Opinion

The biggest myth about the government

"Government can't create wealth. It can only redistribute it."

"Government can't create wealth. It can only redistribute it."

You've probably heard that chestnut before: That government, whatever good it does, is fundamentally leeching off the private sector and depends on its productivity and success. Needless to say, this folk wisdom is quite popular with conservatives and libertarians.

It's also a myth. Probably the most consequential myth we tell about government.

Plenty of liberals are probably already nodding their heads in agreement. Government builds roads and seaports and dams. It provides social workers and enforces all legal contracts. Those are all goods and services that didn't exist before government decided to provide them. That's wealth creation!

So on the surface, the falsehood is perhaps easily refuted. But there's also a deeper misunderstanding at work — one that subtly infects how conservatives and liberals alike think about the economy.

Almost everyone thinks of money as something that precedes wealth creation: To create a business, first you have to go out and get money from investors. For government to go out and build roads or employ soldiers, first it has to raise tax revenue.

But that's actually backwards.

Money is just a medium to facilitate trade. It comes into the picture after you've created a good or service, to help you attain some other good or service you might want more. And in any economy, someone has to create the money supply. In America, that someone is the federal government.

This means the U.S. government could be an utterly unique actor in our economy if it wanted to be. It could literally just print money and start hiring.

As it stands, we divide the government's money-creating powers in a murky way between fiscal policy at the Treasury Department and monetary policy at the Federal Reserve. The rules also require the treasury to issue bonds and thus "borrow" money whenever the federal government deficit spends, and thus pretend it's cash-constrained like an individual or business or state government is. Finally, our system mainly uses the government's money-creating powers to backstop and stabilize the private financial system, leaving the job of providing the economy with liquidity mostly to private banks.

But all of this just clouds the real nature of what's going on.

So is there any need for taxes at all? Well, yes.

If the government just prints money and gives it to people (say, to raise incomes or provide social insurance) that risks inflation. If the government prints enough money to employ everyone in the economy, but then just keeps printing money and hiring, it'll just shift people between jobs instead of creating new ones, which also risks inflation. But taxes provide a useful tool to control inflation. If government spending dumps too much money into the economy, threatening to overheat it, taxes suck money back out and cool it off.

But plenty of the government's activities really don't necessitate taxes: Namely, those that produce some new good or service to absorb the new money. So if government hires you to teach kids or build a bridge or something, that probably doesn't require tax revenue to pay for it. But if the government just gives you a check for, say, retirement income (i.e. Social Security) that probably does require the counterbalance of taxes.

So how could the federal government use its unique economic powers? First, it could champion the value of public employment and expand it. It could also get more creative, and provide a permanent stream of money to state and local governments, to use for new goods, services, and infrastructure as they see fit. To wipe out unemployment, it could even guarantee a job, with good pay and good benefits, to anyone who wants to work.

But even liberals don't really understand this. Hardcore left-wingers like Bernie Sanders think the government must first raise tax revenue to pay for policy. Keith Ellison, Sanders' preference for DNC chair, recently told Vox's Ezra Klein that there really won't be enough wealth to go around if we don't raise taxes on the rich.

But that's not true. Government doesn't really need to extract money from the wealthy to pay for everything.

Even Keith Ellison could afford to be a little more radical.

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