“What’s in your wallet?”: Why we should start taking modern monetary theory seriously

by Stephen Reynolds


What if I told you that the United States could fund the President’s “proposed” $1 trillion infrastructure package, the additional image of a wallet$3.6 trillion civil engineers say is necessary, a public jobs program similar to Franklin Roosevelt’s Works Progress Administration, the additional defense spending that seems to be necessary every fiscal year, and even Sen. Bernie Sanders’s $32 billion “Medicare-for-All” and $47 billion tuition-free college plans all without breaking a sweat?


Enter a different way of thinking about money – modern monetary theory (MMT). For those who haven’t heard of it, it’s essentially a rejection of the traditional idea of how the federal government budget (and money) works. We all think of the federal government’s budget like our own bank accounts. You put money in from paychecks, loans, tax returns, gifts, excess aid checks, etc. You take money out to pay your bills, buy food and gas, and spend on services. When your checking (or savings) accounts run out of money, you can’t spend any more without borrowing on credit.


The federal budget seems on its face to operate the same way. Tax revenue goes in, spending comes out. To offset costs of new government spending, taxes must be raised, spending must be cut in other areas, or the government runs a deficit (more spending than revenue in a year) and adds to the national debt (total amount the federal government is “in the red” after adding all the deficit years and surplus years together). Pretty simple.


But why is the federal government’s budget different than a personal checking account, business bank account, or city or state government’s budget? Because the federal government can make up its own money. Now it’s a little more complicated than that, as I’ll explain. In 2013, an idea was pitched from the depths of the Internet to alleviate the national debt without raising the debt ceiling. Proponents suggested that the U.S. Treasury mint a $1 trillion coin and deposit it in its account at the Federal Reserve as a way to get around the debt ceiling without raising it. The idea here is, if we need money to spend on programs and services we want, we can make more of it.


Now, again, we couldn’t do away with taxes, or risk runaway inflation. Essentially, the federal government would pay itself for public works projects, increases in defense spending and to eat costs of new or modified programs for its citizens’ care. The basic philosophy behind the idea is that our money is only valuable because we all agree to it having value – this is called fiat money. There’s no other value to our paper currency other than the value we have agreed to as a society. A $20 bill is worth $20 because we say it is. Gold, diamonds, silver, shells, and goods in bartering systems have value as currency, but they have intrinsic value because you can do something with them – this is commodity money.


When the United States still followed the gold standard, dollars were sort of a hybrid – representative money. We used paper dollars, but they represented actual intrinsic value. What MMT does is take this philosophy to its logical conclusion. The government, the source of all our currency, funds programs by spending money, which flows into the economy. Taxes, a control on inflation, send that money back to the government so that dollars stay in demand. Money flows out from the government first, then back in. It’s a common-sense adage for smart businesspeople – you have to spend money to make money.


So, what does this all mean? Under a MMT system, the government can never “run out” out of money. As long as we continue to work, maintain our machines, continue extracting raw materials, and pay our taxes, there is no limit to the public services the government can provide. Deficits and budget constraints, as a problem to be debated, will be purely political (and for MMT proponents, like myself, already are) instead of an actual financial barrier to funding programs we want. Compare Sanders’s plans with defense spending. When Sanders pitched his plans while running for president in 2016, media outlets on the right and the left were agog at how expensive the plans were, and sounded alarms about the possibility of exploding deficits. In interview after interview, Sanders was asked “how are you going to pay for it?” While Sanders had proposals for raising taxes on the wealthiest Americans and large corporations, these proposals would only serve to help mitigate inflation under a MMT regime. Similarly, the U.S. raises defense spending year after year and no one asks the Congress how they intend to pay for these spending hikes.


Under the current system, either taxes will need to go up or other programs will be cut if we are really concerned with deficits. But, under a MMT system, we wouldn’t have these concerns. Government spending will spur economic growth. We can have our cake, and eat it too.

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