The states, counties, and cities are becoming insolvent. Do you care?

If you don’t live in a state that now is heading toward insolvency, you are fortunate. You are even more fortunate if your county and/or your city are not on the edge of insolvency.

An insolvent state or local government is not able to provide much-needed local services — education, poverty aids, infrastructure, etc. — without a tax increase. So as a citizen of an insolvent government, you are faced with the unfortunate choice of paying more taxes or doing with less service.

By contrast, the U.S. government never can be insolvent. It has the unlimited ability to create its own sovereign currency, the U.S. dollar.

The federal government never can run short of dollars, and in fact, its method for creating dollars is to pay creditors.

So it is the height of ignorance that the following outrageous situation exists.

11 states pay more in federal taxes than they get back

• Alabama: Total balance of payments: -$169 million; Per capita balance of payments: -$291
• California: Total balance of payments: -$13.7 billion; Per capita balance of payments: -$348
• Connecticut: Total balance of payments: -$4.4 billion; Per capita balance of payments: -$1,242
• Illinois: Total balance of payments: -$14.8 billion; Per capita balance of payments: -$1,158
• Massachusetts: Total balance of payments: -$10.5 billion; Per capita balance of payments: -$1,532
• Minnesota: Total balance of payments: -$6 billion; Per capita balance of payments: -$1,078
• Nebraska: Total balance of payments: -$267 million; Per capita balance of payments: -$139
• New Hampshire: Total balance of payments: -$749 million; Per capita balance of payments: -$558
• New Jersey: Total balance of payments: -$24.7 billion; Per capita balance of payments: -$2,748
• New York: Total balance of payments: -$24.1 billion; Per capita balance of payments: -$1,216
• Wyoming: Total balance of payments: -$169 million; Per capita balance of payments: -$291

In summary, a government that has infinite money takes more money from eleven states than it gives to them.

That alone is economically ignorant and outrageous, but it gets worse. Much worse.

Here are a few excerpts from a web article, today:

If the Federal Government Won’t Fund the States’ Emergency Needs, There Is Another Solution
Posted on May 25, 2020 by Yves Smith
Yves here. I’m glad to see Marshall Auerback mention the program that great American socialist Richard Nixon implemented, revenue sharing, which was the Federal government handed out money to local government.

No, Yves doesn’t really believe Nixon was a socialist. She is making a point for the right-wingers who in their ignorance and/or spite, term any federal spending that benefits those in the lower 99% income brackets, as “socialist.”

In the first week of October, 39,000 cities, counties, towns, villages and other communities across the county received checks from the Treasury, some as small as $201. The biggest -$41,957,530 – went to New York City.

With these checks, the program of Federal revenue-sharing came to an end, 14 years and $85 billion after it began.

In that span of time, from before Watergate to the afternoon of the Reagan era, this low-overhead, highly practical, widely popular program brought an extraordinary array of benefits to the people of New York and every state.

Revenue-sharing paid for teachers in Manhattan and streetlights in Buffalo, provided snowplows for Adirondack villages and built the community hall and ice rink in New Hartford.

A so called “revenue-Sharing” plan is defined by the Encyclopedia Britannica as:

A government unit’s apportioning part of its tax income to other units of government. For example, provinces or states may share revenue with local governments, or national governments may share revenue with provinces or states.

The problem with that definition is that it does not consider Monetarily Sovereign governments like the U.S. government, which does not spend revenue, nor does it share revenue with anyone.

A Monetarily Sovereign (MS) government destroys all the revenue it receives, and it creates brand new money when it spends.

Unlike monetarily non-sovereign governments –i.e.  the states and local entities —  for the federal government there is no “flow-through” of income to out-go.

Incoming money is destroyed: outgoing money is created.

There is no link between the two.

The program was misnamed “revenue-sharing” by its creators, economist Walter Heller and President Richard Nixon, to make it more palatable to the public.

Presumably, if it were not called “sharing” it would be called “socialism,” and Nixon’s base didn’t want that.

Nixon believed the Federal government could collect taxes cheaply and more efficiently than could the states and cities, while local governments were closer to the needs of their citizens and could often deploy funds more efficiently and in a more tailored manner than could the Federal government.

The Federal government’s “cheaper and more efficient” ability to collect taxes is irrelevant, and may not even be true., because destroys the taxes it collects.

Many states are now experiencing severe budget deficits as they cope with the combined collapse of tax revenues and corresponding expansion of spending brought about by the coronavirus.

Although the most recent $3 trillion fiscal package of the House Democrats proposes significant funding for the state and local governments, the GOP and the president have already said it’s “DOA.”

It’s “DOA” because the states experiencing the worst budget deficits primarily are “blue” states, and the current President would rather give up cheating on his wife and lying to the public than to do anything to help the “blue” people.

His focus is, and has been, on helping the rich.

Absent assistance from the federal government, many of the country’s states might have to introduce cuts amid a crisis at a time when the economy has already collapsed into a depression.

Today’s dire situation evokes what many states experienced in the wake of the 2008 financial crisis (if not worse).

At that time, many of the same arguments marshaled against revenue sharing for the states were being made (especially by Republicans)—namely, that this kind of a measure represented a bailout for fiscally irresponsible governments that were failing to adequately reform their bloated pension schemes or undertake “meaningful reforms” (which in many cases was code for weakening public-sector unions that espoused political views contrary to the prevailing orthodoxy).

Let’s face it. All states have some degree of “fiscal irresponsibility,” blue being no different from “red.”

But President Donald Trump and his groupies seldom miss a chance to throw hatred and vengeance on the poor, the foreign, blacks, browns, yellows, Muslims, gays, and anyone who doesn’t stroke Trump’s fragile ego.

Calling it a “bailout” rather than “sharing” is just another excuse to kick those who are down.

But the truth is that today we are in the midst of a pandemic. Unlike 2008, it is a federal government-mandated shutdown that is the key precipitating factor behind the states’ respective fiscal crises, not runaway pension funds or uncontrolled government spending.

Washington should therefore supply the funds required to help the states close their budget gaps and to maintain public services at baseline levels, for the duration of the crisis.

That not only is the norm; it is the fundamental purpose of a central government.

Anytime a state is hit with a national emergency, the federal government does not first demand that the state government get its fiscal house in order. (FEMA does not wait for an auditor’s report on state finances.)

It mobilizes national funding immediately to deal with the crisis at hand, whatever the cause.

Except, of course, when it’s Puerto Rico, in which case the President tosses a few rolls of paper towels at the desperate people.

Back in 2009, when faced with a similar fiscal crisis, California’s state controller, John Chiang, began printing IOUs in lieu of cash to pay taxpayers, vendors, and local governments.

These IOUs came with a potentially radical provision, namely allowing them to be used for personal income tax refunds—an action that effectively would have meant that California was de facto entering the currency issuing business.

The tax payment provisions of the IOU program were headed off before they came into use.

These IOUs were a form of money, no different from the money issued by the U.S. Treasury.

Contrary to popular belief, nothing in the U.S Constitution prevents states, counties, cities, businesses, even you or me from printing money.

In fact, businesses do it all the time, when they print coupons.

Walgreens prints money when it offers costumers points, redeemable for merchandise. Those points represent money as do airline miles, credit card points and casino chips.

If you would like to create your own money, feel free. Your only challenge would be public acceptance, which primarily would be based on your full faith and credit.

If you issued “Reader-bucks,” which were accepted by individuals and businesses, you would be a Monetarily Sovereign money issuer, and so long as people and businesses kept accepting them, you could keep issuing them.

In the words of the American economist Abba Lerner, from his essay in the 1947 edition of the American Economic Review: “The modern state can make anything it chooses generally acceptable as money…”

A key insight is that in a world of fiat currencies (i.e., money established via government fiat), both the use of currency and the value of said currency are based on the power of the issuing authority, as opposed to some underlying intrinsic value (as would be the case, say, if a currency was backed by gold).

Though Lerner is correct about the “modern state,” he then drifts into mythology.

All government currencies are “established via government fiat (i.e. decree), and gold has no “underlying intrinsic value.”

In a gold-backed currency, the relationship between the value of the currency and the value of gold is determined by the currency issuer, and subject to change.

The Gold Standard Act of 1900 arbitrarily fixed the value of $100 at 150.46 grams of gold (4.83740133 troy ounces) and subsequently, the government changed the value at will.

Then we come to what I term is the “tax myth” of money:

As I have written before, “The tax (and the corresponding ability to enforce payment) is what gives an otherwise worthless piece of paper with pictures of dead presidents on it its value.

Even though this paper is not ‘backed’ by anything, taxes function to create the notional (i.e. theoretical) demand for said paper dollars.”

The tax provision itself imparts the value or, as the economist A. Mitchell Innes termed it, “A dollar of money is a dollar, not because of the material of which it is made, but because of the dollar of tax which is imposed to redeem it.”

This is widely believed by MMTers, but it is false. First, a very minor point: There are no “paper dollars.” There are paper dollar bills, which represent dollars.

Dollars themselves have no physical existence. They are mere balance sheet numbers, which also have no physical existence.

More importantly, the author confuses acceptance with value. While the need to pay taxes with a certain currency does force some acceptance of that currency, it does not give the currency value.

Inflations and hyperinflations, where the value of currencies declines dramatically — sometimes effectively to zero — are not caused by changes in tax rates.

While money acceptance is related to the full faith and credit of the issuer, money value is far more related to the scarcity of key items, usually food and/or energy.

If California did move in this direction, it would not be historically unique. Economist Rob Parenteau and I have documented five instances of paper currency being used simultaneously and interchangeably in the U.S. in the 1920s:

• Gold Certificates (redeemable in gold coin until FDR’s prohibition on private citizens holding gold)
• Silver Certificates (redeemable for coin or bullion)
• National Bank Notes (issued by U.S. government-chartered banks with equivalent face value of bonds deposited by bank at Treasury)
• United States Notes (issued directly by Treasury and called Legal Tender Notes, but with no “backing”)
• Federal Reserve Notes (redeemable in gold on demand at Treasury or in gold or “lawful money” at any Federal Reserve Bank, until FDR’s prohibition, when it was just declared legal tender redeemable in lawful money at the Fed or Treasury)Similarly, in this instance, the proposed IOU would not replace the dollar, but could operate in parallel to extinguish state liabilities.

A good analogy for real money is Monopoly™ game money. The game could be played without any paper “money” at all, but rather just with a scoresheet.

And now we get to the good part:

Per capita distributions to all states to allow them to sustain relief efforts and public health policies designed to mitigate the spread of the coronavirus, similar in model to the range of block grants that the federal government has in the past allocated nationally.

That is exactly what should be done, with the only question being: Per capita distributions to the states, or per capita directly to the people, or both.

There is nothing inherently radical or “un-American” about this proposal. Indeed, it was a Republican president, Richard Nixon, who first introduced the concept.

As I described in an earlier piece:

Nixon viewed the federal bureaucracy as a poor revenue manager and argued that much counter-cyclical spending should go to the states, as they are closer to people’s needs and more directly hurt by falling revenues.

But instead of simply cutting taxes, as later conservatives would, he proposed a new system called revenue sharing, which redirected funds to states and municipalities…

Passed after contentious debate, the State and Local Assistance Act of 1972 initially delivered $4 billion per year in matching funds to states and municipalities.

The program, before it was killed by Ronald Reagan in 1986, proved enormously popular.

Direct, per capita payment to the states plus Social Security for All, would be far superior to tax cuts. The former would benefit the 99% far more, and put the money where it is needed.

The latter would likely be of most benefit to the upper 1% income/wealth/power groups, widening the Gap, when it really needs to be narrowed.

And the mechanics today would likewise be very easy: the Treasury would appropriate the funds and the Federal Reserve would credit the states’ existing bank accounts.

The states in turn could then spend those dollars to sustain vital services.

This is another instance where the GOP’s obliviousness to the ramifications of the states’ respective fiscal crises is likely to make things far worse.

The GOP is not oblivious. It knows exactly what it is doing.

It wishes to widen the Gap (which makes the rich richer) by allowing the lower 99% to be crushed by recession and depression.

The U.S. already operates a fiscal transfer union, so the chaotic issues of distribution and implementation that have characterized many of the newer federal relief programs would be non-factors here.

There would be no bureaucratic obstacles to overcome, as has characterized other programs, such as the government’s Paycheck Protection Program (PPP) nightmare.

Done on a per capita basis, it would be effective at dealing with fiscal crises in a manner less prone to the kind of fascistic crony capitalism that continues to erode the political legitimacy of our existing institutions.

But if per capita revenue distributions fail to pass muster in Washington, then California, as it has done so many times in the past, should be prepared to adopt a more radical policy stance in order to help lead the nation as a whole out of a self-inflicted fiscal crisis.

ADDENDUM

Every form of money is a form of debt backed by the full faith and of the issuer, i.e. the debtor. (https://mythfighter.com/2010/02/23/understanding-federal-debt/)

The notion that money is, or ever was, backed by gold, silver, or some other valuable physical asset is nonsense, since it is the issuer that determines the backing (aka the “collateral“).

Gold is not, and never has been money. It has been, at best, collateral for the issuer’s debt that is implicit in money distribution.

When gold and silver supposedly collateralized the U.S. dollar, the U.S. arbitrarily changed this “backing” on several occasions. Because a money issuer arbitrarily can change the collateral at will, the collateral is of no use.

The U.S. states vis a vis the U.S. government are in exactly the same position as the euro nations vis a vis the EU.

Like the U.S. states, the euro nations cannot control their money supply nor do they have the unlimited ability to create money.

That is why some of the euro nations and some of the U.S. states are in perpetual financial difficulty.

The entire process of one Monetarily Sovereign entity controlling multiple monetarily non-sovereign entities must at least include the MS entity continually providing money to the non-MS entities.

This has nothing to do with frugality or supposed fiscal irresponsibility on the part of the non-MS entities.

The U.S. federal government has the unlimited ability, indeed the duty, to provide the means for making the health and welfare of all its people possible.

Punishing the states for political purposes, is not what makes America great.

Rodger Malcolm Mitchell

Monetary Sovereignty Twitter: @rodgermitchell Search #monetarysovereignty Facebook: Rodger Malcolm Mitchell …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………..

THE SOLE PURPOSE OF GOVERNMENT IS TO IMPROVE AND PROTECT THE LIVES OF THE PEOPLE.

The most important problems in economics involve:

1. Monetary Sovereignty describes money creation and destruction.
2. Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics. Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps:

Ten Steps To Prosperity:

1. Eliminate FICA

2. Federally funded Medicare — parts A, B & D, plus long-term care — for everyone

3. Social Security for all or a reverse income tax

4. Free education (including post-grad) for everyone

5. Salary for attending school

6. Eliminate federal taxes on business

7. Increase the standard income tax deduction, annually. 

8. Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.

9. Federal ownership of all banks

10. I

Increase federal spending on the myriad initiatives that benefit America’s 99.9% 

The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.

MONETARY SOVEREIGNTY