A trillion dollar bill
Move over, military-industrial complex
In a classic episode of The Simpsons, Mr. Burns (“America’s wealthiest and therefore most trustworthy citizen”) is given a trillion dollar bill to deliver to European allies after World War Two, which he promptly steals. In 1998, the idea of a trillion dollar bill was a joke, but a quarter-century later, the United States received one—and not in a good way.
In January, the Federal Reserve confirmed what I predicted six months ago: in 2023, the United States paid over $1 trillion in interest on its debt. This edges out the $.95 trillion for the military-industrial complex that Biden has requested for FY2024.
For decades, the “defense” budget has been singled out for wasteful spending, and with good reason. However, when we spend $14,000 for a toilet seat, we at least get a toilet seat that we didn’t have before. When we spend $1 trillion on interest, what exactly do we get for it?
Think about that for a moment—I’ll circle back.
Discretionary spending vs. Mandatory spending
A decade ago, there was a group (I forget which one) going around calling out the fact that the military was taking up a lion’s share of the “discretionary budget.” They’d hand out little round magnets to people with a pie chart like this; I’d see them on bumpers all around the state capitol.
Things like Social Security, Medicare, and Medicaid don’t show up in this chart because that spending is “mandatory.” Mandated by whom? The same people who decide on the discretionary spending—Congress.
Since Congress authorizes all spending—it’s their Constitution duty—there is another way to see the dichotomy. Mandatory spending is that which a previous Congress has promised to make and the current Congress is willing to go along with, and discretionary spending is when no previous Congress has codified an amount or formula.
We haven’t always paid interest on government spending
When Congress authorizes the borrowing of money, it promises that the United States will repay it, with interest, according to the terms of the loan. That’s mandatory. What’s discretionary, though, is the borrowing itself. Congress has the ability to issue money directly, and has used it in the past. As I’ve written,
After Lincoln’s election [in 1860], demand for government bonds dropped precipitously, with bidders demanding interest rates as high as 36%. Big banks promised to loan the United States hard currency, but soon reneged. Congress then passed legislation to issue legal tender; paper money not redeemable for gold or silver, but required by law to be accepted for payments. ‘Greenbacks,’ as the notes printed with green ink became known, were our first national currency.
Greenbacks were a sovereign currency, issued on the credit of the United States at 0% interest. It was debt-free government spending, and this financial freedom allowed the US to win the Civil War and end chattel slavery. However, when the war ended, the US soon returned to the old way of doing things—borrowing for any spending not covered by tax revenue.
Taxes for revenue are obsolete
Back during World War Two, the Chairman of the Federal Reserve Bank of New York gave a speech explaining how taxes for revenue were obsolete; a central bank could simply spend because of its power to issue sovereign currency. Of course, there were still good policy reasons to have taxes; he listed four.
First and foremost, taxes serve to claw back extra money from circulation and keep the purchasing power of the dollar relatively stable. The United States has traditionally aimed for 2% inflation; other nations like India and South Africa aim as high as 6%.
The second was to express public policy around income and wealth inequality. These inequalities distort the economy; progressive income taxes and the estate tax are an attempt to address them.
Third, taxes could be used to guide policy around industries and other economic groups. Tariffs are an example of this: increasing the cost of imported goods makes American production more competitive.
The fourth reason was as user fees, so the costs of things could be accounted for. When we buy gasoline, the gas tax is earmarked for funding the highway system.
A fifth reason, not mentioned but still valid, lies in influencing individual behavior. Taxes on cigarettes, for example, are demonstrated to reduce smoking, and thereby the high healthcare costs that result from their use.
The real insight of the speech was to think of taxes as policy questions, not revenue ones.
What are we getting for $1 trillion in interest?
Earlier, I observed: When we spend $14,000 for a toilet seat, we at least get a toilet seat that we didn’t have before. When we spend $1 trillion on interest, what exactly do we get for it?
There can be situations where borrowing money at interest is good policy, as was the case during World War Two. More than half of the country bought war bonds, which served an important economic function—it kept inflation in check by temporarily withdrawing that money from circulation. However, in 2022, only 1% of households owned Treasury bonds, so that clearly isn’t the reason today.
Is there another economic benefit that we’re getting worth $1 trillion? It’s not the ability to spend money beyond what’s been generated by tax revenue; as we’ve seen, the United States can do that without borrowing. If you can think of a good answer, please leave it in the comments below, but I’m going to give you my observation.
We get to maintain the status quo.
Congress gets an excuse to divert a trillion dollars to the individuals and institutions that already have money, exacerbating wealth and income inequality in a nation where 140 million people live in or near poverty.
Congress gets an excuse to cut spending in other areas that benefit the broader population. (Research reveals that “each dollar spent to reduce poverty … saves [the government] at least $7 on the future economic costs.”)
This is not a status quo we should maintain.
A smarter way to spend money
A better approach is to copy what Abraham Lincoln did and stop borrowing money. In his time—the second iteration of the Phoenix Cycle—the only option was to physically print paper notes. Today, the vast majority of money is electronic, and Congress can create debt-free digital greenbacks the same way.
In 1992, Ross Perot ran for president and persuaded people (incorrectly) that the budget should be balanced. In truth, a growing economy needs more dollars in circulation because there are more goods and services for sale and more people to buy them. Instead of recognizing this natural fact, the Ross Perot fallacy became baked into the political dogma of Washington DC.
It’s time to fix America’s monetary policy—a trillion dollars in interest is a yoke around our collective necks, plowing us deeper and deeper into debt. When we do, we won’t need to roll over Treasury Bonds as they come due, and the national debt will be paid down. Those who planned on collecting trillions in interest in the coming years will find other productive places in the United States to invest their money, making our economy even stronger. And by ensuring that every citizen collects the dividends from the natural growth of the money supply, we can create a trickle-up economy that benefits all of us.
(Read more: The Cantillon effect and UBI)
Conclusion
Addressing this systemic flaw in our monetary system will require cooperation. Fortunately, the American Union offers a way for concerned citizens to put policy ahead of partisan politics this election year. By crowdsourcing legislative solutions away from Washington’s moneyed interests and offering them to all federal candidates in 2024, a national and nonpartisan bloc of swing voters can create the political pressure to make Congress enact these solutions before the election in exchange for our votes.
The longer the United States takes to fix this problem, the more expensive it will be. What sort of economic legacy do you want our children to inherit? Help put our financial house in order by joining the American Union for 25¢/day and a good faith pledge to vote together November 5, 2024.
