Sovereign Spending in a Market Economy


Even if we assume the principles of modern fiat money will be generally accepted at some point in the future, we must yet confront the problem that sovereign spending is a difficult issue for market economies. It could easily unfold that even with the new “modern” money perspective in place, a serious recession could still find federal stimulus spending unnecessarily constrained. This difficulty was on full display in the last recession when Obama’s stimulus package was finally passed by Congress—appropriating $800 billion for the federal government to spend—only to then confront the almost burlesque-show entertainment of watching Congress and the Obama administration trying to figure out how to actually do the spending.

            The issue, of course, is that in what is supposed to be a sacrosanct market economy there are only three arenas (that I can think of at the moment) where direct sovereign spending to buy goods and services from the private sector is considered justified or allowable:

  1. National Defense and Security—because it is generally acknowledged there is a powerful need for highly centralized planning, control, and implementation.
  2. Basic Science Research—because there is general agreement that, while basic research can greatly benefit both the collective good and private industry, private industry itself will not engage in such spending because the risks of financial loss are too high and the chances of financial gain too small.
  3. Collective Goods and Services Which Significantly Benefit the General Public—because it is generally agreed that while such collective goods and services are desirable and in many cases necessary, it is unlikely that market-based private industry will provide them because of their lack of profitability.

If the sovereign government proposes to buy goods and services outside these three arenas, private industry will complain mightily that the sovereign is interfering in the free market by “picking winners” or, even worse, directly competing with private enterprise. A related problem is that sovereign spending within these three arenas—even if Congress appropriates new dollars to them—will do little to employ the vast majority of people who most desperately need to be employed. Under-educated people without specialized skills have fewer and fewer places to participate in the modern market economy. As a consequence, it seems they are of necessity driven instead to shadow economies. (One of the few entrepreneurial opportunities available to people marginalized by the “official” market economy is growing marijuana.)

The difficulty of sovereign spending in a market-based ideology is embodied in the idea that if a stimulus is needed, the only market-based option allowed is for the central bank to push down interest rates. The thinking seems to be that, unless the market itself can motivate private enterprise to borrow capital and hire workers, it is better that nothing should happen at all, lest we slide down a slippery slope into a socialist command economy. This is why the U.S. central bank is so nervous at the present moment about not being able to push interest rates back up from their near zero levels—out of fear that if the economy slides back into recession (which it feels like it could easily do) the single tool the market-based ideology gives the federal government to play with is essentially inoperable.

From the perspective of modern fiat money this obsession with interest-rate stimulus makes no sense. If the market is unable to incentivize private industry to hire people to create the goods and services society needs, the idea that the only alternative available is a socialist solution imposed by Big Government and higher taxes is simply a false choice. Once you accept that the federal government is not spending either tax dollars or borrowed dollars, it is entirely possible, for example, to imagine sovereign spending programs which are not envisioned, managed, or implemented by the central government at all. It is also possible to imagine sovereign spending programs that not only produce real goods and services society needs, but actually strengthen and diversify the market economy itself—creating employment and even entrepreneurial opportunities for marginalized people in the process.

The general model I keep tinkering with is the same one I introduced in the very first NEP essay I wrote, “Playing Monopoly Monopolis.” Here’s how I described in then:

            The sun’s been down an hour now, and the room we’re playing Monopolis Monopoly in has gotten pretty dark. Sister Sue turns on a light and—to our great surprise—we find we’re not alone! While we’ve been busy rolling the dice, clomping our tokens around the Monopoly board, and counting our stashes of currency, the neighbors have come over. They’re standing around, leaning against the walls, watching us with keen interest. They’re noticing all our pretty houses and hotels and colorful money, and I can tell from the expression on their faces that they want to join in the fun.

Fine with me, except there’s a problem: You and Me and sister Sue already own all the property on the Monopoly board. If the neighbors join the game there won’t be any property for them to buy, and without property, they couldn’t work with You to build a house, or hire Me to design one, or sister Sue to interpret the Building Code. So there’s really no way they can participate in the game.

But a couple of these folks are leaning forward now in a determined way, hands pushed in their pockets in a manner that suggests they might be coming out of their pockets at any moment, and I’m starting to get worried. There are a couple of kids, hanging onto their mother’s dress, who look like they haven’t eaten in two or three days. Sister Sue is looking at them and getting tearful.

Suddenly, I’m struck by a lightning bolt idea, and I immediately share it with the other players: The government of Monopolis should build a series of structures on the Monopoly board that creates new properties that players can build more houses and hotels on. I suggest calling them “Enabling Structures” because they will enable the neighbors to participate in the game. I quickly design a prototype:


The path of play around the board will now zig-up through the Enabling Structure and zag-down to the lower board, with the players either claiming possession of or paying rent to the owners of the Enabling Structure Lots.

How will the government build the Enabling Structures? Just like it buys an aircraft carrier or a building code, and I nominate myself (it was my idea, after all) to be the Enabling Structure developer. I build them all around the monopoly board, effectively doubling the number of properties and houses and hotels players can now buy in the game. To compensate my efforts, CIG (currency issuing government) injects the tidy sum of $8,000 into my currency account.

Now the neighbors can join the game, except they still don’t have any money to begin playing with—the same dilemma, recall, we started out with ourselves. Sister Sue proposes that our currency issuing government is perfectly capable of paying each of the neighbors to build a house on the first “Enabling Lot” they land on, and this procurement by our Monopolis government will become their “start-up” cash for playing the game. The new player will then pay “rent” back to CIG each time they pass go, until those payments equal the original procurement, at which point they will own the houses outright.

Whew! Now the neighbors are in the game, and after a few rounds, they’ve acquired property and built some houses, and the game proceeds just as before, except now there are more of us playing. And while the building of the Enabling Structures—and the government’s procurement of the first Enabling Structure houses—has injected a big chunk of currency into the private sector, it’s also created a LOT more things for the players to buy and sell to each other: more properties, more houses, more building services, more design services, and more services to interpret the Building Code. That’s really something to think about.

In 2012, when I wrote the above, I was thinking particularly of Enabling Structures which are physical constructs, which are paid for by sovereign spending, and which then enable and support a subsequent small-business-market-based process building affordable houses. Interestingly, the Pritzker Prize has just been awarded to a Chilean architect, Alejandro Aravena, for his affordable housing concepts that come strikingly close to the Enabling Structure concept.


Half of each dwelling is intended to be completed with sweat equity by the occupant-owner—and is open to interpretation as to what that completion will entail. It is even possible to imagine, for example, that the empty half could be finished as a separate rental unit, providing income for the owner-builder. Or it could be completed as a small workshop for some kind of local production—or as a small store or cafe. In other words, what we are looking at here is not a displacement of the market economy, but the beginning of a new, local component of the market economy. Importantly, it is a new market component specifically structured for the participation of people who would otherwise be marginalized. And BIG government is not telling people what they have to build in their empty “slots.”

I have more recently come to realize that the idea of Enabling Structures doesn’t have to be limited to physical constructs. It is possible to imagine many different kinds of organizational and/or informational “structures” which could be paid for with sovereign spending and which would, subsequently, enable local citizens to more easily and effectively create and participate in local markets—markets that enable them to create goods and services they really need. This leads me to suggest it might be well worthwhile to begin considering and documenting specific ideas about how direct sovereign spending could make this happen.

My idea is this: if we did what I just suggested, then, when the next recession hits—and the central bank finds that its traditional strategy of lowering interest rates is still not available (which is likely to be the case) and Congress is thus forced—against all its entrenched phobias and market ideologies—to appropriate another huge chunk of emergency sovereign spending, we’ll have a long list of ideas about how those new dollars can be spent to rapidly put them exactly where they most need to go. And once we’ve experienced how well that works, once we see that sovereign spending can expand the market economy rather than destroy it, we’ll have made a big step toward a general acceptance of, and appreciation for, the realities of modern fiat money.

26 responses to “Sovereign Spending in a Market Economy

  1. Having played Monopoly for many hours as a child, I have a few comments to make. First, when the game begins, each player is given a set amount of cash with which to operate. Without new properties to acquire, additional players would be at a disadvantage, but there is no reason why they should not also be given a cash award to start play. This could take the form of an EIC (earned income credit), SS tax holiday (both only help the working), or simply given a “participation grant”, sort of like a Pell Grant for education. Of course this sounds like the “dole” which causes such apoplexy among conservatives, so maybe it needs to be gussied up as a job guarantee. What kind of job; how about building those enabling structures that could be at least planned for ahead of time. States, communities, and school districts could also be funded to keep five year plans for “shovel ready” infrastructure repairs and improvements in their planning departments. Hum, five year plans, sounds like pure communism to me, oh well.

    • End of third to last sentence should be a ?. Also, add at end of comment: at least it is called Monopoly.

      • It isn’t communism. It is a little socialism, with the understanding that private industry is kept intact. I like the idea. The Hoover dam was a five year or so production by the government. Without it 2 million Las Vegas residents would be freezing on the east coast or crowding into Los Angeles.

        • I actually agree it’s not communism, I am just anticipating what opponents would call a Five Year Plan. Call it anything else, Infrastructure Preparedness Plan, Shovel Ready Plan; anything but a Five Year Plan. Don’t gratuitously give them a weapon to use against you.

    • EIC for corporations is already there in the form of subsidies and low taxes. Just ask Warren Buffet

  2. JG puts the money directly where it needs to go, and is automatic.

    Spending by government to buy stuff and build stuff should go on all the time, at a predictable, planned pace, designed to meet the need for it. Not economic need, physical need. You don’t build a bridge just to fight recession, and then stop halfway through when the economy recovers.

    If the recession causes a need for more money than even JG supplies, then a tax cut is in order. Likewise, when inflation threatens during the boom, even though JG spending is plummeting and tax collection soaring, a tax increase is called for.

    • There are two types of public provision. There is the ‘required’ public provision and the ‘nice to have’ public provision.

      In society what we should have is the ‘required’ public provision having first access to the resources of the nation. Those happen all the time and are offset by taxes (hypothecated if required politically). The private sector is then allowed to use the resources that are left, and any left over resources after that are picked up by the public sector to create the ‘nice to have’ public provision.

      The Public sector bookends and contains the private sector. It then becomes, in essence, the containment vessel around the nuclear power of capitalism.

    • I think our history is likely to show the government is more apt to start a project during boom times and suspend it during a recession, not a prescription for counter cyclical success.

      • Are you referring to the WPA, the CCC, TVA, the RFC? History proves just the opposite.

        • Exceptio probat regulam?

          • I can’t see them as proving anything other than that the government can, if it wishes, put people to work and product useful services.

            • I agree that the sovereign government can provide employment during a downturn. The question is, do we remember the WPA, CCC, TVA and RFC because they are common examples of the government actually doing that, or because they are exceptions to the the general trend of governments (local, county, state and federal) to retrench and suspend projects during downturns with accompanying decreases in tax revenue? I am speculating that the latter is the case, but would have to do some research to make the case.

  3. In 2008 the Australian Federal Government took three main expansionary actions. A special grant of $AUS 900 was given immediately to most citizens (the well off were excluded). It made available to each school a significant lump sum enable the school to provide a new library or a gymnasium style hall. It also provided a subsidy to every home owner to install or improve the home insulation.
    The cash grant stimulated either debt reduction or consumption spending or a blend of both. The schools program stimulated the building industry and materials supply industry. The savings in power consumption, from what became known as the “pink batts” program, is believed to have paid for that program.
    The domestic programs and the Chinese stimulus saved Australia from any real recession.
    The ultra conservatives of course now claim that the budget debt created by those actions is now a drain on the economy even though the inflation rate and the interest rate on bonds sold to the private financial institutions are about equal.

  4. I see zero similarity between “sovereign spending into an economy” and the Obama stimulus program.

  5. “we’ll have a long list of ideas about how those new dollars can be spent to rapidly put them exactly where they most need to go.”

    Unfortunately that is just pump priming. It doesn’t actually handle the counter-cyclical requirements of the economy in an appropriate manner.

    If you have a demand drop off during a bust phase, or a demand overload during a boom phase then your automatic stabilisers are not working properly and you need to improve them.

    That means higher corporation tax, and higher investment offset against corporation tax. And it means higher spending when there is unemployment via a Job Guarantee.

    Discretionary spending changes are just going to run into supply side tightness and inefficiency. You need to have a system that is ready to roll when the danger arises – just like any flood barrier.

  6. Wouldn’t you want lower investment offset against corporate taxation during a boom?

  7. Marvin Sussman

    Government can always spend on infrastructure. Why not, in 2009, just hire the idle construction industry to fix the 60,000 bridges that were in critical need of repair, including the 10% in danger of collapse? Because fixing a bridge requires time to find contractors, get bids, choose a winner, get impact statements, etc. But that rerquires “shovel-ready” bridges, a rare species.

    What is needed is a Dept of Interior that is funded to manage the nation’s infrastructure. We need a Congress that knows its job. We need an electorate with brains and knowledge.

    That’s why we are screwed!

  8. Michael Brown

    Canada is currently debating fiscal vs monetary stimulus to handle the terms of trade shock we are currently experiencing. The academics all prefer monetary stimulus as they say government spending (G) actually drives down the other factors in the GDP. They say research by Ramey-Zubairy show the multiplier on GDP is not very high and so therefore less effective than fiscal. What is the MMT response to this debate?

  9. Michael Brown

    Sorry, second to last sentence should read:

    They say research by Ramey-Zubairy show the multiplier on GDP is not very high and so therefore less effective than monetary.

  10. Dear John,
    Great article and the thinking that goes in it.
    However I wonder how speculation in the monopoly game is tamed and managed to avoid the effects of MONOPOLY!?
    This is the essence of the game!!!Amassing as much as you can,as quickly and as abridged as you can (hmmm…sounds like a Donald that is making a mess around this nation’s non participants in the Monopoly game).
    I really do not see that providing those with less to participate in such venture helps the whole at the end of the day…or at the end of the five year plan…

  11. Howard Switzer

    It seems this group goes out of its way not to mention the Green Party’s monetary plank based on the work of the American Monetary Institute which was made into a bill, HR2990, The NEED Act, which, having been through the rigorous 3 year bi-partisan legislative legal review, Dennis Kucinich introduced to Congress in 2011 at the encouragement of his wife Elizabeth. This bill would transform our money system from one based on private greed to one based on public care. It would fund public education and healthcare, a big citizen’s dividend, the rebuilding of the nation’s infrastructure and pay off the national debt as it comes due. Like the Greenback it is debt-free public money spent into the economy by elected government instead of private banks lending it into existence at interest. Instead banks would be changed to 100% reserve, lending only existing money, an honest business model for the first time in our nation’s history. We don’t need theory, we need a real money system. Unfortunately most people believe the myth that money has to be debt, a myth that serves the international bankers well. As Marshall McLuhan said, “Only the small secrets need to be protected. The big ones are kept secret by public incredulity.”

  12. Mr. Switzer, I appreciate your bringing up HR 2990. I do not think it is being ignored, but I believe the issue—based on my understanding of the proposed bill—is that it contains some implicit flaws in the understanding of modern fiat money. Modern fiat money IS the debt of the U.S. sovereign government, so therefore it cannot be structured the way HR 2990 proposes. I believe the folks at NEP can explain this better than me, so at this moment I’m not going to make an attempt. The other issue, from my perspective, is that in order to achieve its many laudable goals (infrastructure repair, universal health care and higher education) HR 2990 requires radical changes to the central bank and banking system which are highly contentious. Modern fiat money can, in fact, achieve those very same goals—but it’s something that already exists. It does not require an act of Congress, only that Congress comes to understand reality.

    • Any meaningful changes to our outdated monetary system, a relic of when gold was money, will require radical changes to both the central bank and commercial banking as well-that point is obvious.

    • Howard Switzer

      Mr. Alt, I think you are mistaken as to any implicit flaws in the understanding of modern fiat money in HR2990. 3 years of the legislative legal review and system dynamics modeling show otherwise. That modern fiat money is debt is the problem, it is privately issued fiat money as interest bearing debt when our government, as I believe you’ve noted before, could simply issue fiat money itself without having to borrow it from commercial banks at interest, as the Constitution provides. As Edison said, if gov can create a bond it can create a dollar. While it would be issued on the faith and credit of the people it would not be a debt to be paid back to some bank at interest. Yes, it would require changes in the banking system, it would force banks into an an honest business model for the first time since 1913, lending only existing money instead of creating it. This is why it is a political issue, one that has really been around since before Christ. The issue is between the private issue and control vs the public issue and control of a nation’s money supply. We currently live under an oligarchy. As you yourself have noted, publicly issued fiat money would change how government looks at costs, money would no longer be an issue but just the resources required to do what needs to be done. The 3 essential reforms in the NEED Act would fix the system. Then we get to spending debt-free money into the economy. I say debt free because it is permanent money, it is not extinguished at the end of a loan, it does not have to be paid back, instead it can circulate as Greenbacks did, serving the interests of the people. As for spending it into the market economy, I don’t see a problem, healthcare, education, infrastructure, a citizens dividend, pay off the debt to the banks as they come due, is all doable and all needed. We have the resources, the labor and materials. Further, we would then have a system based on public care instead of private gain which would do wonders for the human psyche and behavior. There was a reason why the ancients frowned on Usury; the misuse of monetary authority for personal gain. I think the formally trained people here may have bought a flawed premise about money. Here are the 3 essential reforms we need:
      1- Federal Reserve System becomes part of our government, precisely what most of us mistakenly think it is now.
      2- Bank creation of money as debt is decisively stopped. Banks will only loan money that already exists, exactly what most people mistakenly believe happens now.
      3- The federal government creates and spends into existence US Money in non inflation/deflationary amounts for the needs of the nation and its people. Again, what many mistakenly think is now happening. All three of these reforms must be done at the same time or banks would wrangle the money power back into their greedy hands. Here is why;
      1…The Bank of England was nationalized in 1946 (Reform #1). But because bank creation of money was not stopped (Reform #2), private banks now still create 97% of the UK’s money.
      2…Jackson and Van Buren revoked the Second Bank of the U.S.’s charter, effectively ending most bank created money at the time (Reform #2). Misunderstanding the true nature of money, they failed to create and spend, debt-free money into existence (Reform #3), bringing on the depression of 1837.
      3…Debt-free Greenbacks (Reform #3) were created under Lincoln to fight the Civil War and save the nation. But because bank creation of money (Reform #2) was not decisively stopped, the bankers methodically got the upper hand and quashed the Greenbacks.
      The great populist movements of the late 19th century tried and failed to win a public money system but with the issues facing us today we cannot afford to allow the current private money system to continue.
      I think the money issue is the most important issue of this civilization. Any government that does not issue its money is controlled by those who do. For 200 years we’ve done only what is politically expedient instead of what is economically sound.

  13. J. D…..
    I’ve learned so much from the several visual analogisms that you have posted to explicate MMT (with a tip o’ the hat to J. Firestone and HVPPCS). I was a sculpture student at one time… I’ve printed and passed-on several of them to friends but to bafflement and little avail…. It is that few regular folk can stretch their pre-conceptions of what I know now as neo-liberal mumbo-jumbo enough to grab the first rung. This post is another worthy addition to your creative engagement. Thanks Loads!
    Or is it going to be Fiat all the way? I assume S. Kelton is reading this and B. Sanders has intent and license to execute the program once nominated (all of us are tired of the “How do we Pay For It” b. s. line ultimately from Peterson surrogates like Leslie Stahl -rough jab!…).
    I’m sick of it!
    Here’s an analog that I found in a shower thought a couple days ago.
    “Before We Mint the COIN, We Must Pinch the Baby!”
    Wherein our Puritan self shaming austerity is addressed (yes A. Merkel – you too!)
    Sorry, I knew an actual economist who was drummed out of an academy for his ethnicity a couple years ago… about the time I read of The COIN in particular.
    So, I’m just trying to inject a little immediacy into this blog. Where’s the students? Or should I take it to Reddit? Where IS the magic meme for MMT? I am unworthy….
    The one thing I learned from you is that WE CAN DO IT…. all the rest is economics!
    Anyway, KUDOS!

  14. Excellent summary, Howard Switzer. I would only like to add the following: The mind set of the congress and the federal government would need to change as well. At present the central bank has responsibility for both price stability and employment but has very weak tools to perform those functions, bank to bank interest rates and buying and selling the national debt. The congress has the strong tools for employment and maintaining price stability, taxing and spending. Noteworthy is the fact that the ECB tried to usurp that power in the fraces with Greece. The congress will have to learn that money is the cheap commodity and the real issues are resources, price stability and employment. They will have to learn to think that way instead of thinking about budgets, deficits and debt.