Pub. 9 2021 Issue 2 14 is what creates jobs. When the supply side contracts, businesses fail, unemployment rises, and a vicious cycle begins. It is as simple as people buying items or not. Items include houses or rent, food, clothing, cars, and education. All supply chains – except government spending – end with a consumer purchase. The government’s primary tool to prevent contractions is to keep the money f lowing and support personal income through job programs and grants when needed. The government continues to borrow amounts equal to the deficit, but it could just issue the money. The government can issue money to pay all of its debts whenever they come due. But even that is unnecessary. The Federal Reserve has independent authority to buy bonds and securities and could pay off all outstanding government bonds without an appropriation by buying them, then paying itself or just writing off the debt. The Fed is in the unique position of having the unlimited capacity to buy securities and no necessity to make a profit. That is how a central bank is supposed to work. Taxes and borrowings have become more important as tools to manage how much money f lows through the economy. If there is a disruption in demand due to a pandemic or problem in the credit markets, the government can inject more money into the economy. This would maintain demand without causing inf lation, as long as the money supply does not exceed the supply of goods and services. Taxes, along with other actions by the Fed, such as managing interest rates, can inject new money or draw excess money out of the economy. However, to work best, tax decreases should favor lower-income people. They will spend the additional money, which is crucial to increasing demand. Wealthy people tend to save the extra money they get from a tax decrease. Deficit hawks see the main f law in the current deficit model as the extent to which interest on government debt is overwhelming the budget. To manage this successfully, the government first needs to understand what amount of government debt the economy needs and how much debt needs to be circulating to help the Fed manage the money supply. It is another supply and demand equation. The economy uses a certain amount of government debt for various purposes. Suppose the supply of government debt was reduced. In that case, it might create excess demand for other securities, which would enable issuers such as companies and local governments to sell their securities for lower rates, which would undermine the Fed’s ability to manage interest rates. Another issue is emerging that is harder to manage. The total economy does not just measure supply and demand. Inf lation can happen in specific markets even though the overall economy has record low inf lation. A good example is housing. Too much credit in the early 2000s created too much demand. That caused a huge bubble to burst in 2008, bringing about the Great Recession. Even after tightening credit standards, housing costs are once again rising at excessive and unsustainable rates in many parts of the nation. The biggest possible f law in this system is that politicians control it. We must trust them to pull money out of the economy when it begins to inf late, and one way to do that is to raise taxes. In effect, modern federal budgeting shifts taxation from collection before spending to a cleanup role after the spending. And that should often include increasing taxes if federal spending begins overstimulating the economy. What could possibly go wrong? n Mr. George Sutton served as the Utah Deputy Commissioner of Financial Institutions from 1983 to 1987 and as Commissioner of Financial Institutions from 1987 to 1992. He served as president and CEO of one industrial bank and helped organize several others. He has served on several boards of directors, including Glacier Bancorp and Glacier Bank, Synchrony Bank, the Utah Housing Finance Agency, the Conference of State Bank Supervisors, the Utah Symphony, the Utah Association of Financial Services, GMAC Capital Corporation, WebBank and Community Nursing Services. The biggest possible flaw in this system is that politicians control it. We must trust them to pull money out of the economy when it begins to inflate, and one way to do that is to raise taxes. →