“If you owe the bank a hundred thousand dollars, the bank owns you. If you owe the bank a hundred million dollars you own the bank.” – American Proverb
Money is an economic resource and tool that, I believe, can and should be used toward the prosperity of the working class. The United States economy has been prosperous but the benefits are mainly going to a small group already at the top, this is called an oligarchy. The powers-that-be typically employ money for their advantage, rather than using it to provide a better quality of life and jobs for average citizens. Why is it that income inequality is growing and what steps can be made to even the gap?
Historically, there are three categories of money: commodity, credit, and fiat. As of today, if you have U.S. money, this includes a $5 bill or the cash sent from your Venmo account, then you’re using fiat money. Fiat money is a tax credit not backed by any tangible asset. In simpler terms, fiat money isn’t backed by gold, it’s backed by guns and government. It holds no actual intrinsic value. According to Warren Mosler, an American economist, and theorist, our current system of fiat money is misunderstood by contemporary economists, politicians, and the working class.
Mosler is one of the leading voices in the field of Modern Monetary Theory or MMT, a macroeconomic theory that revived chartalism as an explanation of money creation. MMT advocates, like Mosler, argue that the government can use fiscal policy to achieve full employment and create new money to fund government purchases. This means no idea is too big. The government can create a strategy to distribute wealth without heavy tax burdens and curb income inequality because it’s impossible for the U.S. government to run out of money. Alan Greenspan, the former Chair of the Federal Reserve famously stated in 2011, “The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.”
On the other hand, every presidential campaign season we hear candidates discuss government spending and taxes. Populist ideas like “Medicare For All” and free college education, as well as future crises like climate change, have been at the top of people’s lists of concerns. But many ask how will we pay for it? The popular view is that federal spending is reckless, disastrous and irresponsible, simply because it increases the deficit. We hear about deficit hawks, government debt, and “owing” China, but this is an incorrect mindset for approaching new ideas. In his book, Soft Currency Economics, Mosler writes, “The supposed technical and financial limits imposed by the federal budget deficit and federal debt are a vestige of commodity money. Today’s fiat currency system has no such restrictions…The former constraints imposed by the gold standard have been gone since 1971.”
Former vice president Dick Cheney once said, Ronald Reagan proved that in politics, “deficits don’t matter.” If this statement and the comments of Alan Greenspan are true, then why are politicians and economists still hyping up the government debt? Why do politicians make it seem like ideas such as the Green New Deal, single-payer healthcare and free education are farfetched ideas? “The voices that do get heard tend to be people who call themselves economists but are actually working for a bank or have a stake in the system the way it is”, says Esther Duflos, the second woman to win a Nobel Prize in Economics.
The powers that be enjoy the benefits of the system as it is now. Economist Dean Baker and author of Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer, wrote that “the upward redistribution in income in the U.S. was not the result of globalization and the natural workings of the market…it was the result of conscious policies that were designed to put downward pressure on the wages of ordinary workers while protecting and enhancing the incomes of those at the top.”
Studies show Americans at the middle and bottom of the economic ladder have consistently had little increase in income, while those at the top have had a significant increase. According to Baker “the defenders of the status quo benefit enormously by the selective use of standard economics. ” No new news there for anyone that wasn’t born with a silver spoon, so to speak, but having the stats to prove it is valuable. Although a 2018 American Community Survey (ACS) shows that median household income rose between 2017 and 2018 for 10 of the 25 most populous metropolitan areas, the overall trend of inequality has consistently grown since the 1970s, and once again rose last year, according to a recent survey by the Census Bureau.
Mark Hendrickson, adjunct professor of economics at Grove City College wrote in a Forbes op-ed, “There is class warfare in America, but it’s not between the rich and poor, but between the political class and the rest of the citizenry.” Hendrickson goes on to say, “Such cronyism is the antithesis of true capitalism…it is the age-old story of political elites rigging the system to their financial benefit at the expense of the majority of the population.”
According to a Congressional Budget Office (CBO) report the U.S. wars in Afghanistan, Iraq, Syria, and Pakistan have cost American taxpayers $5.9 trillion since they began in 2001. A CNN report published in 2013 says “the U.S. hired more private companies in Iraq than in any previous war, and at times there were more contractors than military personnel on the ground.” CNN goes on to say, “analysis by the Financial Times reveals the extent to which both American and foreign companies have profited from the conflict — with the top 10 contractors securing business worth at least $72 billion between them.”
In the 1980s, cronyism between Republican lawmakers and Wall Street lead to extensive deregulation. The prevailing belief was that “greed is good.” Top bankers argued that their skills made them as valuable as professional athletes. When risky investments blew up during the 2008 crisis and banks were considered too big to fail, lenders welcomed taxpayer money to stay afloat. After markets crashed, the U.S. Federal Reserve began the most successful Quantitative Easing effort to date.
Quantitative easing or QE is an expansion of the open market operations of a country’s central bank. Many investors feared QE would cause runaway prices, but inflation has remained unpredictably low since the Recession, again confirming MMT ideas and Cheney’s words that “deficits don’t matter.” The Fed added almost $2 trillion to the money supply, doubling the debt on the Fed’s balance sheet from $2.106 trillion in November 2008 to $4.486 trillion in October 2014. The Fed bought trillions of dollars of government bonds and mortgage-backed securities.
More recently, under the Trump Administration, the national debt is projected to top $4.1 trillion in 2019, for the first time since the Great Recession, and, under current law will average $1.3 trillion through 2030, according to the CBO. In addition, the Trump team legislated tax cuts to benefit the ultra-rich. For the first time in American history, “the 400 wealthiest people paid a lower tax rate than any other group,” according to a new study by economists Emmanuel Saez and Gabriel Zucman at the University of California, Berkeley.
So, by using the same tools used to bail out the banks, cut taxes for the wealthy and finance wars, we can employ all Americans and rebuild infrastructure to combat climate change and fight poverty. It is extremely possible to even the gap in equality and progress is definitely on the horizon, as ideas like MMT begin to grow more mainstream. As Mosler states, “the only financial constraints, under a fiat monetary system, are self-imposed. Once we realize that the deficit can present no financial risk, it will be evident that spending programs should be evaluated on their real economic benefits, and weighed against their real economic costs.”
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