America was so caught up in the fight between warring economists in the 70s that it barely noticed when Nixon changed the economic reality forever in a feud with France over its Treasury account and gold. He took us completely off the gold standard to avoid the hit on our Treasury and only agreed to pay the demand in dollars. What this means to our economy has only been briefly touched on because the GOP has had such success selling its supply side nonsense that it would be political suicide for any politician to oppose the common thinking of voters, even as wrong as it is. The Dems face the same problem, but their push has been to “tax the rich” and they have entrenched that into their party’s ideology too deeply to begin a discussion of something different.
What this paradigm shift in our economy means is that congress can authorize payment for any program it deems necessary, or beneficial, without concern for how to “pay for it”. With a currency no longer restrained by the gold supply and a debt denominated in that same currency the economy can never become insolvent, or unable to pay its bills. Paying for anything, including the debt, is simply a matter of paying for it. Also, under this system taxes don’t fund spending, and are simply a brake lever the congress can pull should the economy ever become overheated and threaten inflation. While taxes are still accounted for in relation to the debt, they don’t get transferred to appropriations for spending. They are nothing more than “canceled” currency. This gives considerable validity to the conservative argument that taxation drains the economy of purchasing and productive investing potential, although those in the top tiers of income aren’t known to do either willingly.
It does, however, all but completely negate any validity for the conservative abhorrence for government spending that isn’t military related. With one party refusing to allow government to inject any substantial amount of stimulus into the economy and the other wanting to tax as much out as possible we are probably very lucky that the recent political environment has gridlocked both. We will have to see what comes of the recent election giving such policy making power to the GOP. Trump has talked up infrastructure investment, but he has a congress full of deficit hawks to convince. I think that his showing the wealthy that he has their backs against the taxman will give him some latitude for spending and may show the value of our sovereign currency in stimulating economic growth, which is also not going to bode well for the future of budget centered policy.
Once it is shown that we don’t have to “pay for” things before we spend for them (the issuer of currency doesn’t need our currency to spend currency) and that the debt (a record of currency left in the private sector not canceled by taxation) isn’t the harbinger of end times we may be able to sneak up on a sensible economic policy of increased domestic deficit spending that avoids more suffering and creates demand for goods while not depriving the wealthy of their hoarding obsession. Sadly, neither side of the political divide is going to be happy about it.
