Maintaining The Circulation of Money: Government is a Pump, Not a Sponge

Ideology is a scourge on humanity. Among its many ills, one of the less dramatic but most damaging is its influence on people’s thinking about the economy. Most of what passes for economic discourse in this nation — in the world, for that matter — is ideology in the guise of economics. (That even applies to economists in academia, who should be the ones to douse such nonsense but instead fan the flames.)

One of the favorite homilies of people on the political Right, incessantly professed as a truism by both Republicans and Libertarians, is that government is a ‘sponge.’ The implication is that the money collected by government is sucked out of the economy to be of no use to anyone ever again.

They never exactly say — because it can’t be said, because it would be palpably false — why that is the case.

They can claim it is a sponge and imply that the money somehow endlessly collects there, but they can’t say how that occurs for the simple reason that it does not occur. Every penny that the government receives is returned to the private sector. In the economy, government does not act as a sponge; it acts as a pump.

Another favorite mantra of people who are politically conservative is that ‘government doesn’t produce anything.’ That, too, is false, but the point here is that government spends most of the money it collects paying companies in the private sector in the production of public goods and services. It hires construction companies to build buildings and roads, etc.; it pays manufactures to produce armaments; and so on.

The key to general economic prosperity is for the money in the economy to circulate.

The rest of the money it collects goes in the form of wages and salaries to individuals employed directly by the government and in the form of checks to poor and disabled people and to businesses to subsidize the provision of goods and services for poor people. It all goes back to the private sector one way or another.

As both Adam Smith and John Maynard Keynes stressed, the key to general economic prosperity is for the money in the economy to circulate. As long as government exists, it will collect money and spend money, returning it to the private sector. It will contribute to the circulation of money.

It is a truism that collecting and spending money necessarily redistributes that money. How it should be collected, who should provide government with what proportion of the total, and how it should be spent are things about which we can argue. Those arguments are the proper place for people’s ideologies — and theologies, for that matter. The basic functioning of the economy, to include the role of government in that functioning, is the place for facts, not beliefs.