Why the Government Must Tax Instead of Just Printing Money

If the government, instead of taxing us or borrowing money to pay its bills, just printed money and used that instead, what would happen? Well, for one thing, the increase in the money supply would cause inflation, which would mean that everybody’s money would be worth less. But wouldn’t that just be the equivalent of a relatively frictionless, efficient, and difficult-to-evade flat-tax on cash deposits and income? Why doesn’t the government use such a method to fund itself?

Steve Saville suggests that part of the reason is that in order for such a scheme to work, the people the government needs to pay must continue to believe that legal tender is valuable. One way of doing this is to insist that everyone use legal tender to pay their tax bills. This creates a more-or-less universal demand for the currency (since everyone needs some to pay their taxes), which gives it value. So the government cannot wholly rely on “just printing more money” to pay its bills, but must supplement this with widespread demands for the money it prints.

Interesting argument; I wish I was more economically literate and could wrap my mind around it a little better. I know that the powers that be manipulate the money supply and the value of currency for their benefit, but I have a hard time nailing down just what this means quantitatively. For instance, if the money supply were not being manipulated in this way, how much would the government have to beg, borrow, or steal to make up the difference?

“Debra” of The Claire Files writes that as a libertarian critic of government, she got used to being called a right-winger back in the Clinton years, and she’s getting used to being called a lefty today. And sure enough, when the lefties were playing Clinton apologists, she spent more time with the right-wing critics, and nowadays she’s spending more time with folks on the left, even though she holds “the same convictions as [she] had in the Clinton years.”

Of her new strange bedfellows, she says:

The biggest thing about the Left: they seem to be more willing to make personal sacrifices for their principles than the Right is. Whether it’s paying a premium for “fair trade” coffee, refusing to eat animal products, or bicycling to help the environment, they do instead of just talking about it.

Over the last several years, I’ve watched libertaria swing leftward, revolted by the Dubya Squad and the Republican establishment. Wouldn’t it be nice if in the ensuing cross-pollination the liberals got a little more skepticism about government and the libertarians got a little more serious about putting their money where their mouths are?

One of my favorite liberals in blog land is Matthew Yglesias. He has the patience to answer the comfortable idiot-“pragmatists” who want to keep plodding into the Big Muddy, and a pocket calculator that can say a thing or two about how much that’s gonna cost:

By April 2006, a Congressional Research Service (CRS) inquiry concluded that… before it ends, the war will likely cost somewhat more than the $549 billion spent (adjusted for inflation) in the much more lethal Vietnam War. But even this figure will likely prove to be off by hundreds of billions of dollars because it accounts only for funds directly appropriated for war fighting. As Linda Bilmes, a leading Harvard budgetary expert, and Nobel Prize-winning economist Joseph Stiglitz point out in their January 2006 paper, “The Economic Costs of the Iraq War,” the spending captured by the CRS, even in strict budgetary terms, is “only the tip of a very deep iceberg.”

Wartime appropriations do not, for example, include the cost of disability payments to veterans wounded in the war, payments that will continue throughout their life spans. Nor do they cover the costs of medical treatment for those seriously injured in the war, or even such basic war-related costs as the replacement of equipment and munitions expended in the conflict or the need to transport soldiers back to their home bases when they rotate out of country. The war has also substantially increased the military’s overall recruiting costs, reflected in bigger bonuses and additional recruiters. What’s more, by combining the war with aggressive tax cutting, the administration has ensured that the operation is paid for entirely by borrowing money on which interest will need to be paid. The shocking truth, according to Bilmes and Stiglitz, is that if one applies the Congressional Budget Office’s basic assumptions about the duration of the conflict (“a small but continuous presence”), it will cost nearly a staggering $1.27 trillion dollars before all is said and done.

The number is so high as to defy human comprehension. All the numbers ending in “-illion” sound the same. But a trillion is what you get if you spend a million dollars a day … for a million days. That’s 2,737 years — a cool mil a day, every day, in other words, until the Year of Our Lord 4743. Or, working backward, from the time when Homer wrote the Iliad up to now. The $270 billion in rounding error is worth another 750 years at the million-a-day rate. That takes us up to the year 5493 — or back to when Moses fled Egypt.