#NayibBukele #GovernmentFunding #TreasuryBonds #Taxpayers #FederalReserve #MoneyPrinting
In a recent tweet, Nayib Bukele made a bold claim that the government is funded mostly by treasury bonds and not taxpayers. This statement has sparked a debate among economists and financial experts. Let’s dive into this contentious issue and debunk Bukele’s claim.
##Is the Government Funded Mostly by Treasury Bonds?
Nayib Bukele’s assertion that the government is funded primarily by treasury bonds is misleading. While it is true that the government issues treasury bonds to raise funds, it is not the sole source of government revenue. Here are some key points to consider:
1. **Tax Revenue**: One of the primary sources of government funding is tax revenue. Taxes collected from individuals and businesses play a significant role in financing government operations, programs, and services.
2. **Federal Reserve**: The Federal Reserve plays a crucial role in managing the country’s monetary policy. While the Fed can indeed buy treasury bonds as part of its open market operations, its goal is not to directly fund the government’s operations.
3. **Debt Financing**: Treasury bonds are a form of debt financing used by the government to borrow money from investors. These bonds must be repaid with interest, making them a liability for the government.
##Why Do People Still Pay Taxes?
Nayib Bukele raised an interesting question about why people still pay taxes if the government can print infinite amounts of money. Here are some reasons why taxes are necessary despite the government’s ability to print money:
1. **Maintaining Fiscal Discipline**: Taxation helps ensure fiscal discipline by limiting the government’s ability to spend beyond its means. It serves as a check on excessive government spending and helps prevent hyperinflation.
2. **Redistribution of Wealth**: Taxes play a crucial role in redistributing wealth and promoting social equality. They help fund social welfare programs, healthcare, education, and other essential services for the public good.
3. **Creating Demand for Currency**: Taxation helps create demand for the national currency by requiring individuals and businesses to pay taxes in that currency. This demand helps maintain the value and stability of the currency.
##The Illusion of Money Printing
Nayib Bukele’s assertion that taxes are solely meant to uphold the illusion that the government does not print money is overly simplistic. While it is true that the government can technically print money, doing so recklessly can have severe economic consequences, such as hyperinflation and currency devaluation.
The government’s ability to print money must be balanced with responsible fiscal policy, sound monetary management, and appropriate taxation. Taxes serve a vital purpose in funding government operations, promoting economic stability, and ensuring social welfare.
In conclusion, while treasury bonds are a significant source of government funding, taxes also play a crucial role in financing government operations. Nayib Bukele’s claim that the government is funded mostly by treasury bonds is misleading and overlooks the broader context of government revenue sources. Taxes are necessary not just to uphold an illusion, but to fund essential services, maintain economic stability, and promote social well-being.
When the government does something like build a road, it needs real resources like gravel, asphalt, bulldozers, roading engineers, etc. In the short term, that means those resources aren’t available to the private sector.
When the government pays social security benefits, it’s so the beneficiaries can buy real resources like food, clothing, shelter, etc. In the short term, that means other people have a bit less food (practically this tends to mean a bit less animal feed), clothing, etc.
Of course in both cases we hope that such spending will result in more real resources available to everyone in the long term.
The government can obtain those real resources by directly requisitioning them (the 1970s/80s film cliché of a cop following a suspect by jumping into a stranger’s car and saying “follow that car”), but it’s generally a lot more convenient to get said resources by paying money for them.
The government can acquire said money by printing money, by borrowing it or by requiring people to pay taxes (in money, generally, though governments have levied taxes in kind and then traded them for other resources). But all those are simply ways of transferring real resources from the private sector.
Taxes have an advantage over printing money in that it’s more transparent, so easier for voters to monitor, the distributional impacts are easier to manage, and they don’t hurt the usefulness of money for such purposes as budgeting.
Borrowing money shifts the tax burden over time, so in the future taxpayers will be paying more in taxes without receiving more in government services (all else being equal). This may well be justifiable (e.g. WWII is a pretty clearcut case), but it has risks too, as lenders might decide to stop lending if they fear they’ll never be paid back. And that decision tends to happen when the government is already in economic trouble.
Therefore there are practical reasons to favour funding government by taxes [ETA: as a general rule, of course in specific circumstances another tool may be better].
In short, when someone talks about government budgeting, try to visualise what is happening in terms if real resources, at least in part.