“For 53 of the last 60 years, we've spent more than we've brought in. Now, this is where people get on me about comparing apples to oranges, but hear me out. It's bad for our economy. It's stealing from our kids and grandkids, robbing them of benefits they'll never see, and leaving them with burdens that are nearly impossible to repay… Every family in America has to balance their budget,” said Republican Speaker of the House John Boehner in 2013, equating the federal budget to a regular American household. Similarly, in the wake of the 2008 financial crisis, C-SPAN host Steve Scully asked President Barack Obama: “At what point do we run out of money?” Obama responded with “Well, we are out of money now.”
Modern monetary theorists dispute this bipartisan notion that there are financial restraints on our federal government. This is not to say that there are no real limits to fiscal policy, such as inflationary pressures, but if something has the votes to pass through Congress, it always has the capability to be funded.
Take it from former Federal Reserve Chair Ben Bernanke, who responded to questions about the 2008 bank bailouts: “It's not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It's much more akin to printing money than it is to borrowing.”
Yet, the chronic “how are you going to pay for it?” question plagues policies proposed in presidential primaries which attempt to make larger fiscal changes: from Senator Bernie Sanders’ Medicare-For-All proposal to the defense of social security or medicare funding as a whole, blocs of politicians see these programs as wastes of money. Intuitively, it makes sense to ask this question. To the average American voter, they ought to know how these plans are going to be funded by their hard-earned tax dollars.
However, this same question of cost is barely present when Congress increases the defense spending budget each year, which has long since surpassed the next 10 most-funded militaries combined; when President Trump’s infamous tax cut bill is estimated to add over $1,000,000,000,000 to the federal deficit; and when Congress bailed out banks and big business both in 2008 and in 2020.
The average American taxpayer likely justifiably has their qualms about federal spending, but they never felt a proportionate increase in their taxes for the defense budget or bailouts. Congress never imposed some immediate tax on citizens for the stock market bailout in early 2020. This means that whatever these policy proposals are, at least on the federal scale, the cost does not fall on the taxpayer. The reality is that politicians look for the simplest and most relatable rhetoric to their constituents, and in doing so, obfuscate the truth about gubernatorial economics. After all, what better understanding of finances do you have than your own? You, I, local business owners, and state governments must all use dollars that we cannot create to pay for very real expenses, and politicians, knowingly or not, exploit that sentiment of family budgeting to be more relatable to us. Former British Prime Minister Margaret Thatcher exemplified this incorrect idea in a speech in 1983, claiming “The state has no source of money other than the money people earn themselves. If the state wishes to spend more, it can do so only by borrowing your savings or by taxing you more. There is no such thing as public money, there is only taxpayers’ money.”
Modern monetary theory challenges this seemingly intuitive idea based on a few key principles. Firstly, the U.S. government is the only entity on the planet with the capability to mint a net United States dollar; every single dollar spent in a transaction was brought into existence by the United States government. As such, the federal government has one special power that state governments, households, and private businesses alike do not: the power to issue a U.S. dollar for itself. As leading modern monetary economist Professor Stephanie Kelton states: “Uncle Sam doesn’t need to come up with dollars before he can spend. Uncle Sam can’t face mounting bills he can’t afford to pay. The rest of us might.” This power of the purse for Uncle Sam is derived from the U.S. dollar’s power as a fiat currency with monetary sovereignty. In essence, the dollar is not bound to the value of gold or any other precious metals as it once was, or as Argentina is bound to the dollar, and it is unlike the euro, which is controlled by countries across the European Union. The dollar is much like the Japanese yen, borne from and subject to the whims of its own banks and government.
Now, the most common response to this idea is that if Uncle Sam can mint as much money as he’d like, but what about inflation? This is a very important question, and the modern monetary theorist’s answer is to absolutely look at inflation. The risk of inflation is one of the variables that should control federal policy, and that is the question we must ask in regards to federal spending for programs: Not “how are you going to pay for it?”, but “to what extent will this cause inflation/economic side effects?” But America has a history of underspending, well before any fear of inflation is justifiable from policy experts. For example, the $787 billion bill passed under President Obama for economic aid during the financial crisis was on the extremely conservative end of his potential proposals, nowhere near what Christina Romer, Obama’s chair of the council of economic advisors estimated the minimum would need to be to combat the recession: $1.8 trillion. Her proposal was immediately shut down by economists closer to Obama like Larry Summers and David Axelrod, who asserted that Congress and the public would never stand for anything with a price tag above $1 trillion.
Subsequently, over $8 trillion was lost in housing wealth during the crisis, and an estimated 6.3 million people, including over 2 million children, were pushed into poverty between 2007 and 2009. And yet, the fears around increased federal spending mounted. In January of 2010, Obama addressed the nation while unemployment sat at a devastating 9.8%, and said “families across the nation are tightening their belts and making tough decisions. The federal government should do the same.” Looking back, the Federal Bank Reserve of San Francisco estimated that this lackluster response to the financial crisis robbed the American economy of 7% of its output potential from 2008 to 2018. In more concrete terms, “the decade of subpar economic growth cost every man, woman, and child the equivalent of $70,000.” Inflation and overspending were never once nearly an issue, the federal government never even met the bare minimum out of fear of seeming irresponsible to the public. Understanding economics over aesthetics and providing relief accurately would have certainly been the more responsible thing to do.
The truth is that when there is an economic crisis, the appropriate response is not to reduce federal spending but to increase it. For when there is a government deficit, the resulting surplus is not a zero-sum game. The extra money goes into the economy, into the hands of working families: the people who need it the most. That is why even at the height of the Great Depression, we were able to establish social security, minimum wages, electricity to rural communities, federal jobs programs, and federal housing. When President Roosevelt faced a nation in crisis, he spent over $41.7 billion ($653 billion adjusted for inflation), and even his unprecedented level of fiscal policy never neared inflation, all while reducing poverty and strengthening the economy. Some still argue that he didn’t do enough, as when he cut back on the spending, unemployment soared again.
Utilizing the federal deficit in times of crisis in order to save the livelihoods of everyday working families is a sign of fiscal responsibility, not one of irresponsibility. The crime of the aforementioned Trump tax cut is not that it increased the federal deficit, it is that it grossly increased wealth inequality and helped consolidate political and economic power into the hands of the few. In fact, one Princeton University study helps us understand that this is relatively commonplace in the world of legislation. After studying public policy during the decades between 1980 and 2000, professors Martin Gillens and Benjamin Page found that “The preferences of the average American appear to have only a minuscule, near-zero, statistically non-significant impact upon public policy.” In a system where 0.2% of Americans contribute to two-thirds of political donations, this jarring reality is understood and felt by the average American, disillusioned by the political process.
Modern monetary theory does not tell us if this economic disparity is a good or bad thing, we come up with that judgment ourselves. MMT is simply a lens through which we can understand our government’s financing and its implications. Although I could go on about this, I would hate to exceed my limit in writing, so for anyone interested in further understanding the economics of their federal government through the MMT lens, from bonds to the role of taxation to what we call the federal ‘debt’, I highly recommend Stephanie Kelton’s must-read: The Deficit Myth.
In a time where 53% of Americans, according to Pew Research, view the federal deficit as a “very big” problem, MMT posits that it is time for us to understand the deficit as a tool to tackle the real crises facing the nation: the D+ rated infrastructure, the food insecurity, the child poverty, and more. It is time to put this pernicious deficit myth to rest.
*The author does not claim to represent all the opinions of all the members of the Postpartisan in this essay.