RP Logo Red Flame

What is Modern Economics?

Share on facebook
Share on twitter
Share on linkedin
Share on email
Share on reddit
Share on whatsapp

In the United States, one of the most common things to hear about how we view our country is that we are the richest and most powerful nation in the world. Even so, within the nation we are hearing many excuses as to why we as a nation cannot afford policy changes that the populace may want to start funding. All the while, the United States in 2015 spent $598 Billion on military discretionary spending, and that number has only been on the rise (NPP). What we need to understand is that when our monetary system changed from the Gold Standard in 1971, it flew out the window along with our entire perception as to how money works. Money is no longer a finite amount for a monetarily sovereign nation, and as such, the federal tax and spend model we used to subscribe to no longer fits how we now perceive to generate currency, and employ the unemployed. Before we look at that, we must first define some terms and dissect their significance.

Sovereign Money as described by the International Economist, Dr. Joseph Huber, “” the notion of sovereign money also conveys the constitutional dimension of the monetary prerogative which is one of the most important sovereign rights. Sovereign money is issued by a state authority.” What Dr. Huber is describing is a situation where countries with sovereign money systems not only have the ability, but the right and responsibility, to use government funds as they see fit as a nation; for the benefit of the nation by increasing and decreasing the money supply at their discretion in order to fight unemployment, or attempt to curtail inflation. Before we can start to understand how that works, we must first look at what Inflation is and what inflationary and non-inflationary spending is and pertains to. When it comes to sovereign currency systems like we have here in the US, it should also be noted that though the federal government does create funds to finance spending, the individual state governments will still need to follow a tax and spend model because the dollar is not their own sovereign currency. The States are all users of another entity’s sovereign currency, not an issuer, and as such require the funds from either the issuer, the Federal Government, or their individual citizens in order to spend.

Inflation is an increase in the money supply without any matching increases in productivity. Some spending practices tend to be non-inflationary; they create private sector value for the productivity increase that they provide. Some investments are less apt to cause inflation because this they generally provide a service or increase the productivity of its nations’ workforce. Dale Pierce, an editor and contributor at New Economic Perspectives adds, infrastructure spending (roads, power plants, etc.) are some of the most apt to do so because they create jobs. They lower the cost of utilities and travel. They lessen the burden on everyday people so that they are free to put their time, energy, and money into being as productive as possible, with as much interior spending as possible. Before we understand why this happens, we must first understand what money is and how it flows.

One of the most important things to understand about federal government financing is sectoral balances. Sectoral Balances, as explained by the Modern Money Network, is “A framework for macroeconomic analysis of national economies ” balances represent how the result of the flow of funds between the private sector, government sector and foreign sector.” The public sector refers specifically to Government expenditures and financing held by the Fed and the Central Banks. This differs from the private sector which refers to business, households, and independent wealth creation within the country (MMN). The public sector, the federal government, issues the currency. For that reason, any money or assets generated but not held directly by the federal government, the public sector, is held by the private sector, or in the form of a foreign sector surplus/deficit, i.e. a trade deficit to from one to another monetarily sovereign nation. Any deficit in the public sector will translate to a surplus elsewhere. Any surplus in the public sector equates to a deficit in the private or foreign sectors. “We think of taxes as the mechanism by which the Government gets money ” we think the government needs to get the dollars from us ” but the United States government has a monopoly on the US dollar,” says Dr. Stephanie Kelton, an economics Professor at UMKC. So the notion that the government needs to tax us to get dollars to spend is a false one; they issue the currency and as such can spend as they like and use taxes to later tighten the money supply to attempt to curtail inflation if there is no matching employment value or productivity coming from government deficit spending.

Fiat currency is a currency that is issued by a state authority has a value that is based on the marketand backed up by the government that issued it. This differs from monetary policy systems that are based on Gold or other material items and have a finite quantity rather than having the ability to issue new currency. The United States has a non-convertible fiat currency, a sovereign currency that can be issued by the federal government in order to finance spending.

The majority of Government spending falls in one of two categories, Discretionary and Mandatory spending. Discretionary spending refers specifically to the spending that is set aside and allocated during the course of the year; it’s the part of the budget that the president requests and Congress appropriates yearly. Mandatory spending is the spending that doesn’t need to be voted on every year. This includes programs like Social Security and Medicare (National Priorities Project) but also consists of many tax breaks and other government stimulus programs, i.e. the government giving money to a business leader or a corporation by way of the tax code which if not later addressed stays on the books. That means that if the tax code is changed to allow a business/industry to have a consistent subsidy or kickbacks, they could receive it in perpetuity if never again addressed by those same government officials that gave it to them; all coming out of the mandatory spending that we generally attribute the cost of to programs such as Social Security and Medicare.

There are many schools of thought when it comes to Modern Economics with one of the most popular schools being MMT. Dr. Stephanie Kelton, former Chief Economic Advisor to the Senate Budget Committee and to the recent Bernie Sanders 2016 run, described Modern Monetary Theory and the soft money theories pioneered by MMT Scholar Warren Mosler saying, “Government budget constraints are fundamentally different from the constraints that are faced by a household or a private business, when we are talking a country that spends, collects taxes, and borrows in its own non-convertible fiat currency.” The most basic components of modern money theories is that they all hinge on the notions of a sovereign currency system where the amount able to be spent is relative only to the amount of productivity that the nation could potentially produce. Looking at our past spending,one might wonder where our priorities lie.

The United States policies today are in favor of a primarily corporate-military state where over half of our discretionary spending goes towards military spending, and over half of the amount of the mandatory spending (an amount greater than the entirety of discretionary spending) goes towards tax breaks for primarily corporations (National Priorities Project). These things occur even while there is so much public sentiment against war and in favor of more corporate taxes but it all falls on deaf ears. Steven D. Grumbine, an Economic Activist and Contributor for Real Progressive,s argues that the US, as a monetarily sovereign nation could instead use those funds to implement aspects of both a Basic Income Guarantee and a Federal Job Guarantee to reach full employment. Even in areas where the private sector does not have the capability to provide, they can still be given a job with a living wage and good benefits. This work could be on projects to create infrastructure or other investitures into the community so the money spent is non-inflationary. While creating of all these new projects, people would need to be educated to fill incoming positions and job training would need to be easily available. Grumbine suggests some sort of Basic Income Guarantee would be needed in order to allow students to go to school and still be able to pay their bills, be ready to provide their service to society, while still increasing the overall productivity of those individuals and their quality of life. The only issue facing a nation that can put people to work where they are needed would be how to get enough people trained to fill the vacant positions, and in that way job training, specifically easy access job training, would provide for as much community capability as possible.

No way is it necessary per se to even spend on all of these programs; the main point here is that as an economically and monetarily sovereign nation, we never “can’t” afford something. When Congress allocates funds, it is just generated in Federal banks and sent to where it needs to be. If we wanted to get free education and healthcare, we could. If we wanted to spend 10 plus years and trillions of dollars starting wars overseas, we could do that as well without any taxes needed to justify it. We are limited by our manpower. We are limited in our resources. But we are never limited in our ability to spend the US dollar, and so long as value is being generated, Randall Wray, an economist and contributor for New Economic Perspectives, would say that we are not generating excessive inflation, only enough to spur growth.

When it comes to modern money, there are many implications to its use. By utilizing our sovereign currency system, we could effectively avoid the bubbles of sitting money and work towards full employment as well as funding government policies we have long since been told we cannot afford. Mark R Stone, a Consultant on International Economics and Diplomacy, and a consistent contributor to IMF conferences insists when it comes to economic rebuilding, “Successful restructuring is not possible without a strong foundation established by government actions that span the entire spectrum of economic policies.” The ladder must be covered so regardless how they would like to say it, the government is needed to intervene in situations of economic meltdown and corporate restructuring. Excessive tax breaks and non-moving currency only helps to exacerbate such problems, and yet we give business leaders and corporations estimated tax breaks to the tune of $1.22 Trillion in 2015 as described to us by the National Priorities Project. That number is greater than the whole amount of discretionary spending in the entirety of 2015. The government logs tax breaks as “tax expenditures” because they are actively giving up revenue in order to promote certain actions or series of actions. The belief was that they would use that money to create more jobs and distribute the wealth; but as years of bad Neoliberal policies have shown us, this was not the case. So instead, the government can intervene by printing more currency, and creating those jobs, without having to give the corporations such large exemptions. Because of the process that tax code is needing change, and the fact that it is not needing to be allocated on a yearly basis by Congress as is the case with discretionary spending, some corporate taxes can be avoided in perpetuity. Tax breaks are used as incentives to help some necessary industries grow, but many times tax codes are not looked at again until long after the cuts are made. Some tax breaks may sit on the books until re-adjusted by Congress far beyond the original intended time. Many times no one will wonder where that money has gone, while still pushing to remove social programs. But there is a point where government spending cannot rightly create any more value, and that is based solely on what they have the capability to produce and the workforce available to fill new jobs. Gary Stern and Preston Miller, the Former President and Vice President of the IMF had as much to say and implied that though there is benefit to government spending, there is a point where you cannot continue to spend and also create value. To that point we all agree.Â

One of the most popular dismissals you will hear regarding the Federal Government financing programs is, “How are you going to pay for it?” and “Where are you going to get the money for this?” Dr. Kelton would argue that these are both merely distractions. We know where the money comes from, namely us; if we had the raw materials, the manpower, and the willingness to fund it, we would. Being that we issue the currency, it’s nonsensical to assume that in any way, shape or form we would not have the capability to spend it on whatever we want, so long as we are not limited by manpower or lack of resources. We do not borrow from anyone or anywhere, we only generate what we need, and attempt to close the gap if the deficit grows too large over what the expected growth was to be. Wealth inequality has only been on the rise again in recent years (Zucman). The implications of a modern money system is only growing greater by the day and holding onto old tactics and beliefs will not help us to move forward. What we need to accept is that we are a monetarily sovereign nation, and as such that provides a certain level of capability as a society. Whether that be in how we utilize government funds, or whether we choose to invest or not, it should be noted that money is never an object. We may have limitations in workforce, the resources needed, or the insight for it, but never can we be *unable* to afford something as a monetarily sovereign nation. With that in mind, we can demand change from our government because the same old excuse won’t continue to work. We as a nation own the US Dollar. It’s about time it started working for all of us.Â

Grumbine, Steven. “Basic Income Guarantee vs Federal Jobs Guarantee.” Real Progressives. Lewisberry: Real Progressives USA, 28 August 2016.

Huber, Joseph. “Modern Money. Interest-Bearing Credit or Debt-Free Currency? .” American Monetary Institute 9th Annual Monetary Reform Conference. Chicago: American Monetary Institute, 19-22 September 2013. Document.

Kelton, Stephanie. “Sector Financial Balances as a % of GDP 1952q1 to 2012q9.” Stephaniekelton.com. US Senate Budget Committee, 2012. https://skeltonphd.files.wordpress.com/2013/06/slide1.jpg.

National Priorities Project. “Federal Budget Glossary.” 2017. nationalpriorities.org. https://www.nationalpriorities.org/budget-basics/federal-budget-101/glossary/. 1 March 2017.

Office of the United States Trade Representative. Mexico. 2015. https://ustr.gov/countries-regions/americas/mexico. 1 March 2017.

Pierce, Dale. “Modern Monetary Theory – An Introduction: Part 1.” New Economic Perspective. 22 April 2013. ” . “What is Modern Monetary Theory, or “MMT” ?” New Economic Perspectives. New Economic Perspectives, 11 March 2013. Web.

Stern, Gary and Preston Miller. “Avoiding Significant Monetary Policy Mistakes.” Federal Reserve Bank of Minneapolis Quarterly Review Vol. 28, No. 2, pg. 2-9. Minneapolis: Federal Reserve Bank of Minneapolis, December 2004. Document.

Stone, Mark R. “Large-Scale Post-Crisis Corporate Sector Restructuring.” Policy Discussion Paper. 2000. Document.

Wray, Randall. MMT and Debunking AMI: Positive Money Steven Grumbine. New Economic Perspectives, 4 Feb 2017. Video.

Zucman, Emmanuel Saez and Gabriel. ” Wealth Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data.” Institute of Policy Studies, 2012. http://inequality.org/wealth-inequality/.

Leave a Comment

Your email address will not be published. Required fields are marked *

Share this post

Share on facebook
Share on google
Share on twitter
Share on linkedin
Share on pinterest
Share on email
Scroll to Top Skip to content