It’s an interesting time to be an advocate for Modern Money Theory, as political and economic discussions turn to examine the recent tax cuts orchestrated by Speaker Ryan and President Trump. Meanwhile, the TV talking heads’ bromides are landing right in the MMT wheelhouse. Their subject is, of course, deficits. People often dismiss economic conversations assuming they understand the basics. The federal government collects taxes, spends that money and then some, causing deficits. Then, the federal government borrows money to cover the deficit. Eventually, those borrowed dollars must be paid back, with interest. That is what is called the debt, unpaid principal plus interest on the money borrowed to cover the deficit. The common thinking is that as the debt bills come due the government will need to raise taxes to pay off the accumulated deficits. Furthermore, that implies our deficits today become our debts tomorrow, which ultimately resolves as increasing debt for future generations. Our grandchildren will be forced to pay higher and higher taxes until the entire nation goes bankrupt. The only problem is that the narrative is not accurate. Modern Money Theory (MMT) describes how an economic system operates in the aggregate clears up the inaccuracies and misconceptions.
How an economy operates in the aggregate is known as macroeconomics. It does not favor or prohibit any policy choices, such as sin taxes, minimum wages, health care, tax breaks for the wealthy, capitalism, socialism, flat taxes, progressive taxes, income taxes or land taxes. These are all examples of political choices made by whatever mechanism rules a nation, democracy, monarchy, tyranny, or even an oligarchy.
The first assertion that the deficit is spending above taxes collected, is accurate, but does it matter? The common misconceptions occur after the deficit is calculated. As stated, most people will then presume that taxes are needed to fund spending, otherwise why calculate and talk about the deficit? But we must also consider that only the US government can authorize creating new currency to be spent into circulation. Don’t believe me? Buy a high-end printer and run off a few Benjamins. Each one of those $100 bills are one-way tickets to jail.
Taxes are operationally paid after the government spends. In short, they are dollars being returned to pay off your debt to the government for providing the means of conducting business which results in improving the commonweal. The next year when the government wants to spend, it again creates currency anew. If you were able to print up money on your printer, would you borrow if you need more? Of course not. And neither does the government. As noted earlier, the taxes collected, for whatever reason and from whoever, serve to remove money from circulation. That taxes are recirculated is a huge misconception and the exact opposite of what happens. And then there are Treasury bonds that people and foreign nations buy to supposedly lend to the US to cover the deficit? Are they lending back to the US money it can create without borrowing? Of course not, they are savings accounts. And their real purpose is exactly the same as taxes. They remove money from circulation, but only for a specified time while the bond purchase price remains in a security account, not added to any spending account. When the bonds come due, the government has the capacity to create the interest. The bonds add nothing to spending capacity and are not borrowed from anyone. This alone highlights the uselessness of the debt ceiling.
Why is there a belief that taxes and spending need to “balance” ? It all has to do with the level of spending an economy can bear. The US and many of the world’s currencies are no longer tied to a commodity, such as gold, to value their currency. Instead, nations such as the US have a sovereign fiat currency, where all payments and collections are transacted in that nation’s currency. These currencies are based the capacity of its issuing nation’s resources; idle and productive. People either trade the nation’s resources in the currency or risk being unable to pay their taxes. MMT defines debt as the total of all the currency issued in the US since 1787, less total taxes collected. Under a gold standard, the constraint was not available resources; instead, the current value of the gold in reserve. Taxes were collected to prevent the amount of currency from exceeding the gold reserves total value, while with a fiat currency, that constraint on spending ended entirely.
Last of all, to understand how this all fits together, we must recognize the purpose of the constraint, whether an economy is tied to resources, gold, or pigs’ feet. Once the constraint is exceeded, inflationary pressure increases across the economy. It is not and has never been the amount of currency available, we can deficit spend until our capacity is reached while improving life for everyone in America. Should capacity be exceeded, and inflation is either imminent or even just underway, we have tools at the ready to address it. Increase taxes or use bond sales or even tariffs to brake inflation. There is little to fear from the growing deficits from the tax plan but there are economic concerns about President Trump’s love affair with tariffs and trade wars. Push Congress to take back their Constitutional power and prevent the President from imposing tariffs without their approval first and stop worrying about deficits and debts.