By J.D. ALT
My wife is no longer speaking to me. She got angry—hysterically angry—over MMT. This caught me off guard. I could not understand it. She was on the verge of throwing her wine glass across the patio. She banged the glass table where we sat with her fist, which alarmed me. This began as a quiet, after-dinner conversation pursuing her casual inquiry about how my Monopolis Monopoly Post had been received.
Some background: my wife runs our twelve person architecture business. She works ten-hour days and most weekends—both Saturday and Sunday. She manages most of the clients and projects in the office and the bookkeeper. She reviews the timesheets, manages the billing, negotiates with clients who are past due in their payments, signs the paychecks, signs the payroll tax checks, the income tax withholding checks etc. She meets quarterly with our tax accountant to strategize to make sure we’ll have enough cash to pay taxes and retirement account obligations every spring. She is driven to do all this by a type A personality that has to be in control of everything around her, and she does it better than most people could ever imagine it could be done.
My rambling MMT explanation started to get under her skin when I began talking about how the government didn’t really need her tax dollars to fund any of its expenses—how, in fact, if she paid her taxes with dollar bills, the government would actually shred the paper and throw it away. That’s when she banged her fist on the glass table. That was not acceptable, she insisted. There had to be some kind of “equivalency”. If she worked as hard as she does, and every month is forced to pay over a third of the money she collects to the tax-man, then there had to be some good reason for it. It had to go to some good purpose, and it had to be spent wisely to achieve that purpose.
I just woke up in the middle of night (3:30 AM) realizing that my wife’s sudden anger explains a lot of mysterious things, and poses a special problem that MMT has to figure out how to solve. The mystery it explains is why the mainstream media and politicians insist on believing and behaving as if tax dollars pay for federal expenditures—and why, as a result, mainstream economists and pundits (who actually have an inkling about how the money system works) are so tied up in knots trying to explain the economy to us. It appears we are ALL engaged in a massive cultural self-deception. The deception “explains” and gives meaning to something we’re required to do every month that’s very painful: pay taxes. The story we’re telling ourselves to alleviate this psychological pain —that our taxes pay for federal spending—is rooted in what I have referred to as Neandertal (or gold-standard) Economics.
It is clear this story continues to provide the underpinning for virtually all our political dialog: Tax dollars pay for federal expenditures. Therefore: let’s debate (a) how much should those taxes be, and (b) what they should be spent on. In a nutshell, that’s the story of our discourse. The problem MMT has is that while it can demonstrate that this story no longer explains reality, MMT has not provided a compelling substitute for this narrative. We still have to pay taxes. The government still spends money on things. So we’re still arguing the same two points, except now the relationship between these two things has changed in a way that seems to make the dialog meaningless.
How, pray tell, are you supposed to debate what the tax rate should be when none of that money is actually needed to pay for anything? And on what basis do you debate sovereign spending when it appears the sovereign can spend at will for anything and everything it might need? Within this new reality, how is a person supposed to make sense out of paying taxes? What story alleviates the pain? I don’t think it’s enough to simply say that taxes have to be paid or the fiat currency will lose its value. Nor is it really compelling to say: “Your tax dollars are fighting inflation! You can feel good about that.” While these stories may explain what is actually happening, they are not compelling enough to replace the old one: “Taxes pay for federal expenditures.” Even if no longer true, this story still makes a lot more sense to the human psyche (and to my wife). That’s the special problem I think MMT has to figure out how to solve.
The interesting thing here is that it appears the way modern money actually functions today is extraordinarily beneficial to everyone! It occurs to me that the first sovereign country that politically understands this, and is able to align its fiscal policies accordingly, will become so wealthy and prosperous it will rapidly dominate all other economies. It will be able to have the finest, most advanced medical and health services industry, the most efficient and convenient transportation system available, the most beautiful and comfortable housing imaginable, the healthiest and tastiest foods that can be grown and prepared, the most effective education and school systems, the best and most stylish shoes and apparel, the healthiest and most diverse natural ecosystems, and the most leisure time—including the most wonderful, fun, and satisfying places and ways to spend it. What politician, in her right mind, couldn’t get behind that? What voter, in his right mind, wouldn’t vote for it? And how could a platform of sour-faced austerity even begin to compete?
Here’s a first try at a new way of framing the tax problem:
Let’s all agree that we have to pay federal taxes NOT because that money is going to be used to pay for federal expenditures, but because the tax collections are specifically going to be used to create a “fiscal space” that is essential for the effective use of our sovereign currency. It is within this “fiscal space” that we are able to issue currency to buy the things and services we decide that we need, but that the private market, left to its own profit motive, is not going to create (or is not going to create enough of). Examples of such things are: military defense, pre-K through 12 and community college systems, public transit, smart-grid electrical transmission, highway and bridge repairs, universal health care, etc. Without the “fiscal space” created by our tax dollars, expenditures made to buy these public goods and services would cause inflation to accelerate, devaluing the currency and damaging the economy for everyone.
To take full advantage of the opportunities our sovereign currency gives us to employ ourselves to create the things we really need, it is therefore essential that we create the “fiscal space” to do so by paying federal taxes on a regular basis.
This new frame leaves us free to debate (a) how large the “fiscal space” needs to be to keep inflation in check, (b) what specific things and services our public expenditures should be directed toward, and (c) what is the relationship between the two. Please note that this debate is quite different from the one that focuses on whether we can afford to build the things we need and have the services we require.
What is especially important to recognize here is that in agreeing to this new narrative, we are not changing anything about the way the government already taxes and spends. The only thing we are doing differently is giving ourselves permission to spend—without guilt or fear—that which we intrinsically have an unlimited supply of: our sovereign currency. The fact that we have an unlimited supply of this “special stuff” doesn’t mean we can spend it haphazardly, without attention to the consequences. If anything, it means we have to pay even more attention to the consequences. The agrarian philosopher, Wendell Berry, made this point very well when he pointed out that a man with a mule can plow to his heart’s content and never do a moment’s damage to the earth; a man with a tractor, on the other hand, can destroy the productivity of his land in a single year.
J.D. ALT 5-22-12
John is a writer-architect. His novel, The Architect Who Couldn’t Sing, is available at Amazon.com or iBooks.