As President Biden prepares to launch of multi trillion dollar public works project – aka by the liberal gradocracy as “infrastructure” – the question arises: where will the money come from? Your editor addressed this in his 1997 book, The Great American Political Repair Manuel. A few excerpts:
The national debt is really not the same as yours
While there are similarities, the parallel between personal and public finances is often misleading. For example, when you borrow money from the bank, you owe it to someone else and you know there will be trouble if you don’t pay it back. But when America borrows money, it borrows mostly from itself. America is not about to foreclose on America. Besides, everyone who owns a savings bond, has money in treasury bills or notes, or in publicly invested CDs is a creditor of the United States as well as a debtor. Most pension plans get at least some very secure income thanks to the federal government owing them money. This makes government debt quite different from yours. Abraham Lincoln thought this so clear that he over-optimistically concluded that citizens “can readily perceive that they cannot be much oppressed by a debt which they owe themselves.”
All debt is not the same
When we talk about the national debt, we tend to make no distinction between types of national debt. There is an immense difference between going into debt for capital investments like schools and bridges and going into debt to pay current operating costs. That’s why a bank will lend you money to buy a house but not for dinner and a movie. Our national budget makes no distinction between buying schools and buying doughnuts. It should.
Revenues are part of budgets, too
Lost in the great balanced budget mania of the 1990s was a fact obvious to anyone in business: a really good way to improve your books is to increase your revenues. For government, this simple notion has gone out of style. The assumption has become that the only way to reduce the deficit is to cut expenses. But just as a business needs customers, our country needs thriving citizens and companies to keep it going.
Cutting the deficit only slows the growth of the national debt. It does not reduce it. To cut the debt, the government would have to create a surplus and apply it to the national debt. At which point politicians and citizens would start hollering for a tax cut — and everyone would probably forget about the national debt.
Cutting the budget may not even cut waste
Few of us like to see the government waste money. Yet while Americans have been sold on the notion that cutting the deficit will cut waste, it seldom does. In part this is because the same politicians who claim to be budget-slashers also have a bunch of pet projects they want funded. Multiply that instinct by the number of congressional members and you’ve got 535 big problems.
Cutting budget deficits can be hazardous
Cutting deficits can easily have unfortunate side effects. Investment manager Warren Mosler has closely studied the relationship between the economy and deficits. He finds that with remarkable consistency, reducing the deficit as a percentage of the gross domestic product leads shortly to a slowdown in economic growth or even to a recession. Further, he could find no cases where cutting the deficit has increased the rate of economic growth. As Mosler explains it:
“The noble attempt by Congress to balance the budget will result in a weaker economy. … Every time the budget deficit, as a percent of GDP, drops the growth rate drops a few quarters later. It is only after the deficit begins to expand again the economy recovers. The historical correlation is 100%. “
Cutting the national debt can be disastrous
History suggests that cutting the national debt can be even worse than slashing the deficit. Mosler notes that we have only had six periods of sustained debt reduction. For example, the national debt was reduced by a third in the 1920s. Andrew Jackson even managed to produce a surplus of $440,000. Each time the national debt has been significantly reduced, a major depression has followed. There are no contrary cases.
Most money doesn’t exist
The total federal state, local and private debt in this country in 1996 was around $14 trillion. The actual money supply was just under $6 trillion. So what happened to the rest of the money? Most of it doesn’t exist and never did. We call this imaginary money debt. This debt is money that we (as individuals, companies and government) have borrowed, primarily from private sources. As Bob Blain, a professor at Southern Illinois University, put it: “Most debt is not the result of people borrowing money; it is the result of people not being able to repay what they owed [to banks or individuals] at some earlier time. Instead of declaring them bankrupt, creditors just add more to their debt.”
This new debt is called interest. Many people think the idea of the government printing money is shameful, yet our laws permit private financial institutions to create money all the time. Every time you fail to pay off your credit card, you’re letting a banker print some more money.
You’re not the first, of course. For example, when the Congress met in February 1790 to figure out how to pay off the Revolutionary War debt of $75 million, Alexander Hamilton strongly advocated issuing debt certificates and using them as money. Congressman James Jackson of Georgia warned that this would “settle upon our posterity a burden which [citizens] can neither bear nor relieve themselves from. …Though our present debt be but a few millions, in the course of a single century it may be multiplied to an extent we dare not think of.”
It’s really okay for the government to print money
An alternative to Congress borrowing money to pay off its debt would have been to have created the $75 million, using Congress’s constitutional power to “coin money and regulate the value thereof.” Instead Congress began a long tradition of borrowing the money that — five trillion dollars of debt later — many believe we can neither bear nor relieve ourselves from.
In the early 19th century, the little British Channel island of Guernsey faced a smaller but similar problem. Its sea walls were crumbling. its roads were too narrow, and it was already heavily in debt. There was little employment and people were leaving for elsewhere.
Instead of going still further into debt, the island government simply issued 4,000 pounds in state notes to start repairs on the sea walls as well as for other needed public works. More issues followed and twenty years later the island had, in effect, printed nearly 50,000 pounds. Guernsey had more than doubled its money supply without inflation.
A report of the island’s States Office in June 1946 notes that island leaders frequently commented that these public works … had been accomplished without interest costs, and that as a result “the influx of visitors was increased, commerce was stimulated, and the prosperity of the Island vastly improved.” By 1943, nearly a half million pounds worth of notes belonged to the public and was so valued that much of it was being hoarded in people’s homes, awaiting the island’s liberation from the Germans.
About the same time that Guernsey started to fix its sea walls the town of Glasgow, Scotland, borrowed 60,000 pounds to build a fruit market. The Guernsey sea walls were repaid in ten years, the fruit market loan took 139. In the first part of the the 20th century, Glasgow paid over a quarter million pounds in interest alone on this ancient project.
How did Guernsey avoid the fiscal disaster that conventional economics prescribed for it? First and foremost by understanding that when you build roads or sea walls or colleges or houses, you are not reducing your society’s wealth. In fact, if you do it right, you are creating something that will add to its wealth. The money that was created was simply backed by public works rather than gold or “full faith and credit.” It was, in fact, based on something more solid than the dollar bills in our wallets today. In contrast, tacking on an interest charge to public works — as we do in the US — creates no new wealth, but merely transfers claims on existing wealth from debtors to creditors.