Government Finance – The Truth Behind Borrowing

Two Patrons of Economic Update ask: “Can you please explain the difference between the government borrowing money (from the corporations/rich/other countries) vs. printing money? What are the differences between government bonds for financing infrastructure projects or public goods, and borrowing money from corporations and billionaires for those same projects and services? What if bonds are bought by rich people and corporations to get the tax write offs?”

What is going on, we might say, when the government borrows money? Why does it do it? What are the consequences? What alternatives are there, and of course, this is an urgent question, because in our times, right now, governments are borrowing more money than we have ever seen, in the history of not only peace time but any time. In the lives of countries, including the United States, so here we go. When the government does things, all kinds of things, and let’s be really clear, in the history of capitalism and before that too, we have always had governments do enormous numbers of things. There are all kinds of reasons for that, including the economic reality that we see everywhere. If you have a big entity doing a whole lot of things, it’s often cheaper than having all of those things done by individual units. It is called economies of scale in economics. It’s why we have large corporations, it’s why we have large governments, they can do things and by doing it for everybody they can minimize often the costs and so on that are involved, but in any case when we have governments and we want them to do things like maintaining roads or providing security or whatever, there is the question: how we’re going to pay for that?

And one way to do it is to tax. And societies have been doing that for a long time. We take money from individuals, from institutions, from corporations, from businesses, we bring it all together, give it to the government so it can pay the people and the input costs for providing the services we want and that’s the end of that story. It can be done; we can pay as we go as a nation by taxing ourselves to enable the government to function. However, what we have, particularly, in capitalist societies is a very well coordinated effort by business to avoid paying taxes and by rich people to avoid paying taxes. It’s not that the rest of us don’t want to avoid it but we don’t really have the way to do that. Big corporations collect into their hands amounts of money that allow them to buy politicians, and you know the rest of that story: rich people likewise so they begin to resist paying taxes and they do that quite successfully. That pushes the burden of taxes on to the rest of us, the mass of the people, and they keep doing that until the mass says no more. We can’t have it. Now, the government’s in a jam. Everybody wants the services it provides, businesses, workers and so on, but nobody can pay for what it now costs. And what happens is, the politicians solve that problem by borrowing.

They don’t tax the rich, they don’t tax the rest of us as much as they might need to perform their functions, but they borrow instead. That’s another way of getting the money, and by borrowing, we call that issuing bonds. In other words, they give an IOU to whatever lender is going to give them money and that’s all a government bond is. It’s the same thing as government borrowing it’s just a form in which that borrowing is done. If you lend to the government, get a piece of paper where the government promises to pay you back at a certain point and to give you interest payments between now and when they pay you back. It’s an IOU, like any other. Now, here comes the politics of it all. Who lends to the government? The answer is, the mass of us, employees don’t. The major lenders to the government of the United States, for example, are big corporations led by banks, big insurance companies, very wealthy individuals who lend and foreign governments. That’s basically it. The mass of the working class doesn’t lend to the government. Now, let’s understand what that means. The government is spending money for services but is borrowing it from the rich. It could have taxed the rich, it could have taxed the corporations, but they were politically powerful and got that stopped. So, instead, they still give money to the government but instead of a tax they have arranged for government borrowing.

The government comes to them and borrows the money it did not have the courage to tax and so now for rich people and corporations they are in the catbird seat, aren’t they? Instead of paying taxes they give that same amount of money to the government. But it’s a loan which they will get paid back and while they’re waiting, they’ll get interest. This is the best arrangement for funding the government that rich people and corporations could ever have imagined. And guess who has to come up with the money to pay him back and the money to pay the interest? You and me who will pay the taxes eventually to do all of this payback that has to happen, so, government bonds are a maneuver, borrowing from corporations is a maneuver. It saves them from having to pay taxes and then doubles the reward not only will you not have to pay taxes, but we’ll borrow the money from you pay it all back and give you interest in the meanwhile. No wonder, eventually, this system blows up as the mass of people watch themselves squeezed ever more by a government that is serving the rich and powerful in this way. Which is a little bit hidden, but once you study it, you can see exactly what’s going on.

Final point. There are critics of this system, of course, one of the most recent ones is Modern Monetary Theory, which simply explains: you know the government could print the money. The government needs to do its services and inject money into the economy to pay for the things the government wants and that way there’d be no debts, there’d be no serving the wealthy, you would put the money in when the government needs to spend and you’d pull the money out where the economy needs it, by taxing and, you know, who you’d probably tax if the MMT people were in charge? You’d probably tax corporations and the rich which is where you should have started in the first place.