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Money doesn’t grow on trees. It is issued by a central government — but only if that government is a monetary sovereign. A monetary sovereign can print (or create digitally) as much money as it needs to reduce unemployment and grow the economy as long as it doesn’t trigger excessive inflation. Greece can’t do it. It gave up control of its currency when it substituted the euro for the drachma. Neither can a U.S. state or local government. But the federal government can, as long as it keeps inflation under control.
But a country may have other objectives beyond growing the economy. One may be to reduce carbon emissions to mitigate climate change. A higher gasoline tax would help motivate electric vehicle (EV) production and sales. Secretary Pete Buttigieg’s original idea of increasing the tax on gasoline isn’t the only way to pay for infrastructure improvements because printing additional money is a reasonable alternative. However, it still has merit as a way to induce the switch to electric vehicles.
President Biden’s proposal to increase the income tax on annual incomes above $400,000 and increase the corporate tax rate from 21 percent to 28 percent could serve to reduce extreme income inequality and reduce the money flowing from Main Street to Wall Street that has distorted our financial markets. With so much of the money flowing to Wall Street, the people on Main Street are unable to buy back the value of the goods and services they are producing. The flood of money into the bond market has driven down interest rates, encouraging and facilitating both private and public debt. If more money were flowing to Main Street, less private and public debt would be necessary to make up the difference in ability to pay for the goods and services.
Only the Federal Reserve is authorized to print (or digitally create) more money. But the U.S. Treasury can issue more U.S. Treasury securities, which the Fed could then purchase with newly minted money. That would increase the money supply and stimulate the economy to some extent, while further suppressing interest rates in the New York financial markets. In other words, the Fed’s monetizing the federal debt is equivalent to the government just printing more money. The Fed could just burn up the U.S. Treasury securities that it buys to eliminate that debt, but it prefers to hold on to them in case the economy begins to overheat so that the Fed could counter by selling those U.S. Treasuries back into the financial markets to draw money out of the economy.
What this all boils down to is that there are several alternative ways of paying for President Biden’s infrastructure plan. Each method could serve different alternative economic objectives. However, more likely than not, it will be the political considerations that ultimately decide how these infrastructure improvements will be funded. Keeping voters happy is the most important objective, but unfortunately getting the infrastructure plan passed by Congress may require satisfying the PAYGO rule in the House of Representative and the Byrd rule in the Senate, both of which require some combination of tax increases or spending cuts elsewhere in the budget. These rules are unnecessarily restrictive in that they prevent a monetary sovereign of expanding the money supply to keep up with and facilitating full employment in a growing economy. Even the late conservative economist Milton Friedman understood that expanding the money supply at least at some constant rate is necessary for economic growth. I can only hope that our lawmakers will come to understand how all this works. They all need to read Stephanie Kelton’s excellent book: “The Deficit Myth.”
Please provide your insights and comments on “How to Pay for Proposed Infrastructure Improvements” in comments box below.
Lawrence C. Marsh is Professor Emeritus in Economics at the University of Notre Dame and author of the 2020 book: Optimal Money Flow: A New Vision on How a Dynamic-Growth Economy Can Work for Everyone.
You can donate the entire purchase price of the book to student scholarships by buying a hard-bound copy of the Optimal Money Flow book at the Avila University Press website at: https://www.avila.edu/aupress/optimal-money-flow-by-lawrence-c-marsh
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