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The federal government has a limited supply of money, but people tend to think of it as endless because that supply is much larger than state budgets and because the federal government continues to spend more than it receives in revenue. The federal government obtains most of its money from various taxes (such as income taxes, payroll taxes, estate and gift taxes, and excise taxes) (CED, 2019). It also collects tariffs on certain goods as well as penalties and interest (such as when taxes are not paid in full and on time).

The federal government can spend more than it receives in revenue by two methods – borrowing money by selling bonds (TreasuryDirect, 2021); or increasing the money

Paying the Bill Elizabeth Keavney, Ph.D. Professor at American Public University System Published Jun 19, 2021

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supply, sometimes called “printing money,” though that term is no longer a literal description.

Borrowing money by selling bonds simply means the federal government is agreeing to repay the money borrowed plus interest. If it cannot do so, it can offer a deal to bond holders that it will pay back only part of what it owes them for buying government bonds or extend the maturity date so it can take longer to pay back that loan. Either paying late or paying in part would be a default (because it changes the terms of the agreement between the bond holders and the government). According to Siegel and Zivney (2011), the last time this happened was in 1979, when the U.S. government failed to make timely payments to bondholders. This $120 million issue cost the federal government approximately $6 billion a year for at least a year. Supposedly, this was a “glitch” in the system. If the federal government continues to spend more than its revenue and borrows money to make up the difference, the interest on the borrowed money will become a larger and larger part of the federal budget, and eventually a crushing burden.

Since the COVID-19 pandemic shut-downs created a recession, some people look to Keynesian Economics, which say the government should borrow and spend money to boost demand. However, they generally forget the rest of Keynesian Economics, which says that once the economy expands, governments should pay back the loans (John Maynard Keynes, 2021). Increasingly larger debt is the result.

All the “stimulus money” given away during the COVID-19 crisis will have to be paid back with interest in the future. Estimates say that these “stimulus packages” have already increased the national debt (total the government owes) by approximately $4.7 trillion (as of June 13, 2021) (Alpert, 2021). That figure is more than three times the amount the U.S. expects to spend on all non-stimulus discretionary budget items in 2021 and almost as much as the total 2021 non-stimulus federal budget (Office of Management and Budget, 2020). This figure does not include any interest that will be due on the money borrowed to pay for these packages.

The government can also pay its debts (to bondholders or to providers of goods and services) by decreasing the value of money by creating money (through the Federal Reserve) out of nothing by virtually “printing” it. This is all very complicated, but the thing to remember is that when the government “prints” money, it decreases the value of every dollar people have.

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Modern Monetary Theory says the federal government can always pay its bills by creating more money (D’Souza, 2021). However, its proponents often do not tell people that creating more money makes current dollars less valuable. This generally causes an increase in the prices of goods and services, including basic necessities such as food and fuel. It causes other problems, but the thing most people are concerned with is the cost of the goods and services they need. Right now, inflation is very low, but the policies that are enacted in the coming months and years could change that.

In the long run, the federal government can bring its budgets back into balance by increasing revenue or by reducing spending. Reducing spending is generally not popular with politicians, because every item in the budget has some constituency that will object to its reduction. Some people suggest increasing tax rates to increase revenue. However, since taxes reduce economic activity and discourage specifically taxed activities by reducing the financial motive for people to do them, increased tax rates sometimes reduce revenue, rather than increase it (Avendano, n.d.). Conversely, reduced taxes and regulations lead to increased economic growth, which can lead to increased revenue.

Economic growth is tied to the Gross Domestic Product (GDP). The GDP is the measurement in dollars and cents of the market value of all the goods and service produced in a given time frame (usually a year). This can be broken down by market sector, but most of the time, it refers to the GDP for the entire country. GDP tracks the nation’s wealth. It is one of the most used indicators used to track the health of the nation’s economy (Fernando, 2021). In order to increase GDP, businesses create and sell goods and services; they buy things from other businesses, and they employ people to do this, all of which creates jobs. All of this increases the GDP.

This means that when businesses and people are able to prosper, the GDP improves. The Federal Reserve bank and US Office of Management and Budget show us that since about 1940s (post Great Depression), the federal government takes in approximately 16-17% of GDP. (It varies, of course, but that’s the rough average.) Tax rates have varied far more than that percentage over that period. So, the best way to obtain a larger amount of cash into the federal government is to increase GDP (Federal Reserve Bank of St. Louis).

References

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Alpert, G. (June 13, 2021). A breakdown of the fiscal and monetary responses to the pandemic. Retrieved June 13, 2021 from https://www.investopedia.com/government- stimulus-efforts-to-fight-the-covid-19-crisis-4799723

Avendano, E.M. (n.d.) Effects of a tax cut on government revenues: Laffer curve analysis. Retrieved June 5, 2021 from https://www.sjsu.edu/faculty/watkins/econ202/laffercurve.htm

Committee for Economic Development (CED). (February 5, 2019). Debt 101:Where Does the US Government Get its money? Retrieved June 2, 2021, from https://www.ced.org/reports/where-does-the-us-government-get-its-money

D’Souza, D. (February 23, 2021) Modern Monetary Theory (MMT). Investopedia. Retrieved June 3, 2021, from https://www.investopedia.com/modern-monetary-theory- mmt-4588060

Federal Reserve Bank of St. Louis Economic Research. (2020) FRED Economic Data. Retrieved November 14, 2020, from https://fred.stlouisfed.org/series/FYFRGDA188S

Fernando, J. (April 25, 2021). Gross Domestic Product (GDP). Retrieved June 13, 2021 from https://www.investopedia.com/terms/g/gdp.asp

John Maynard Keynes. (2021). Keynesian Economics in a Nutshell. Retrieved May 20, 2021, from https://www.maynardkeynes.org/maynard-keynes-economics.html

National Constitution Center. (2021). The U.S. Constitution. Retrieved May 20, 2021, from https://constitutioncenter.org/interactive-constitution/full-text

Office of Management and Budget (2020) Budget of the United States Government. Retrieved June 13, 2021 from https://www.govinfo.gov/content/pkg/BUDGET-2021- BUD/pdf/BUDGET-2021-BUD.pdf

Patton, M. (May 3, 2021). U.S. National Debt Expected to Approach $89 Trillion by 2029. Forbes. Retrieved June 1, 2021, from https://www.forbes.com/sites/mikepatton/2021/05/03/us-national-debt-expected-to- approach-89-trillion-by-2029/?sh=58f2292c5f13

Sergent, J., King, L., and Collins, M. (May 8, 2020). 4 coronavirus stimulus packages. $2.4 trillion in funding. See what that means to the national debt. USA Today. Retrieved November 14, 2020, from https://www.usatoday.com/in-

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depth/news/2020/05/08/national-debt-how-much-could-coronavirus-cost- america/3051559001/

Siegel, R. and Zivney, T (July 11, 2011). When did the U.S. last default on treasury bonds? NPR Retrieved November 14, 2020, from https://www.npr.org/2011/07/11/137773341/looking-at-when-the-u-s-last-defaulted- on-treasury-bonds

Tax Policy Center, Urban Institute and Brookings Institute. (2021). The State of State (and Local) Tax Policy. Retrieved May 20,2021, from https://www.taxpolicycenter.org/briefing-book/what-are-state-balanced-budget- requirements-and-how-do-they-work

Treasury Direct. (2021). Treasury Marketable Securities. Retrieved June 2, 2021, from https://treasurydirect.gov/instit/marketables/marketables.htm

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