The $10,000 Public Finance Challenge
The $10,000 Public Finance Challenge
The Prize – $10,000 in Canadian funds.
The Claim – That it makes no difference whether a community has its government borrow from or tax resident citizens to fund public expenditures.
The Challenge – Find the flaw that defeats the proof and refutes the claim.
In watching the video do note:
1. That Government does not fund Government.
2. That Government’s deficit is the whole of public expenditures, and not simply expenditures beyond tax revenues.<
3. That taxpayers or resident citizens, and, specifically, the aggregate of their assets, property, incomes, and wealth, fund government or rather public expenditures.
4. That one must examine this aggregate of assets, property, and incomes of resident citizens, or what I term ‘that which funds government’, to arrive at proper and reasonable conclusions in Public Finance theory, and not the finances of an entity that has no such assets.
5. That such an examination reveals that creating or adding to a public debt, adding interest to public debt, and reducing public debt does not alter the aggregate of ‘That which funds government’, if government borrows solely from resident citizens.
6. That every premise of this argument follows reasonably and soundly if one accepts the first premise: “That Government does not fund Government.”
7. My affiliation with a political party has ceased so just ignore the related references.
I wish to present a very interesting but obscure economics idea and proof devised through my inquiries into Public Finance Theory. Having been rather taken with this insightful proof and conclusion, I thought I should share it with the site’s visitors. Because of its profound implications I offer CDN$10,000 to the person able to find the flaw in this startling discovery as all my efforts have failed. Perhaps, one of you shall have that elusive victory. Best of luck to all challengers.
I identified an errant premise in economics that has long marred its theories and practices, specifically those of Public Finance. I argue that modern Public Finance theory presumes that Government funds Government. Yet as we all must undoubtedly concede, the evidence confirms in abundance the very opposite: Government does not fund Government. Government does not provide the funds to pay its bills, does not settle its debts, and does not fund public investments. It never has and it never will. Government has not contributed 1 dime to its expenses since its inception. If one were to account the finances of Government, it would show full indebtedness to the Taxpayer for all funds expended and debts incurred from day 1.
The task of funding government has always fallen to the Taxpayer. So, in order to fully understand public finances, one must apply this long neglected fact. Given that a community of Taxpayers funds government, it is their finances: their combined assets, incomes, property, and money one must examine in order to answer basic questions about funding public expenditures.
In doing so, one easily discovers that it makes no difference whether a community taxes its citizens or borrows from its citizens to fund public expenditures.
To prove this contention I shall examine the question of a deficit. Some think the cure to a deficit, a shortfall in tax revenues over expenditures, is to have the government further squeeze this sum from beleaguered taxpayers and, thereby, dispel all financial troubles. This erroneous cause and solution will have only aggravate the problem.
If a Government has approximately $13 billion in expenditures and tax revenues of about $12.5 billion. The figures may be more or less because governments love to fiddle. However, working with these numbers the deficit would be $500 million.
Let us say that the government requires $500 million to fund its deficit. It can tax or borrow the funds.
If it tax, $500 million leaves the bank accounts of resident taxpayers and the deficit is funded.
If the government borrow, strictly from resident citizens, $500 million leaves the accounts of resident lenders and the deficit is funded.
The same $500 million leaves the bank accounts of resident citizens whether taxed or borrowed. However, there is a little extra paperwork with borrowing. A bond of $500 million is issued. This item counts as a public debt, liability, or claim against the combined property, assets, incomes of resident citizens. It equally counts as an asset among that combined property, that which funds government, because resident lenders now hold the bond or paper.
Aggregate Finances of Residents
|+ $500 million||+ $500 million|
So, with an equivalent increase in the size of resident citizens’ assets and liabilities of $500 million, have the aggregate finances of resident citizens’ changed? Not at all.
If one were to add interest into the mix say of $100 million, then the aggregate assets of resident citizens rise by $100 million as do their aggregate liabilities.
Aggregate Finances of Resident Citizens (Bond and interest)
|$500 million||$500 million|
|+ $100 million||+ $100 million|
|$600 million||$600 million|
So, have the aggregate finances of resident citizens changed? Not at all.
And if the government should decide to pay off the public debt of $600 million by taxing, $600 million is taken from the bank accounts of resident Manitoba taxpayers and moved to the bank accounts of resident lenders. And the $600 million asset of bond and interest is extinguished simultaneously with the equivalent public liability.
|– $600 million||– $600 million|
So, again, have the aggregate finances of resident citizens changed? Not at all. All this happens within the wealth of resident citizens. At the individual level there are changes, but not at the aggregate level.
So, as long as we restrict government borrowing to residents, creating a public debt, adding interest to it, and reducing that debt leaves the finances of resident citizens unchanged.
So, as demonstrated, a deficit for the wealth of residents is not a problem.
There is an insight whereof its acknowledgement and insertion into present theory would completely alter the nature and practices of Public Finance and unleash an immediate and perpetual torrent of wealth for the citizens of a jurisdiction implementing it.
Do recall that government does not fund government. Thus, whether taxed or borrowed, all funds expended by government must be considered as financed by deficit. Therefore, the gpvernment deficit is not merely the negligible sum of $500 million, but rather the gargantuan sum of all its expenditures or $13 billion.
By repeating the foregoing example with the numbers altered to reflect the true deficit, the result remains the same. $13 billion dollars leaves the bank accounts of resident citizens, taxed or borrowed. And, in borrowing strictly from resident residents, the act of creating a public debt of $13 billion, adding interest to that public debt, or subsequently reducing or eliminating that public debt does not alter the aggregate finances of residents, or those assets which fund the government.
However, by opting for full Borrowing of all public expenditures instead of Taxation, the government would have to borrow funds instead of eagerly and obnoxiously confiscating them, daily entering the financial markets in pursuit of funds. By turning financial slaves into public bankers the people, the resident lenders, will become the arbiters of which public expenditures are worthy and deserving of funding, and which are unworthy and deserving of rejection.
With the public banker firmly in charge of public expenditures, the government would no longer operate upon the principle of expenditure. Thus, entire programs and departments would be scrutinized and assessed for value and adequacy of returns. The authorities would terminate all politically useful, but dubious, harmful, and barren programs and regulations. Favourable regulations, programs, protections, loans, and payments to politically influential and powerful industries, firms and individuals would be identified and eradicated. If malfeasance and mal-administration should occur or persist, the people will requite neglect and derelictions by depriving government of the means to operate until the agents of waste or corruption have been identified, removed, charged, punished, or imprisoned.
With the petulant and perpetual public banker now in charge, one would expect the costs of government to decline and drastically. Let us say they almost halve from $13 billion to $7.0 billion.
Thus, residents gain an asset of $13 billion consisting of $6.0 billion in cash and $7.0 billion in public bonds held. And residents incur a public liability of $7.0 billion in bonds issued.
|Assets Gained||Liabilities Incurred|
|+ $7.0 Billion public bonds held||+ $7.0 Billion public bonds issued|
|+ $6.0 Billion cash|
|$13 Billion||$7.0 Billion|
And do recall that the deterrent effect of Taxation would evaporate with its abolition. If the increases in productivity and growth from shedding deadweight costs of Taxation for citizens and firms are calculated and included, the wealth of the province would surge steeply. The return of absconding wealth, assets, able individuals, and productive corporations from formerly light climates of Taxation, the eradication of all constraints upon, impediments to, and distortions of investment, industry, and labour, the elimination of favoured relationships and monopolies that shamefully elevate prices and enhance profits for the select at the expense of the common, liberation from the expensive apparatus of tax preparation and advice, the elimination of onerous and unnecessary regulation, an end to surcharges and constraints upon consumption, an influx of external investors and investment, the end of disparities and inequities in payment of tax, and the erasure of many other unnecessary practices sired by this corrosive instrument should all yield a collective and immense largesse.
It is very conservatively reckoned that the abolition of Taxation, by diminishing costs and spurring profits, would enlarge the assets of resident citizens by at least a further $5 billion per year.
|Assets Gained||Liabilities Incurred|
|+ $7.0 Billion public bonds held||+ $7.0 Billion public bonds issued|
|+ $6.0 Billion cash|
|+ $5.0 Billion eliminated deterrent|
|$18 Billion||$7.0 Billion|
Hence, the aggregate assets of residents shall rise to $18 billion and incurred liabilities remain at $7.0 billion, leaving the wealth of residents greater by $11.0 billion. Dividing this figure by the population of the province leaves the increase in wealth of every resident at approximately $10,000 for every man, woman and child, or on average $40,000 per household, in just one year.
If this is agreed, then it is easily conceded that Taxation, a penalty, and Borrowing, an inducement, possess little equivalence between them as a means of raising funds for public expenditures. Taxation bears immense costs in deterrence and government squander that disappear under Borrowing.
So why does a community tax with all its inherent and punishing costs to fund public expenditures when it can borrow, escaping these financial ills, and unleash great wealth for its citizens?
This is our $10,000 challenge: that it does not affect the combined assets, property, incomes of resident citizens, i.e. that which funds government, whether the community borrows from or taxes its citizens to fund government deficits. So submit the flaw in our reasoning and gain the prize.
If unable to discover the elusive flaw in our reasoning, perhaps the idea will be of some service in rendering the stagnant field of economics once again fertile.
Certain Questions Repeatedly Arise with the Reading of the Foregoing Proof.
I have provided answers for the primary queries below. If no answer is found for your question or an answer unsatisfactory, please do provide the question or nature of the inadequacy in a comment and I shall respond as soon as possible. If it should fatally wound the proof, then you shall receive the promised reward of $100,000CDN.
How can a community borrow without end to fund public expenditures?
An individual, or firm, may borrow as much as he desires as long as the assets purchased or created with the borrowed funds exceed all liabilities.
Were a community to abolish Taxation and begin borrowing all of the funds needed for public expenditures, as long as assets exceed liabilities, those within need not fear financial calamity.
With the abolition of Taxation 2 important obligations would come into play:
One: that government, the community’s agent in public expenditures, will now have a capital charge.
In the present, when the community through its government furnishes a good or service, one is never sure the money expended in the effort bears a calculated return, a return that surpasses all costs. With Taxation abolished and the imposition of a capital charge, the government will have to garner at least that rate of return on public expenditures.
Two: the government will have to face the community every time it requires funds.
Under Taxation, a government may take the funds and do as it pleases. With its abolition, government will learn very quickly not to mistreat its perpetual banker. The people, converted from financial slaves to public bankers, shall directly determine legitimate public expenditures.
These 2 factors will create a revolution in how government operates.
The costs of government would certainly contract.
Wasteful expenditures would decline rapidly as the return on any public expenditure must exceed the capital charge.
There would be no more tax collection, no subsidies to favoured industries, firms or persons, far less corruption, far fewer regulators, far fewer and much smaller government departments, far greater controls on enduring expenditures, the use of service fees to curb abuse of public resources, etc.
In a nation with annual public expenditures of $300 billion, savings of $100 billion could easily be had.
And what would happen to the other side, to the financial assets of all citizens and corporations:
Taxation is a deterrent. It deters one from doing what he would normally do were there no taxation. Without this burden, there will be all lot more worthy economic activity and far less of the other kind.
There would be no taxes to pay and no papers to file, no taxes in the prices of goods, no tax distortions or burdens in the labour, financial and commercial markets, far less needless regulation and interference, more open and competitive markets, few inequities.
In my home country of Canada, with savings from annual public expenditures combined with the removal of the Taxation deterrent, over 4 years, I estimate very conservatively the accumulation of $1 trillion in wealth with the abolition of taxation.
|Cum. Community Assets||$400||$880||$1443||$2076|
|Cum. Community Liabilities||$200||$430||$694||$986|
In the US, one may multiply everything by 9 or 10, which means a conservatively calculated increase in wealth of about $9 trillion in just 4 years.
Over those 4 years, the community through its government will acquire a much greater financial debt, but with that debt it will acquire accruing assets at least double that burden.
If a corporation were able to create $2 or $3 dollars of accruing assets for every $1 of accruing liabilities, who would not readily lend to such a corporation?
What is this Cost and Benefit Analysis that Government would then perform?
It is said that public expenditures do not add to the wealth of a nation. I disagree.
The problem is that with Taxation government may simply take the money and do as it pleases. One does receive some valued public services and goods, often at the maximum possible cost, but one also tends to receive many more of the worthless variety.
How might the government assess the merits of a public investment creating wealth in a community?
Let us say we have a paved road in a community. It has a big hole in it. The vehicles using this road hit the large hole leaving them severely damaged. There is a huge cost to the community’s residents in mending damaged vehicles, but not enough damage to any one vehicle to induce the owner to fix this hole.
Say the cost of vehicle repair is $3000 and the cost to repair the hole is $6000. Say 30 cars are damaged causing $90,000 in increased transportation costs on a weekly basis.
How does the market system fix this hole when no one person will pay to fix this hole?
Now, what is the daily cost of leaving this road unrepaired for the residents of that community or what is the benefit of repairing that road for the residents of the community?
It looks like the cost is $90,000 to the community in not fixing the $6000 hole.
So a $6000 public expenditure will yield a $90,000 return for the community.
Such analysis will become the future of public finance.
Broken Windows Fallacy
Some have argued that the ‘broken windows’ proposition, or really any economic activity that leads to increased GDP, is a great benefit for the community and its residents. This is erroneous thinking.
In the previous question, the funds that the vehicle owners must hand over to the garage owners is disposable income, or profit if you will. It is $90,000 per week that could go to save, invest, retire debt, or consume. It is money above all costs of operations for businesses and households.
With the hole in the road, those businesses and households must divert these profits to mending damaged vehicles. Their costs of living or of operating have risen. But the funds forgone are not pure profit to the garage owners, who must buy parts and materials and perhaps hire new staff to meet the increased demand for their services. The resources of the community in labour and materials, diverted from worthy economic pursuits to unworthy economic pursuits, result in greater costs of living and a poorer community.
Now imagine the Keynesian advocating for new, needless, and excessive government regulations that increase costs for businesses. Firms must hire new staff for their manufacturing operations. The cost of manufacturing goods rise, forcing consumers to pay more or businesses to accept less for their products.
It’s no different from employing a fellow to dig a hole in the morning and fill it up in the afternoon. The costs of production rise without any increase in output or supply. Demand rises for the goods of the community because a fellow has a job. However, he adds nothing to supply, meaning he is a burden rather than a benefit.
Wind energy follows exactly the same course. Labour, investment, and materials diverted from producing valued goods to producing worthless goods greatly harm the finances or inflate the costs of a community. The costs of such ventures are immense and the return a negligible and unstable increase in energy supply.
Public expenditures undertaken by the Government can produce valued goods. However, in a climate of Taxation, they rarely do.
How shall the Government repay Resident Lenders the Loaned Funds when it apparently has not the Means of doing so?
Government does not pay its debts. It does not fund public expenditures. The government is in deficit to the full extent of its expenditures, not just to that amount not covered by Taxation revenues. Were one to account the finances of government, it would reveal a shocking indebtedness to the taxpayer of the sum total of expenditures from its inception. Government in its long history has not and nor shall it ever contribute $1 dollar to settling public debts or funding public expenditures as it generates none of its own revenues. The task of funding public expenditures or settling public debts has always fallen to the taxpayer.
Given that the community of taxpayers funds government and settles public debts, it is their finances one must look at and examine in order to answer basic questions about funding public expenditures.
An individual lender shall always receive their promised funds of interest and principle upon demand. The community via its government shall simply exchange one lender for another, just as any financial lender or bank, which never has to make good on its aggregate IOUs. The liabilities of banks rise through the years. Individual lenders are paid off by the bank exchanging one lender for another. And so it would be with public borrowing.
Resident lenders will be repaid with the funds borrowed from other resident lenders. Liabilities will rise, but the community’s accruing assets will always outpace them by 2 or 3 to 1. If the community debts amounted to $1 billion, know that those debts have sired assets within the community of at least $2 or $3 billion.
Would It Ever Be in the Financial Interest of the Community to Reduce its Outstanding Debts?
The answer is clearly no as the provided proof demonstrates.
Theoretically, at some point in the future, the community via its government could collect taxes in the amount of all debts and interest from the community, i.e. the taxpayers, and simply hand the collected funds right back to the community, i.e. its lenders, erasing the acquired community government debts and assets.
So, the community via its contracted agent, the government, would collect X principle and Y interest from the community’s taxpayers. It would take in all outstanding IOUs and cancel them, eliminating in one stroke both the community’s public debts as well as the assets held within the community by its resident lenders. It would then hand X principle and Y interest gathered from the taxpayers back to the resident lenders. The result of cancelling both debts and assets and the gathering and return of the equivalent funds would be nil since the aggregate financial position of the community and its residents is unaltered in the transaction.
All debts and assets sum to nil before the transaction and again after the transaction. The financial benefit of paying down the debt for the community is nil. However, the costs in using Taxation to collect funds to retire the community’s debts are immense in government squander or, at least in this one instance, in its deterrent effect.
It is similar in circumstance to a person or firm selling an asset yielding 50% to settle a debt with an interest charge of 0%. No rational person would ever undertake such a sale.
Thus, the community will NEVER retire any of its outstanding and accumulating debts.
Doesn’t Ricardian Equivalence Vanquish the Proof?
Ricardian equivalence dictates that taxpayers will have to save money in order to retire the debts incurred on their behalf for public services.
Now I have stated in the previous question that a community could tax to pay off its debts, but that it never would because the cost of doing so would be immense and the financial benefit nil. Thus, there will be no debt retirement. The individual lenders shall be repaid by exchanging one resident lender for another, but the community debt once issued shall circulate forever. So Ricardian equivalence does not apply to this idea.
Secondly, as explained above, the wealth generated in limiting government to expenditures of confirmed value and in removing the great deterrent of Taxation upon all worthy economic activity will be incredible. When a community’s accruing assets outstrip its accruing liabilities by at least 2 or 3 to 1, as will certainly be the case, then Ricardian Equivalence as a problem evaporates.
For a full discussion go HERE
Is this MMT or Modern Monetary Theory?
No, it’s not MMT.
With MMT the national government would just drop off its debt papers or bonds at the local Fed bank and have its account credited there for the funds. It is equivalent to a government creating as much money as it pleases as they did in the old Soviet corpse or in Zimbabwe. There will be no constraint upon public expenditures. With profligate expenditures and a great deterioration in the value of the nation’s currency, people should quickly find other forms of money or other currencies to use.
The Euro is a fascinating instrument since one government has little control over the actions of the European Central Bank. Euro money are the same throughout the nations using it. It is free to move through the member banks. A cheque drawn on a Greek bank and cashed in Germany will end up at the ECB for payment. The Greek Central bank must have the Euros to transfer to the German Central Bank. Greek Government bonds will not be sufficient for payment unless all other Euro members agree to it. So the Greek Government may have to enter the financial markets to borrow Euros at market rates to complete the transfer.
The community will have to borrow directly from resident lenders for needed public expenditures. And resident lenders may not wish to lend to a government known to squander large sums of money. With such constraint exercised, one may easily expect that public expenditures will decline to a fraction of their former size, making the community government far more productive and the community that much wealthier.
MMT, like present day Taxation, has no check upon profligacy among national governments. Public borrowing possesses such a means and a very effective one.
The question of a free rider disappears. There are no free riders or all are free riders. The community will decide worthy public expenditures based upon a cost and benefit analysis. Briefly, the expenditures will pay for themselves. Funds borrowed for public expenditures at 5% must generate a return of at least that amount. If not, the expenditure is delayed until conditions change.
The community only requires the funds to make these expenditures. It offers a market interest rate. Those enticed will lend. Those with better returns or uses for their money will not. When an erstwhile lender finds a better use for his money, he shall present his bond to the government for payment, and another lender with lesser financial prospects shall fill the void.
Lend for a return, or don’t. None is forced to cede funds. Those that do are properly rewarded. The public expenditures will pay for themselves in yielding financial returns greater than all costs. The problem of the free rider vanishes.