In 2020, we must begin to spend serious money fighting climate change: switching over to renewable energy and electric cars, weatherizing buildings, planting trees. It’s not too late if we will get started.
I think it would help if people understood how government finances really work, especially that the federal government will not be spending “taxpayer money” on these crucial planet-saving projects.
When the federal government spends, it creates every dollar on the spot by directing the Federal Reserve to increase the bank accounts of its intended recipients. A sovereign government with its own currency doesn’t need to first obtain money through taxes in order to spend. It automatically creates money as it spends. These are key insights of Modern Monetary Theory.
Then why do we have federal taxes? Primarily to reduce private spending in the economy to make room for government spending approved by Congress and thereby avoid inflation. If government spending – on fighting climate change or anything else – were simply added to all the spending desired by the private sector, there would be more demand than the economy could handle. We’d see bidding wars that would lead to serious inflation. To avoid this, the government imposes taxes.
But federal taxes need not equal federal spending. If the government spends more than it collects, running a budget deficit, the extra spending stimulates the economy, but it won’t cause inflation if the economy can handle it. We are running large government deficits right now, but they have not caused inflation because the economy has produced enough goods and services to meet total demand without price hikes.
When budgeting, the government must always keep its eye on inflation and should never run deficits if they threaten to start an inflationary cycle. Short of that, however, the government should not hesitate to run deficits for projects as important as fighting climate change, just like we did to win World War II.
The federal government doesn’t need to borrow – issue bonds – to finance budget deficits. If it spends more than it taxes, the difference immediately shows up in the banking system. Current law requires the Treasury to sell bonds in that same amount. But the government doesn’t need to sell bonds to physically obtain money to spend; it already created that money in the act of spending. If it doesn’t sell bonds, the new funds will just remain in bank accounts.
Everybody calls this “printing money” – although no printing is involved – and says it will cause terrible inflation. They claim that selling Treasury bonds will avoid that inflation by vacuuming up the newly created money so it can’t be spent by the public.
This common belief is false. The bond-holding class – wealthy people and financial institutions – may wind up holding the new money as cash or as Treasury bonds, but that will not influence their spending in the slightest – and it’s excessive spending that causes inflation. If a bond holder has decided to buy a vacation home, she will sell enough bonds to do so. If she is holding cash instead because the Treasury decided not to sell any bonds this year, she will pay cash. It’s the same effect on the economy either way.
A more sophisticated argument is that this extra cash will cause interest rates to fall, which will stimulate too much investment, again causing inflation. But the Federal Reserve can keep interest rates steady if it wants to limit total spending to prevent inflation.
If the Treasury continues its current practice of financing deficits by selling bonds, the bonds will continue to add to the national debt. That isn’t really a problem because the Fed can always keep interest rates low and prevent the debt from being a financial burden. But people think it’s a problem.
If public concern about a rising national debt causes Congress to hold back appropriating the large sums we need to fight climate change, then that really is a problem. To avoid that, I suggest Congress order the Treasury to stop selling bonds and let cash from deficit spending accumulate in bank accounts instead. The national debt will stop rising, and we will promote jobs and protect our endangered planet at the same time.