Green New Deal is unaffordable,” or “Green New Deal is the road to ruin” is disingenuous because the annual quantity of domestic resources required to implement the proposal turns out to be small at the moment (the longer we wait, the larger the use of resources will be).

Finding the money is the easy part

Another example is the framing of the Social Security problem. As Chairman Greenspan’s response to Representative Paul Ryan makes it clear, Social Security does not have a solvency problem because “there is nothing preventing the federal government from creating as much money as it wants and paying it to somebody.” Social security faces a demographic problem, not a financial problem. Finding the money is the easy part, finding means to raise the productivity of the labor force, having a well-defined immigration policy, and repurposing and building infrastructure to meet the needs of an aging society are the hard parts. This framework ought to guide discussions and debates about Social Security. Representative John Yarmuth said the same thing for policies to deal childcare and housing access and correctly framed policymaking: “Historically, what we have done is said what can we afford to do? The right question is, what do the American people need us to do? That becomes the first question. Once you answer that, you say how do you resource that need? […] The constraint on us is rampant inflation.”

Overall, MMT fiscal policy recommendations do not favor out of control spending and limited to no taxation. Monetary sovereignty reorients the policymaking process toward a more systematic analysis of the intrinsic relevance and merits of tax and spending proposals. The current policy making praxis promoted by deficit hawks and deficit doves misleads policymakers and the public by mis-specifying the nature of problems in terms of financials, it channels the public debate toward futile discussions about the ability or inability to find enough domestic currency, and so it generates the incorrect responses to the very real problems a society faces. While it may serve as a convenient and effective rhetorical tool and strategy for those who oppose government involvement and want an out from uncomfortable conversations, it is deceitful and dangerous. Government has the power of the purse, this disqualifies all the “how to find the domestic money”-related questions.

 

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Eric Tymoigne is an associate professor of economics at Lewis & Clark College and a research associate at the Levy Economics Institute who specializes in the fields of money and banking, monetary theory, and financial macroeconomics. His most recent book, coauthored with L. Randall Wray, is The Rise and Fall of Money Manager Capitalism: Minsky’s Half Century from World War Two to the Great Recession.