We Can Be That Alternate Universe
Imagine that we live in an alternate universe in which the US government has access to all the money it needs without raising taxes or going into debt, and has the necessary tools to keep inflation in check. A universe where federal taxes do not fund federal spending, but rather, serve to motivate money-seeking behavior (working), and to siphon excess cash out of the money supply. In that universe, our government actually creates new money every time it pays an obligation. Thus, its ability to meet obligations is unlimited. With the proper checks and balances, it can literally pay for Improved Medicare for All health coverage for every American. It can pay for college tuition for every student who wishes to attend. It can employ every unemployed person. With the ability to create money any time it needs to, the US does not borrow money. It has no debt and never needs to go into debt. Further, it is not faced with a deficit. Deficits are created when spending exceeds income. But since the government does not use taxes to fund spending, the usual formula does not apply. Sounds like fantasyland, right?
Truth be told, we do not have to conjure an alternate universe. Every statement in the previous paragraph is true of the US government today! The US is a monetarily sovereign nation. That means that it established its currency by law and has sole and sovereign control over it. When the US came off the gold standard in 1971, the dollar was no longer tied to a valuable physical commodity. It became a fiat currency. The constraint of having to proportionally raise the gold reserves whenever the Feds wanted to issue more currency is gone. Since the US issues its own currency it can never become insolvent in that currency. We cannot go bankrupt! Note that states, counties, cities and the private sector are not monetarily sovereign, thus this discussion does not apply to them.
Economists who developed Modern Monetary Theory have clarified for us how our money system works, and the implications of their revelations are profound. One of their crucial insights is that since all money originates with the federal government, that government must first spend so that individuals and businesses can obtain money to pay their taxes. This reverses the conventional wisdom that the government relies on taxes in order to spend. Federal spending creates and adds money into the private economy. Collecting taxes at an appropriate rate removes sufficient cash from the economy to keep the value of the dollar stable, thereby keeping inflation in check. In the same way that paper money is incinerated when it is worn out, with no harmful effect on the economy, so too, once tax revenue is collected it is deleted, having no further use.
This juxtaposition of the facts of our money system blows up the age old political excuse that the needs of the people, infrastructure and environment cannot be met because the government does not have enough money. No one wants to raise taxes, and that is the only place the money can come from, they say. But where did the trillions of dollars used the bail out the banks after 2008 come from? The government created it out of thin air, just like it does every day when it pays a bill. Trump wants to increase the Pentagon’s budget by many billions and we are told that other agency’s budgets must be cut to make that money available. Totally disingenuous. Not that the Pentagon should get any more money, but the constraints on government spending are determined by political considerations, not by fiscal realities. The government has the unlimited power to spend (not that it should), consequently, all federal departments can be fully funded without robbing Peter to pay Paul.
What about government debt? We are regularly told that our country has too much debt, that countries like China hold too many of our Treasury bonds and that makes us vulnerable. The reality is that being monetarily sovereign, the US has no need to borrow money. The sale of Treasury bonds is another measure for controlling the money supply in segments of the economy. As with taxes, the US does not rely on bond sales to cover spending. The MMT folks tell us that what some pejoratively point to as “debt”, actually amounts to savings deposits with the Federal Reserve.
Despite these indisputable facts about our monetary system, the US government chooses to follow fiscal policies that are regressive and punitive for a very large segment of the population. Unemployment and poverty could largely be eliminated were the Feds to use its sovereign monetary power in the appropriate way. It is probably no coincidence that these policies favor corporations and the wealthy, as do most other government policies. Historically, capitalism has required unemployment and poverty to grease its skids. To put it as plainly as possible, the US political system manipulates the monetary system to benefit the capitalist class at the expense of the rest of us. The loud cries about deficit spending and excessive debt are but political theater that gives cover to the politicians, who wish to change nothing.
Modern Monetary Theory economists have met repeatedly with government officials, advocating the enormous benefits and liberating qualities of their approach. Their efforts have so far fallen on deaf ears. And in case you think that Bernie Sanders is one politician who would be inclined toward MMT, well, during the 2016 campaign Prof. Stephanie Kelton, a University of Missouri, Kansas City MMT economist was his economic adviser. Sanders has given us no sign that he was influenced in that direction.
The potential of MMT for our economy is great. Few Americans know anything about it, but they really should. I encourage you to make it your business to investigate MMT. I have little doubt that you too will become an advocate.
