Much of the public debate on today’s economic issues is invalid, often going so far as to confuse costs with benefits
We (The US) operate in a "Fiat" money system. The "Gold Standard" was abandoned in 1971, forty years ago but public and government opinion operates as if the Gold Standard was still in place..
There are two categories of government money: Commodity and Fiat.
Commodity money is backed by - a commodity: Rice, Gold, Sea Shells, Oil, whatever. Gold is nice because it doesn't rust, rot, or evaporate and it's pretty.
In a commodity based system there are three interesting facts:
1. The government can go broke.
2. The government must tax or borrow to spend. And
3. The government has limited control over the value of its own currency.
Fiat money Is backed by - pretty much nothing. ( I know - Full Faith etc. Not really worth anything.) But the facts about Fiat money are quite interesting.
1. The government CANNOT GO BROKE. (that should be etched across every politicians head.)
2. The government must spend in order to tax. And
3. The government has almost complete control over the value of its money.
The government must spend before it can tax???? There must be deficit spending???? Gasp!!!
Think about it. The government levies a tax on - something - and says it can only be paid in the currency it approves. But where does that currency come from and how do you get any? It is obvious that the government must hand out the money to people BEFORE it can collect taxes. It can build roads, hire an army, pay doctors to help the sick, hire people to keep score (keep the spread sheet). You might farm food for the road builders (or the army) and sell it for - that currency you need to pay taxes (and, perhaps buy a TV).
Thus what really gives the currency value (forget about Full Faith etc.) was the fact that it is the only thing you could pay your taxes in.
So, taxes are useful to give the currency value. But it has another function that is equally important: Taxes (and borrowing) serve to drain excess currency out of the market.
What's with that?
Suppose the government buys a lot of stuff. Suppose everyone is fully employed and buys a lot of stuff. What? There isn't enough stuff to go around? Prices are going up? There is INFLATION???
What to do? Oh! Tax and borrow and drain excess money (and buying power) out of the market. Ease up on the gas pedal (deficit spending) and touch the brake (taxes and borrowing).
Oh dear, employment is falling and facilities are standing idle!!
What to do? How about spending more on, say, the infrastructure, giving grants to states and towns to upgrade their facilities. Make sure everyone has health care. Provide support for local schools. Subsidize fuel efficient cars and research into renewable energy. Oh! And cut taxes on middle and lower income workers; you know, the ones that will actually spend money in the market place.
Remember this if nothing else: In a fiat monetary system and there are no debts in any other currency or commodity, THE GOVERNMENT CANNOT GO BROKE!!! Never! Never!