If the Federal Government Won’t Fund the States’ Emergency Needs, There is Another Solution
Cold Mountain TrailParticipant
- Total Posts: 12,932
If the federal government persists in ignoring the fiscal needs of the states, a more radical approach might be required. California’s own history provides a potential path forward.
Back in 2009, when faced with a similar fiscal crisis, California’s state controller, John Chiang, began printing IOUs in lieu of cash to pay taxpayers, vendors, and local governments. In the context of a $26 billion fiscal deficit, the amount of IOUs created was actually quite small: 28,750 IOUs worth $53.3 million issued initially. But these IOUs came with a potentially radical provision, namely allowing them to be used for personal income tax refunds—an action that effectively would have meant that California was de facto entering the currency issuing business.
The tax payment provisions of the IOU program were headed off before they came into use. There were indications that Treasury Secretary Timothy Geithner pressured the banks not to accept the IOUs as payment for taxes. In any case, the Obama administration ultimately passed a sufficiently large-scale fiscal relief package (the 2009 American Recovery and Reinvestment Act) that alleviated the need for the more extreme measures contemplated by the California state government at that time.
(T)he economics behind the 2009 California project were solid, even though the experiment was never seen through to its full conclusion. In the words of the American economist Abba Lerner…
“The modern state can make anything it chooses generally acceptable as money… if the state is willing to accept the proposed money in the payment of taxes and other obligations to itself the trick is done…”
May 27, 2020 at 3:38 AM #319396Blue MeanyParticipant
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printed their own scrip. I’ve read that this started in Austria and was the source of John Kenneth Galbraith’s ideas about deficit spending. In any case, they were very common in the US and are collector’s items now. Since they could be used to pay taxes, this created a local demand, and they circulated in the local economy, which was also lubricated by the credit offered by locally-owned business. This is one of the rationales for creating local currencies today: to re-localize the economy and cut out the big businesses that take money out of the community and hoard it. Seem like state scrip would make a lot of sense, along with state banks.
May 27, 2020 at 4:07 AM #319404retired liberalParticipant
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This was back when nickles would buy something.
We are an arrogant species, believing our fantasy based "facts" are better than the other person's fake facts.
If you are wrong, it will be because you are not cynical enough.
The older we get, the less "Life in Prison" is a deterrent.
Always wear a proper mask when out and about. The life you save could be both yours and mine.
May 27, 2020 at 4:11 AM #319405PolecatHollererParticipant
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If these IOUs can’t be exchanged for milk or gasoline, THEY AIN’T MONEY!
What good is a “tax credit” to some starving minimum-wage worker who doesn’t earn enough to OWE anything on April 15th, but really needs to feed their kids TODAY?
What would happen is: all those utterly useless IOUs would get bought up at pennies on the dollar by wealthy persons and corporations, who would then apply them at face value to their tax bill. Every strip mall “we buy gold” business would put up an “and IOUs” sign, and most of the benefits would go to people who don’t need them. AS USUAL.
If you give a man enough rope, it will be six inches too short. This is not the nature of rope- it is the nature of man.
May 27, 2020 at 5:18 AM #319440Cold Mountain TrailParticipant
- Total Posts: 12,932
In the words of the American economist Abba Lerner, from his essay in the 1947 edition of the American Economic Review:
“The modern state can make anything it chooses generally acceptable as money… It is true that a simple declaration that such and such is money will not do, even if backed by the most convincing constitutional evidence of the state’s absolute sovereignty. But if the state is willing to accept the proposed money in the payment of taxes and other obligations to itself the trick is done.” [emphasis added]
The key insight from Lerner here is that in a world of fiat currencies (i.e., money established via government fiat), both the use of currency and the value of said currency are based on the power of the issuing authority, as opposed to some underlying intrinsic value (as would be the case, say, if a currency was backed by gold). As I have written before, “The tax (and the corresponding ability to enforce payment) is what gives an otherwise worthless piece of paper with pictures of dead presidents on it its value. Even though this paper is not ‘backed’ by anything, taxes function to create the notional demand for said paper dollars.” The tax provision itself imparts the value or, as the economist A. Mitchell Innes termed it, “A dollar of money is a dollar, not because of the material of which it is made, but because of the dollar of tax which is imposed to redeem it.”
“began printing IOUs in lieu of cash to pay taxpayers, vendors, and local governments”
not to pay welfare mothers in need of milk. to pay the taxed or taxing to save ‘real’ money for the welfare mothers.
not a scam. not ideal either, but a short-term way out of complete shutdown and chaos for state governments.
and one that has worked in the past as the author documents.
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