Modern Monetary Theory: why government spending isn't like household checkbooks

You know the drill: someone proposes something utterly commonsense, that has been done all over the world (say, universal healthcare) and the next thing you know, someone's shown up to shout "Who will pay for it?!"

Or, more toxically, a discussion of immigration or refugees or asylum seekers ends up being derailed by the state's inability to pay for basic services for the people in the country today — how can we afford immigrants?

Or, worst of all, someone tells you that they voted for a shambling pile of human garbage because he's promised to "fix the debt" and to do less would be immoral, burdening the generations to come (see also: the fucking Democrats buying into this).

Governments aren't households, and governments borrowing money in a currency that they themselves issue isn't the same thing as you getting a bank loan. For more than a century, there has been a group of economists who've pointed this out: called "chartalists," then "neo-chartalists" and now, "modern monetary theorists" and they know exactly how to fund universal healthcare.

Modern Monetary Theory is the key to the economic prescriptions of Bernie Sanders and it underpins the platform of the Democratic Socialists of America. It's an idea that is having something of a moment!

This week's Planet Money podcast does an excellent job of describing MMT in terms that are literally designed to be understood by an eight-year-old (so I was able to follow along, too!).

Once you've given that a listen, try The Nation's potted history of MMT and the groundswell of support for it.

And remember: governments are not businesses, CEOs make shitty presidents, and government debt is not a bank-loan.

To a layperson, MMT can seem dizzyingly complex, but at its core is the belief that most of us have the economy backward. Conventional wisdom holds that the government taxes individuals and companies in order to fund its own spending. But the government—which is ultimately the source of all dollars, taxed or untaxed—pays or spends first and taxes later. When it funds programs, it literally spends money into existence, injecting cash into the economy. Taxes exist in order to control inflation by reducing the money supply, and to ensure that dollars, as the only currency accepted for tax payments, remain in demand.

It follows that currency-issuing governments could (and, depending on how you lean politically, should) spend as much as they need to in order to guarantee full employment and other social goods. MMT's adherents like to point out that the federal government never "runs out" of money to fund the military, but routinely invokes budget constraints to justify defunding social programs. Money, in other words, isn't a scarce commodity like silver or gold. "To people who've worked in financial markets, who work at the Fed, this isn't controversial at all," says Galbraith, who, while not an adherent, can certainly be described as "MMT-friendly."

The decisions about how to issue, lend, and spend money come down to politics, values, and convention, whether the goal is reducing inequality or boosting entrepreneurship. Inflation, MMT's proponents contend, can be controlled through taxation, and only becomes a problem at full employment—and we're a long way off from that, particularly if we include people who have given up looking for jobs or aren't working as much as they'd like to among the officially "unemployed." The point is that, once you shake off notions of artificial scarcity, MMT's possibilities are endless. The state can guarantee a job to anyone who wants one, lowering unemployment and competing with the private sector for workers, raising standards and wages across the board.