Posted by: Dirk | October 1, 2014

Campaign Finance and Modern Monetary Theory

Over at Muckraker, Carillo, Gokhmark, Grey and Schweinberger wonder whether campaign finance should be financed from public coffers:

Once the public understands that the U.S. government cannot “go broke,” and thus most fears of federal budget deficits are irrational, the dream of fundamental CFR becomes much more viable. Public elections do not need to be financed by higher taxation, spending cuts, or greater indebtedness to China and our grandchildren – instead, they can be funded directly from the source of money itself: the U.S. Government. This insight, in our opinion, is ultimately the strongest argument in favor of public election funding, yet remains sorely overlooked by the CFR community.

I agree with this the application of this insight of understanding modern money. It is obviously not a good idea to institute one dollar – one vote in a democratic system. This idea belongs to the market: one dollar – one vote. For example, what determines the location, quality and prices of bakery’s in your neighborhood? If we let the market decided, you decide with your dollars what will be the outcome. This is not independent from the institutional structure (regulations in health, workplace safety, labour contracts, etc.), but nevertheless only those that spend dollars on the actual production have a say.

While markets work more or less well for many things, for some they don’t. That is why we have democracy, where the rule of thumb is, or used to be, one man – one vote. If we want to decide on, say, the minimum standards of food quality, then this should not be decided by lobbyists of big business, but rather by all the people. This ensures that the consumers get a bigger say. It would prevent business interests from creating institutions that benefit them to the harm of everybody else.

So what if big business has ‘all the money’? As the Muckraker article rightly points out, the US government cannot go broke. Therefore, if it wants – so, if people elect a government that wants – it can publicly finance the election campaigns. In most countries this is basically how it works. Probably most systems are hybrid in the sense that parties receive money from party members and donations, but also money from the government depending on the election results. For instance, in the Czech Republic all votes for parties that reach more than 1% translate into a €1,20 transfer for the party. In Germany, donations from people to parties are increased by €0.38 for every euro donated.

It is very important to understand money in order to make the right policy choices. Normally, I would think that universities should provide that understanding. From my own experience, I cannot see that happening. Academic economists are ignoring money creation and the mechanics of fiscal spending. You don’t think so? Consult your public economics, monetary economics or general economics textbook and see if you can answer the following questions (correctly):

  1. How does government spend?
  2. Is there any limit to government spending?
  3. How is money created (cash and reserves)?
  4. How are loans created (credit)?
  5. What is the connection between money and credit?

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