Most people assume that the government is an entity like a household or a business where expenses must be covered by income. If a business consistently spends more than it earns, it will “go out of business” and cease to exist. If an individual lives beyond his means for too long he will be forced into bankruptcy. He may not cease to exist, but he may well end up homeless and unemployed. A government’s primary source of income is generally thought to be taxation, and if its expenditures exceed its tax revenues, it must borrow to make up the difference. Deficit spending and escalating government debt is generally considered a major problem, and it is assumed that allowing a government to default on its debt wreaks havoc on the global as well as the national economy.

Malcolm Mitchell, one of the proponents along with Warren Mosler of “Modern Monetary Theory,” is emphatic about the implications of the government’s ability to create money.

Because our Monetarily Sovereign nation has the unlimited power to create its sovereign currency, the dollar, it never needs to ask anyone for dollars. It doesn’t need to tax or borrow, and it never can be forced into bankruptcy. It can pay any dollar-denominated invoice of any size at any time. [see “Monetary Sovereignty:The Key To Understanding Economics“]

The idea that it is a mistake to even think about government spending in terms of a need to balance the budget is perhaps the most striking contribution of Modern Monetary Theory. This may not be new – the concept of “Functional Finance” advanced by Lerner in 1943 was intended to shift the focus of fiscal policy from a goal of balancing the budget to that of insuring maximum productivity without inflation – but it clearly seems alien to the rhetoric of almost every member of Congress. Even liberals view deficit spending as a corrective measure which is only required during recessions and appear to believe the ultimate goal is a balanced budget and “manageable” national debt. The idea that government budgeting and financing is essentially the same as household budgeting and financing seems firmly engrained in all our political debate. (One notable exception: Stephanie Kelton, one of the most visible advocates of Modern Monetary Theory was an economic advisor for the Bernie Sanders’ campaign. She was also the Chief Economist for the Democratic Minority Staff of the Senate Budget Committee.)

If the national debt is a loan which must be perpetually renewed, then “servicing the debt” is really just an income redistribution program or a government subsidy to holders of Treasury bonds.

What is needed is the ability to think about “government spending” without classifying it in terms of a deficit or surplus. The “national debt” is normally viewed as the accumulated deficits from an “unbalanced federal budget,” but if government spending is “financed” by the creation of money, the “national debt” is simply a record of the net amount of money the government has injected into the American economy over the years. If the money injected was created with interest-bearing loans, the expense of servicing the debt just becomes a subsidy for the bond holders. There is a problem only if the growth of the economy has not kept pace with the supply of money. The main symptom of this failure to keep pace may be inflation, but the supply of money circulating can be reduced with taxation or by regulation of the ability of banks to create money with extensions of credit.

^BackToTop