The 7 Deadly Innocent Frauds of Economic Policy

1. Government spending isn't limited by taxing or borrowing.

Federal government spending is in no case operationally constrained by revenues, meaning that there is no “solvency risk.”

Operational reality. The federal government, as the issuer of the currency, doesn't need to "get" money from anywhere before it can spend. Unlike a household or a state government that must earn or borrow currency created by someone else, the federal government creates dollars when it spends. This is done simply by changing numbers in bank accounts.

Scorekeeper analogy. Think of the government like the scorekeeper at a football game or bowling alley. When points are added to the scoreboard, they don't "come from" a reserve of points. The scorekeeper just changes the numbers. Similarly, when the government spends, it changes the numbers in private bank accounts upwards.

No running out. The government can always make payments in its own currency. The question "How are you going to pay for it?" fundamentally misunderstands how a sovereign currency system works. The government doesn't need to tax or borrow to obtain dollars; it needs to spend dollars into existence first for the non-government sector to acquire them.

2. Government deficits don't burden future generations.

Collectively, in real terms, there is no such burden possible.

Real vs. financial. The idea that today's deficits burden our children confuses financial accounting with real resources. Future generations will consume whatever goods and services they produce in the future. Today's financial balances (like the national debt) do not physically prevent them from working or producing.

No time travel. We don't send real goods and services back in time to pay off past debts, and our children won't have to either. The real cost of government spending is the real resources (labor, materials) used today that are then unavailable for private use today.

Lost potential is the real cost. The true burden on future generations comes from underutilizing resources today. When we have high unemployment and idle capacity due to misguided austerity policies driven by deficit fears, we are failing to produce goods, services, and investments (like education or infrastructure) that could benefit the future.

3. Government budget deficits add to savings.

Federal Government budget deficits ADD to savings.

Accounting identity. As a matter of national income accounting, the government's deficit spending exactly equals the net increase in the financial assets (savings) held by the non-government sector (households, businesses, foreigners). This is an accounting fact, not a theory.

Dollars flow out. When the government spends more than it taxes (runs a deficit), it is injecting more dollars into the economy than it is removing through taxes. These net dollars accumulate as financial savings in the non-government sector.

Surpluses drain savings. Conversely, a government budget surplus means the government is taking more dollars out of the economy through taxes than it is spending. This directly reduces the net financial savings of the non-government sector, as seen during the Clinton surplus years which preceded an economic downturn.

4. Social Security is not broken; government checks don't bounce.

Federal Government Checks Don’t Bounce.

Operational capacity. The federal government can always make Social Security payments because it is the issuer of the currency. The "money" for Social Security, like all federal spending, is created via spreadsheet entries that increase the recipient's bank balance.

Trust fund is accounting. The Social Security Trust Fund is merely an accounting construct within the government's own books. Whether the number in the trust fund is positive or negative has no bearing on the government's operational ability to make payments.

Real resource question. The real question regarding Social Security in the future is about the availability of real goods and services produced by the working population to be consumed by retirees (the dependency ratio). It is not a question of whether the government can financially afford to make the dollar payments.

5. Trade deficits are benefits, not costs or job destroyers.

Imports are real benefits and exports are real costs.

Receiving is better than giving. From an economic perspective, receiving real goods and services (imports) is a benefit, while using real resources to produce goods and services for others to consume (exports) is a cost. A trade deficit means we are receiving more real goods and services than we are giving up.

Increased standard of living. Trade deficits directly improve our standard of living by providing us with more goods and services than we produce domestically. The rest of the world is sending us real wealth in exchange for financial assets (dollars or Treasury securities).

Jobs issue is domestic. Jobs are lost not because of imports themselves, but because domestic spending power is insufficient to purchase both imports and the full employment level of domestic output. Appropriate fiscal policy (tax cuts or spending) can ensure enough aggregate demand exists to maintain full employment regardless of the trade balance.

6. Investment adds to savings, not the other way around.

Investment adds to savings.

Paradox of thrift. The conventional idea that we need to save more to fund investment is backwards at the macro level. When individuals or businesses decide to save by reducing spending, it lowers aggregate demand, potentially leading to reduced income and output for others.

Spending drives investment. Decisions to invest (e.g., build a new factory) involve spending. This spending becomes income for others (workers, suppliers). If this income is not fully consumed, it results in savings. Thus, investment spending creates the income from which savings can occur.

Savings is accounting. Savings is the accounting record of investment and other injections into the economy (like government deficits or export surpluses) that are not offset by leakages (like taxes or imports). Policies designed to increase savings by reducing spending can be counterproductive, leading to lower income and less actual saving.

7. Higher deficits today don't necessitate higher taxes tomorrow.

I agree—the innocent fraud is that it’s a bad thing, when in fact it’s a good thing!!!

Taxes regulate demand. The primary function of federal taxes is to regulate aggregate demand and manage inflation, not to fund government spending. Taxes remove spending power from the private sector.

Deficits fill spending gap. Higher deficits today are typically a result of insufficient private spending, leading to unemployment and underutilized capacity. The deficit represents the government filling this spending gap to support output and employment.

Taxes rise with prosperity. If higher deficits successfully stimulate the economy to full employment and potentially inflationary levels, then higher taxes might be needed tomorrow to cool down the economy by reducing private spending power. In this context, "higher deficits today mean higher taxes tomorrow" simply means "policies to fix a weak economy today will lead to a strong economy tomorrow, potentially requiring taxes to prevent overheating."

8. The operational reality of money is simple spreadsheet entries.

Government spending is all done by data entry on its own spreadsheet called “The U.S. dollar monetary system.”

Digital money. In the modern era, money is primarily digital. Government spending involves the Treasury instructing the Federal Reserve to add numbers to the bank accounts of recipients. Taxation involves the Fed subtracting numbers from bank accounts.

No physical transfer. There is no physical transfer of funds from taxpayers or bond buyers to the government before it can spend. The process is one of adjusting numerical balances within the interconnected banking system and the Federal Reserve's accounts.

Fed Chairman confirms. Even former Fed Chairman Ben Bernanke has publicly stated that the Fed lends to banks by simply using a computer to "mark up the size of the account that they have with the Fed," confirming the data entry nature of money creation.

9. Taxes function to regulate the economy, not fund spending.

Taxes function to regulate the economy, and not to get money for Congress to spend.

Creating demand for currency. Taxes create a demand for the government's currency. By imposing tax obligations payable only in dollars, the government ensures that people need dollars, motivating them to sell goods, services, and labor to obtain them.

Managing aggregate demand. Taxes are a tool to manage the total level of spending in the economy. If total spending (government + private) is too high relative to the economy's capacity, it can cause inflation. Taxes reduce private spending power, making room for government spending without causing excessive inflation.

Balancing the economy. The appropriate level of taxation is determined by the need to balance aggregate demand with the economy's capacity at full employment. It is not determined by the amount of government spending needed for public purpose.

10. Government debt is just private sector savings in Fed accounts.

In fact, the entire $13 trillion national debt is nothing more than the economy’s total holdings of savings accounts at the Fed.

Savings accounts at the Fed. U.S. Treasury securities are functionally equivalent to savings accounts at the Federal Reserve. When the government "borrows," it is selling these securities. Buyers transfer funds from their checking accounts (reserve accounts at the Fed) to their savings accounts (securities accounts at the Fed).

Not borrowing to spend. The government doesn't sell bonds to get money to spend. It spends by crediting bank accounts. Bond sales are primarily a monetary policy tool used by the Fed and Treasury to manage the level of reserves in the banking system and support the Fed's target interest rate.

Paying debt is account transfer. When government debt matures, the Fed simply transfers the funds from the securities accounts back to the reserve accounts. This is a non-event operationally and does not pose a solvency risk for the government.

11. Policy should focus on real resources, not financial constraints.

What matters is the real life—output and employment—size of the deficit, which is an accounting statistic.

Functional Finance. Economic policy should be judged by its real-world outcomes – full employment, price stability, and public well-being – not by arbitrary financial targets like balancing the budget. This approach is known as "Functional Finance."

Real costs and benefits. Decisions about the size and scope of government spending should be based on the real resources consumed (labor, materials) and the real benefits provided (infrastructure, education, defense), not on whether the government can "afford" it in financial terms.

Monetary system as a tool. The monetary system is a tool to mobilize real resources for public purpose. Misunderstanding its operations leads to policies that constrain real output and employment unnecessarily, prioritizing financial accounting over human well-being.

12. Specific policies can restore prosperity and full employment.

This book’s purpose is to promote the restoration of American prosperity.

Payroll tax holiday. Suspending payroll taxes (FICA, Medicare) for both employees and employers would immediately increase take-home pay for workers and lower labor costs for businesses, boosting aggregate demand and job creation.

Revenue sharing for states. Providing direct, unconditional federal funding to state governments would alleviate their fiscal crises, allowing them to maintain essential services and jobs without raising state taxes or cutting spending.

National service job guarantee. Offering a federally funded job at a modest wage ($8/hr with benefits) to anyone willing and able to work would eliminate involuntary unemployment, provide a transition to private sector jobs, and create a stable labor buffer stock.

Last updated: June 11, 2025