A Message to Lawyers and Law Students: We Can Always Afford Justice (And No, Your Taxes Will Not Pay for It)

Most Republicans and Democrats agree on one thing: looming fiscal challenges, made more severe by the recent tax cuts, require that something be done about the budget. According to this view, we didn’t have enough money before, and we have less money now, putting ever more spending on the nation’s “credit card.”

Although lawyers and law students might (wrongly) think broad macroeconomic issues such as distribution and entitlements should be left to economists and policy wonks, they should recognize that fiscal policy involves questions of individual rights and justice in a narrow, legal sense. Courts determine what due process requires in part by evaluating the “financial cost.” Cash-strapped government entities rely on fines and fees for funding, inevitably preying on vulnerable communities. There’s also the massive crisis in legal services, with understaffed and underfunded public defender and civil legal aid offices facing overwhelming caseloads. The results are a disaster, and in each instance, individual rights are subject to fiscal considerations.

When members of the legal profession try to address these challenges, they will be asked how we will pay for it, implying that there is some constrained source of funding. Lawyers and law students should know better. The Constitution gives Congress the power to create money. In the Legal Tender Cases, the Supreme Court held Congress can issue money backed by its own credit and declare it payable for all debts, public and private. Rather than some finite resource, money is, as Professor Christine Desan explains, a legal institution. It doesn’t come out of the ground, and it doesn’t grow on rich people (the whole notion of “taxpayer money” is a myth). No matter how much income lawyers or anyone else makes, the federal government does not use their taxes to pay for food stamps, Medicare, the Legal Services Corporation, or anything else. And it wouldn’t use their money to pay for universal healthcare, student loan cancellation, a job guarantee, effective public funding for elections, or real rights to counsel and due process. As Ben Bernanke explained, when the government spends, it does so “by crediting the bank accounts” of the recipients and increasing the bank’s reserve account at the Fed. Likewise, when the Fed lends to a bank, it “simply use[s] the computer to mark up the size of the account that they have with the Fed.”

When we want to implement a new policy or program, the question isn’t whether we can “afford” it in terms of dollar cost (we can), but whether we have or can create enough of whatever we want to use the money to buy. As the issuer of dollars, the federal government must spend before it taxes. The dollars everyone uses to pay taxes only exist because the government spent them into existence. Moreover, since the government issues dollars, they are not convertible or pegged to anything, and all of the government’s debts are denominated in dollars, the probability of an involuntary government default is zero. The United States, unlike New York or Greece, is a monetary sovereign. Alan Greenspan explained this to Paul Ryan, assuring him that Social Security benefits can always be paid in full and the system faced no risk of insolvency. And New York Fed Chairman Beardsley Ruml explained to the American Bar Association back in the 1940s, given our monetary arrangements, “Taxes for Revenue Are Obsolete.” (This doesn’t mean we don’t need taxes. Taxes address distributional concerns, a crucial role if we want a functioning democracy. They also ensure demand for the currency—taxes drive money—because you need it to pay taxes, as Adam Smith described centuries ago. It’s very different, however, to need some level of taxation to ensure demand for dollars than to face actual financing constraints.)

According to the ABA’s model rules “a lawyer should seek improvement of the law, access to the legal system, the administration of justice and the quality of service rendered by the legal profession.” If it’s serious, the ABA must heed Ruml’s message. Money is not scarce, and the legal community cannot sacrifice justice in the name of uninformed economics. It also means lawyers should be thinking about justice far beyond the courtroom—about the structure of society itself.

The legal profession should also be well-equipped to counter claims that larger deficits will lead to higher interest rates, reduce (or “crowd out”) private investment, or cause inflation. Interest on the national debt is a policy variable, and the Fed can set interest rates at any level it wants. (The Treasury Department used to tell the Fed what rates to hit). And the notion that government debt reduces private investment assumes some limited, pre-accumulated “loanable funds.” Legal scholars Robert Hockett and Saule Omarova have demonstrated that, in fact, the financial system is a public-private franchise, and at the core of that system are banks, “licensed private purveyor[s] of the public full faith and credit.” Banks create deposits when they make loans rather than simply intermediating existing funds (a view adopted by economists at the Bank of England), and the government accommodates that activity by providing sufficient reserves so that checks clear at par and the newly created deposits are spendable as money. In other words, the credit generation powers of banks rely upon the nation’s full faith and credit. Furthermore, rather than reducing savings, government deficits add financial assets to the private sector. Lawyers and law students should know that one person’s (or the government’s) financial liability is another person’s financial asset and that net financial assets must add to zero. Simple GDP accounting identities and data confirm this. Jan Hatzius, the Chief Economist of Goldman Sachs, uses these insights in his own work.

While the government can afford anything for sale in dollars, spending more or cutting taxes when the economy is operating at full capacity can cause inflation. However, more government spending does not automatically generate higher prices, and certainly not a spiraling disaster. And the lack of a mechanical link between low rates of unemployment and inflation has led Daniel Tarullo to describe the Fed as having no “working theory of inflation dynamics that is useful for real-time policymaking.” To allow the crisis state of our legal system to continue because of inflation fears is deeply misguided, as are deliberate attempts to slow down the economy that will disproportionately harm marginalized groups, particularly black and Latinx communities. (If your instinct is to point to hyperinflations in Zimbabwe and Weimar Germany, you have to recognize the dramatic differences between those nations and the United States. Zimbabwe suffered an enormous drop in production following land reforms. Weimar Germany’s debts were not denominated in its own currency. Neither scenario is relevant to the U.S.)

Government spending should be determined by public priorities. No budget deficit or level of national debt will ever limit our ability to provide adequate legal assistance, healthcare, jobs, or any other public priority, and no one’s federal taxes—not the rich, not lawyers at big law firms with large salaries and bonuses—will be paying for any of it. And when it comes to the legal system and the broader structure of society, the question isn’t can we afford one that adequately protects the rights of all, but how can we accept the disaster that is the status quo? The answer for members and future members of the legal profession is simple: we can’t.

Danny Sufranski is the outgoing President of the HLS Chapter of the Modern Money Network, an independent nonprofit committed to the right of every person to participate in economic life in a manner consistent with basic principles of justice, fairness, equality and dignity. If you’re interested in learning more, please email Danny at modernmoneyhls@gmail.com.