The debt hawks are to economics as the creationists are to biology. Those, who do not understand Monetary Sovereignty, do not understand economics. Cutting the federal deficit is the most ignorant and damaging step the federal government could take. It ranks ahead of the Hawley-Smoot Tariff.
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In the previous post, I speculated that concerns about “big government” had less to do with size than with control. (Suggestion: Read that post, before reading this one.) Those who abhor big government face the difficult task deciding which federal initiatives to eliminate, for every federal expenditure benefits some group. Eliminating benefits neither is popular nor appropriate for a great nation. There may be a solution to that dilemma.
Many people equate big government with “Big Brother,” the dictator in the book “1984,” whose motto was, “Big Brother is watching you, “ and who controlled every aspect of people’s lives. I suggested the concerns about big government would be allayed, not by reducing the physical size of government, but rather by reducing its control over us. In the previous post, I had said:
Visualize a new nation, called “Freedom.” The Freedom federal government creates dollars, which on a per-capita basis, it distributes to each state, each county, each city and each person. There would be no federal, state or local taxes. The states, counties and cities would get all their money according to a formula, and spend the money they receive according to their local requirements. The people would spend the money according to their personal desires.
The solution to big government is not to do away with the services government provides, but rather to transfer responsibility for implementing those services to state and local governments, while the federal government continues to pay the bill.
Let’s say in year 1, the federal government were to give each state $2,500 per state resident, while transferring to each state $2,500 worth of financial obligations currently funded by the federal government. There would be no net effect on the federal deficit, but the states would take control over $2,500 per capita of funding now controlled by the federal government. This would have no effect on the federal deficit.
Assume, in addition, the government were to give each state an additional $1,500 per resident, which the states could use for debt reduction, tax reduction or for new initiatives, at each state’s option. This would increase the deficit $1,500 per capita. The U.S. has about 310 million people, so that $1,500 gift would total about $465 billion. The federal government estimates it will spend about $3.9 trillion in 2011, so that $465 billion would add a net of about 12% to the federal budget, bringing the federal budget up to $4.4 billion.
In year 2, assume the federal government were to transfer an additional $2,500 in per capita obligations to each state, while giving each state $5,000 ($2,500 to cover existing obligations and $2,500 for the additional obligations). Again, there is no net effect on the federal deficit. In addition the government again gives each state a gift of $1,500 per resident.
Assume the federal government continues to follow this procedure each year.
What does this accomplish? At the end of 10 years, the federal government will have transferred to the states control over nearly $8 trillion worth of federal spending. Further, depending on how the states decide use their annual $1,500 per resident gift, some can be debt-free, or tax-free or both.
The above example assumes a steady $1,500 per capita gift from the government. What if, instead, the government provided a steady 12% increase as a gift to the states. By the end of 10 years, the states would receive about $4,600 per resident. The table below shows the per capita debt, deficit and taxes for several states. You can judge how additional annual support from the federal government might affect these states.
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Fiscal year 2007; Debt Rank |
(Source: Center on Budget |
State Tax Collections Per Capita Rank |
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Each state would acquire the option to eliminate its deficit, reduce its taxes, reduce its debt and/or create new state initiatives for the benefit of its citizens.
In summary:
-The above approach could reduce the power of “big government” to rule our lives, since “small government” would acquire the finances to assume many big government initiatives.
-States could become healthier financially, while providing more services to their citizens.
-Any reduction in state debt would reduce states’ interest cost, thereby speeding the elimination of debt, reduction of taxes and increase in citizens’ money ownership.
-Any reduction in state taxes would add to the dollars owned by the private sector, increase each state’s GDP, reduce unemployment and increase each state’s average standard of living.
-The federal government, being Monetarily Sovereign, has the money-creating, legal power to support any additional per capita spending, subject only to inflation. The deficit increases are well within the levels of previous, non-inflationary deficit increases, so are unlikely to cause inflation, which in any event can be prevented/cured via interest rate control.
This would mark the end of big government control, while not giving up the benefits of federal spending.
One caveat: Every state has different financial circumstances, different needs and different spending philosophies. So transferring each federal obligation to each state, will not affect the states identically.
Comments?
Rodger Malcolm Mitchell
http://www.rodgermitchell.com
No nation can tax itself into prosperity, nor grow without money growth.
#Monetary Sovereignty - Mitchell 
“The solution to big government is not to do away with the services government provides, but rather to transfer responsibility for implementing those services to state and local governments, while the federal government continues to pay the bill.”
I don’t know about a solution, but I like the idea. 🙂 The phrase, “unfunded Federal mandate”, always makes me cringe. It’s easy to pass the buck. If the Federal gov’t wants to mandate something, it should damn well pay for it.
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Right, Min,
An unfunded federal mandate is the height of ignorance. The Monetarily Sovereign federal government has the unlimited ability to pay its bills; the monetarily non-sovereign states do not. Rather than asking the states to pay the federal government’s bills, the federal government should pay the states’ bills.
Rodger Malcolm Mitchell
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Hey Rodger. I have been reading your posts for a while now. I suppose I used to be a debt hawk, but the concept of monetary sovereignty has changed my view of federal spending.
I still have a few questions however.
Is the Federal Government really monitarily sovereign? Didn’t it give up control of how much money should be injected into the economy to the federal reserve banks? How much money is really printed anymore by the department of treasury? Isn’t it mostly checkbook money created by the banks in the federal reserve system?
Regardless of the answer to these questions, don’t you think that any political entity or business group that has the power to make or break a country by reducing the amount of money in the economy is dangerous? Shouldn’t this power be given to the free market, meaning; shouldn’t the amount of money in an economy be relative to the size of the economy, and grow with the physical economy in the way that a commodity currency like gold would do? Wouldn’t this reduce the risk of a planned economic collapse to make the American people ready to reliquish their power to a radical form of government?
You have said yourself that it is a good thing when our government spends lots of money on social programs, is that because it is the only way to stop recessions using the current fiat currency?
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Matt,
Yes, the U.S. federal government is Monetarily Sovereign. Congress determines the amount of money the federal government will inject into the economy. That is what the debt ceiling battle and the budget battle are all about.
Banks too, create money by lending, but when the loans are repaid, that money is destroyed. So over the long haul, banks create no money.
Federal spending creates money and federal taxes destroy money. That is why a balanced budget creates no net money, and which is why balanced budgets result in recessions and depressions.
The amount of money in an economy determines the size of the economy, and not the other way around. You are correct that the federal politicians’ reluctance to run deficits may result in a recession or a depression. Remember, we have a recession every five years on average. That Congressional reluctance to deficit spend is the reason. See: https://rodgermmitchell.wordpress.com/2009/09/07/introduction/
Fortunately, we are scheduled to deficit spend more than a trillion dollar each of the next three years, so the economy should grow nicely. After that, when the debt hawks have their way, we’ll have yet another recession.
While spending prevents recessions, the reason I like spending on social programs is because these programs benefit people. If the right wing is successful in cutting $100 billion from the Obama budget, many Americans will be injured.
The right wing does not care about people. They are more worried about deficits than about human beings. Since “deficit” means “net money created this year,” they don’t want to create the money to help people.
Lord save us from those who neither know nor care.
Rodger Malcolm Mitchell
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