A Deadly Ignorant Fraud of Economic Policy - The Federal Government must raise funds through taxation or borrowing in order to spend

 

The belief that the federal government must raise funds through taxation or borrowing in order to spend is one of the most pervasive—and damaging—myths in modern economics. This misconception has crippled governments’ ability to address critical issues like poverty, unemployment, and inequality.

The truth, as revealed by Warren Mosler of Modern Monetary Theory (MMT) , is simple yet transformative:

"The federal government can always make any and all payments in its own currency, no matter how large the deficit is, or how few taxes it collects."

This revelation, which emerged in the early 1990s, emancipated fiscal policy from artificial constraints. It shifted power back to elected governments, freeing them from the dominance of central bankers. Unfortunately, this shift has gone largely unrecognized, even by policymakers. Why? Because central bankers, reluctant to surrender their prestige and influence, have failed to communicate this paradigm shift to the public. The result? A collective failure to realize the monumental potential of our modern monetary system.

The Promise of the Modern Monetary System

Under the previous gold-backed currency regime, money creation was limited by gold reserves. Governments had to collect taxes or borrow to fund spending, creating an illusion of financial scarcity. But today’s non-convertible, floating exchange rate fiat currency system has no such limitations. There is:

• No commitment to convert currency into gold on demand.
• No need to protect the currency in foreign exchange markets (since exchange rates float).
• No requirement for gold reserves to back new currency issuance.

This means the federal government can issue new money to fund expenditures without relying on taxes or borrowing. Taxes, in this system, serve a different purpose: they regulate demand, reduce inequality, and maintain the value of the currency—not to "fund" government spending.

The Unfulfilled Potential

With this newfound freedom, we could solve every economic challenge faced by our citizens: poverty, unemployment, inequality, climate change, and more. Yet, instead of embracing this opportunity, we continue to operate under outdated assumptions about fiscal responsibility. We treat deficits as inherently bad, impose unnecessary austerity measures, and fail to invest in public goods that could transform lives.

The key to unlocking this potential lies in understanding two fundamental principles:

1. Money Supply Matters : Adequate money supply and circulation are essential for economic activity. Without sufficient currency in circulation, transactions stall, businesses fail, and unemployment rises. Demonetization in India serves as a stark reminder of what happens when money is abruptly removed from circulation.
2. Real Resources Are the Limit : The only constraint on government spending is the availability of real resources (e.g., labor, materials). If the economy has idle capacity, the government can safely spend to employ people and boost production. However, if spending exceeds available resources, it risks inflation—a risk that must be managed carefully.

Taxation and Federal-State Relations

In a fiat currency system, the federal government is the sole issuer of currency, while state governments are users of that currency. This distinction has profound implications for fiscal policy:

1. Taxes Are Not Revenue for the Federal Government : For the federal government, taxes reduce the money supply rather than fund expenditures. Since the federal government can issue currency at will, it does not rely on tax revenue to spend.
2. States Need Revenue to Spend : Unlike the federal government, states cannot issue currency. They depend on tax revenues and federal transfers to fund their expenditures. Therefore, all tax revenues collected from a state should be returned to that state to ensure it has the resources needed for development.
3. Empowering High-Contributing States : For example, states like Tamil Nadu, which contribute significantly to national tax revenues, could achieve far greater social and economic development if the currency in circulation were maintained or increased. Rather than penalizing such states by withholding their tax revenues, the federal government should reinvest those funds locally to maximize their impact. This would not only benefit Tamil Nadu but also contribute to the overall progress of the nation.
4. Enabling Low-Contributing States : To address disparities between richer and poorer states, the federal government should directly fund projects in tax-deficient regions. For example: 

1. Infrastructure development (roads, schools, hospitals). 
2. Social programs (healthcare, education, unemployment benefits). 
3. Disaster relief and climate resilience initiatives.

By empowering states with adequate funding, we can achieve balanced regional development and improve living standards across the country.

Focus on Local Consumption Over Exports

Conventional wisdom holds that exports drive economic growth. However, this perspective overlooks the fact that exports represent a real cost to the economy—they divert goods and services away from local consumption. Instead of prioritizing exports, we should focus on producing for domestic needs, particularly in regions with high inequality. By boosting local production and consumption, we can improve living standards and reduce deprivation.

For instance, if there is significant inequality within a state, the policy focus should shift toward increasing the consumption of the deprived population. Producing for local consumption ensures that real wealth—goods and services—is available to meet the needs of the community, rather than being exported to other regions or countries.

Preparing for Catastrophic Risks

We live in an era of unprecedented challenges: climate change, pandemics, natural disasters, and prolonged recessions. These crises disproportionately affect the most vulnerable members of society. To mitigate their impact, we must leverage the full potential of our monetary system to:

1. Achieve full employment , ensuring every individual has access to decent work and a living wage.
2. Build resilient infrastructure to withstand disasters and adapt to climate change.
3. Invest in healthcare, education, and social safety nets to protect citizens during emergencies.

The recent COVID-19 pandemic demonstrated the devastating consequences of underpreparedness. By guaranteeing full employment and robust public services, we can create a society that is better equipped to face future crises.

Ending the Fraud

The refusal to acknowledge the realities of our monetary system is not just ignorance—it is a deliberate fraud that perpetuates deprivation and inequality. By clinging to outdated narratives about fiscal responsibility, we have squandered the opportunity to eradicate poverty and achieve economic well-being for all.

It’s time to set things right. Let us embrace the truth about modern money and use it as a tool for liberation. The federal government must:

1. Recognize its unlimited capacity to spend in its own currency.
2. Prioritize full employment and equitable development.
3. Empower states by returning their tax revenues and providing additional funding where needed.
4. Focus on real resource utilization, ensuring that spending aligns with available goods and services.

Only then can we end the monumental deprivation caused by this deadly ignorant fraud and build a society where everyone thrives.

Conclusion

Our current monetary system offers unparalleled opportunities to solve the greatest challenges of our time. By understanding and leveraging its potential, we can create a world free from poverty, unemployment, and inequality. The question is not whether we can afford to act—it is whether we have the courage to do so. Let us seize this moment to rewrite the rules of economics and build a brighter future for all.

Rajendra Rasu