Inside Modern Money Theory: Our Route to Full Employment and No Debt

By Rollo Martins
Cross Posted from PolicyMic.com

America has a tool that millennials can — and should — use to trump all the negatives that are piling up at their doorsteps (the high unemployment, international competition, and all that college debt). This tool is called the U. S. dollar, which aligned with a fiscal policy designed for growth and prosperity, would eliminate their debt and give them full employment for the remainder of their lives.

A sea-change is occurring in economics and the University of Missouri-Kansas City is leading the way. Combining a fiscal policy geared toward prosperity and growth with a new understanding of what fiat currency means for the country, the economists there are touting what is being called Modern Money Theory. MMT turns traditional neoclassical economics on its head: Instead of tax then spend, it’s spend then tax. In other words, we can spend whatever we want. (But I oversimplify: There is still inflation to worry about.) This is all great news for the country, and for the millennial generation in particular.

Let’s just review what the traditional dismal science has told us: We tax, then we spend an amount based on what we want. Deficits are bad, creating a loan that future generations need to pay back. There’s a whole lot of other stuff known as monetary policy which Milton Friedman liked a lot (basically stating that currency amounts are really important), but we don’t need to get into all that. (You can find this information and more at New Economics Perspectives, a blog created to broadcast the Kansas City approach to economics, featuring economists such as Stephanie Kelton, William Black, and L. Randall Wray.)

Americans are told repeatedly that the government is bankrupt, that we are spending too much, and that we cannot afford to borrow endlessly on the backs of our grandkids. But all of this is, in a word, wrong. It is a mythology built upon an economics of gold, but is not nearly as useful in an age of fiat currency.

What the MMT economists teach us is that our taxes do not fund the government. Rather than view our economy as tax-then-spend, we need to see that we spend first, and then collect the taxes from individuals and firms who have used the currency the government had first created. Taxes are necessary to give value to currency in the wake of an absence of gold or silver, as well as to tweak how our economy functions (an element of fiscal policy). They are not necessary to spend money. That is important to understand. After all, it is plain that our government is the sole creator of currency, and can issue/print however much it wishes. If it so dictates it could spend and print 10, 12, or 20 trillion dollars. Eighty trillion. There really is no limit (other than inflation, remember). So how does taxation give value to currency? If the government did not tax any money there would be no value to currency, since currency is not backed by any sort of metal. Because we have to pay taxes (or face imprisonment) then we need to work in order to accumulate enough money to pay those taxes. In the process this transfers currency and value throughout the economy. This work — the goods and services we provide— is what allows our civilization to prosper. The simple measure of taxing by government fiat is the tool, brilliant in its simplicity, that now allows for our relative prosperity. The government taxes, and we spend the bills the government prints and give back some on tax day. We have to work to save those same bills and to pay the taxes. That is really all it takes to give value to money. It is that simple.

OK, so we have a government that can spend based not on tax revenue, but on what we need to do as a country. Remember, are not constrained by revenue. (Those guys on TV saying we’re bankrupt? They’re wrong.)

In our current economy we have tens of millions of people out of work or working too few hours. We have a health care system that is half as efficient as it should be. We have a trillion dollars in college debt with record numbers defaulting. We have so many goods and services standing idle that if we poured trillions of dollars into the economy it is highly unlikely we would have any inflationary pressures. Most economists still regard inflation as merely a given amount of money flooding an economy, without regard to how many resources are unused. If we could fund full employment and still not have inflation, well, that would be very good news to millennials. And we could very well do that.

The reason is this: Our economy is like a sponge. A dry sponge. If we create a lot more jobs through government spending (for example repairing roads, railroads, etc.) the sponge gets wet. It expands. Once we have full employment, with an economy humming, then we risk an overflow of water (money) since the sponge is saturated and can hold no more. Water spilling out onto the counter is our inflation. It’s important to note that we are a long, long way from spilling water onto the counter.

But since these ideas threaten a few powerful accumulators of wealth, this truth is having a hard time being understood, as it directly opposes the existing narrative of scarce dollars. But when properly understood, modern money theory opens up new opportunities and new wealth to tens of millions of people. It is time that the next generation of potential power-brokers, the millennials, understands how economics actually works, and uses it to their advantage. That’s turning the dismal science into a science that is hopeful and downright luminous.