When Thomas Huxley heard about Darwin’s “Theory of Evolution by Means of Natural Selection”, he is reported to have said, "How extremely stupid not to have thought of that!" The mechanics of Modern Monetary Theory (MMT) merits a similar response. A sovereign and free-floating currency allows spending prior to taxation. How is it that we have not seen this before? We in the U. S. are free to take advantage of this ability, and yet, our good fortune remains largely untapped.
Infrastructure is badly in need of attention.
Many suffer homelessness and others face food insecurities. We tilt toward
authoritarianism in hopes of finding peace. We defer a response to environmental
warnings. Leadership disappoints.
Centuries of indoctrination have left
us blind to the possibilities our economy holds. We submit to the rich and
powerful, who have their own agenda. We do not question those who say we’re out
of money. We are blind to the ability we possess. We fail to recognize the
power a sovereign currency grants to its stakeholders.
Balancing the Budget
Our economy is run as if it were still on the gold standard. Governmental services, we’re told, must be paid for in cash. Congress imagines the budget to be like a household budget. It assumes tax revenue must be available prior to spending. As the proponents of MMT have made clear, this has never been the case, and this should have been made even more clear once we were taken off the gold standard in 1971. Because the U. S. issues its own currency, the dollar, we have almost always been able to fund worthwhile projects at the national level as the need arose.
Being a currency issuer grants one the privilege to fund social and economic interests outside of taxation policies. With this ability, it is neither necessary nor advisable to tax prior to paying for socially useful initiatives. Revenue is available for projects that require attention. With increased economic activity, full employment becomes possible. Taxes are necessary but not for the reason we have all come to accept. Leadership can direct spending on what is deemed prudent up to the point where inflation becomes a possibility.
Thin Air
It’s not that we in the U. S. have been totally unaware of the ability to leverage currency outside of first taxing it into existence. In recent memory, Quantitative Easing made large sums of money available during the Great Recession in a failed attempt to stoke the economy, and the Cares Act created trillions of dollars overnight in reaction to the Corona pandemic. Where did that money come from? It came from the same place that all money that’s available within the economy comes from in this country. It was produced as a journal entry on the books of the Federal Reserve System, or as some like to say, it was created out of thin air.
What happens when we do this? We add to the Gross Domestic Product. Once this money is put into circulation, it becomes income for some, and we expand the economy. More money in circulation means a higher level of economic activity which benefits everyone.
When does this money get paid back? It doesn’t get paid back. It is not a loan. Money created out of thin air and put into circulation is not debt in the traditional sense. It becomes income to someone. This revenue becomes part of the economy and the Gross Domestic Product. It’s one way in which an economy grows. New money introduced by the Fed that gets spent by consumers is like food for an economy. It nourishes. New money introduced into the economy allows firms to do what they do best. Until it gets withdrawn by way of taxation, this revenue continues to be a part of the now larger economy.
Inflation
With great sums of money available in this new environment, how do we protect against inflation? How do we slow an economy where production is not keeping pace with spending? With this new way of viewing fiscal policy, a more robust solution to an overstimulated economy must be put in place.
The Federal Reserve is currently charged with fighting inflation, but their tools will be of limited use in this new environment. The Fed has inflation targets that normally get met by keeping the economy functioning at less than full capacity. Fighting inflation by way of higher levels of unemployment will no longer be an option. An economy that seeks full employment, and not merely maximum employment, will require a new approach to fighting inflation and tools that the Fed does not possess.
Congress will be required to address inflation by way of income tax policy. Congress will be required to target buying power and raise taxes on consumers when the economy begins to overheat. But this is only half of the technical solution. The supply chain must be addressed by way of both fiscal and monetary policy adjustments. To ensure that the supply of goods and services keep up with demand, income taxes and interest rates must be adjusted to induce firms to increase production.
Given that Congress is a political animal, any new legislative requirement will be a challenge and will require some ingenuity. We must find a way to insulate Congress from the political sphere as it attempts to prevent harm. The mandate for Congress to address the issue of inflation will be challenging in its design but not an impossible task. Inflation is in the interest of no one. (See pamphlet: Inflation)
Protecting Democracy
So, are we ready to begin funding much neglected needs once we can be assured proper inflationary controls have been put in place? The answer to this question is, unfortunately, no. Not yet. Besides first putting in place a failsafe mechanism to guard against inflation, there is one additional consideration to address before we are ready to use the newfound power inherent within a sovereign currency. We must take measures to protect our way of life.
Before we can seriously entertain notions of removing excess capacity and running our economy to produce full employment, we must ensure that democracy remains intact. We must recognize the problem human nature poses for us all. We must recognize that, on the part of a small minority, the need to amass wealth has no limit. More money than can be spent in a hundred lifetimes is no reason to pull back for some, and this can be dangerous for us all. We must recognize that at the highest levels, excessive wealth can be a problem, as great wealth is no friend to democracy. We must protect ourselves against those who would enshrine their status as the benefactors of humankind and attempt to gain total control of the political process.
With almost half of all new income currently going to the top one percent, increased economic activity will make financial inequalities worse. We must initiate an income tax code that lessens the likelihood of excessive wealth concentrations. That is to say, the tax code must protect against hoarding. We must create a tax code that is sufficiently progressive. We must ensure everyone pays their fair share. Before we unleash the power of a sovereign currency, we must ensure our system of government remains intact by tying income tax rates to saving behavior. We must use the tax code to lessen the possibility of losing our democracy entirely to the rich and powerful.
Conclusion
For most of human history, taxes were seen as funding governmental activities. This perception has been shown to be without merit as the proponents of MMT have made clear. We currently have the ability to address large systemic problems without a disruption to the economy. We must educate ourselves to a broader perspective of monetary systems.
This new appreciation for the power of a sovereign currency begins with a challenge to protect against the inherent evil that large sums of money enlist. We may be able to remove the shackles of long-ago economic doctrines, but this act requires more than just tearing down. We must prepare for this new beginning. We must first build necessary safeguards. Let’s start this journey to a new prosperity with eyes wide open and put the proper guardrails in place before we begin and before it’s too late.
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