Modern Monetary Theory for Conservatives
It’s time to debate to what ends, not whether the government should spend.
As predicted, conservatives have responded to the latest $1.9 trillion stimulus package with outrage about our growing national debt, and the taxes that will be required from our children and grandchildren to pay for it. While there may be many things to criticize in the package, it is significant that despite the fact the defense of the family is supposed to be a hallmark of conservative politics, not even a generous family policy embodied in an expanded Child Tax Credit could assuage many conservatives of their mortal fear of government spending.
This reluctance to accept government expenditure can be explained by many factors, some of them ideological and political. But one important and somewhat understudied factor is a faulty and outdated economic theory. Without defending all the details of the latest stimulus package, conservatives should re-examine the economics that underlie the tendency on the right to condemn any instance of large-scale government spending. On the basis of such a re-examination, the policy conversation could then shift away from whether government spending is economically justifiable and towards what kinds of spending are productive and worthwhile.
In her recent book The Deficit Myth, economist Stephanie Kelton offers a compelling challenge to the common idea that deficit spending is essentially unsustainable. Kelton is one of the foremost proponents of an increasingly influential school of economic thought known as “Modern Monetary Theory,” or MMT. According to MMT, no sovereign state that issues its own currency can ever run out of money. This is because it simply “prints” its money in order to pay for whatever operations it deems necessary. The government doesn’t need to go out and find the money it needs for such spending; it needs no fundraisers, no sales, and not even taxes, to fund its operations. It simply spends into existence the money that it needs for its operations.
The theory is intended as a rebuttal to common objections against deficit spending, which is when the government spends more money into the economy than it takes out in taxes. Every time the government puts out a plan to spend large amounts of money on any project, whether it is infrastructure, education, healthcare, or a stimulus package, the constant refrain is “how will you pay for it?” And the expected answer is always “with taxes of course!”—whether taxes now or taxes upon future generations. According to MMT, this is entirely the wrong way to think about it, and a few public figures, even including conservatives like Tucker Carlson, are beginning to recognize this. The government in a country with a sovereign currency, like the U.S., does not depend on taxes for its revenue. Indeed, the money for taxes only exists because the government prints it in the first place.
This means that unlike any private entity, such as a household or a corporation, the government does not need to worry about its own solvency, since it can never go insolvent—it can never run out of money. Thus, the government does not need to take any of the measures that private entities take to accumulate savings or make a profit. It will always be able to “spend into existence” whatever money it needs to pay for its operations. The difference between the federal government and a household is thus not merely a difference in degree (one is bigger than the other). It is a difference in kind.
It follows that taxes do not amount to the accumulation of wealth for the government. Rather, they amount to no more than the extinction of money from the economy. Like God, the government giveth, and the government taketh away; the government spends money into the economy by printing it and removes money from the economy by taxing it.
In terms of the pure quantity of government spending, there is no limit except inflation to what the government may spend. Inflation only occurs, at least in any damaging degree, under certain conditions. Foremost among those conditions is full employment. When the economy is at full employment, which it rarely is, then the overall purchasing power within the economy may be considered to be at full capacity. At this point, an injection of more money into the economy might result in inflation, since it would likely push demand to outstrip supply, thereby causing prices to soar higher and purchasing power to decline at a dangerous rate.
However, even this danger could be averted to a significant degree if the government aimed its spending not only at stimulating demand but also at stimulating the production of consumer goods. In fact, the U.S. government has a long history of doing exactly this, as the extensive research of economists like Mariana Mazzucato demonstrates quite compellingly. If there is a risk of inflation from government spending, it would not be because government spending automatically produces inflation. Rather, it might be due to the fact that the U.S. government has ever since the Reagan era failed to make a priority of stimulating both demand and production through the implementation of a deliberate industrial policy. This only highlights further the importance of well-planned spending by the government.
Furthermore, the government has many other tools at its disposal for controlling inflation. Not only does the Federal Reserve play a central role here, but even taxes can be levied by the government as a way of controlling inflation. When demand begins to outstrip supply, the government may very well consider imposing taxes where this might effectively limit inflation. Of course, not just any taxation would do this; the government needs to ensure that its taxes target entities or classes who spend enough money to affect consumer prices. Taxing the extremely wealthy, for example, may not be the best way to control inflation, since wealthy people tend to save more than they spend.
But there are also other good reasons for taxation. While taxing the wealthy is not the best strategy to address inflation, it may be good for other reasons: leveling the playing field, adjusting wealth inequality, preserving social cohesion, protecting democracy, etc. Moreover, taxes can be wielded as a legal instrument of moral pedagogy: the government can impose taxes on certain vices, e.g., the use of tobacco, drugs, alcohol, etc., in order to encourage more moderate consumption of such products.
So while there are many good reasons for the government to impose taxes, especially to control inflation, funding government expenditure is not one of those reasons. Indeed, the idea that taxes should fund the government’s expenditure by “plugging its deficits” could prove to have damaging effects on the economy as a whole, if actually put into practice. As MMT theorists are fond of pointing out, what we call the government’s deficit actually amounts to nothing other than the people’s surplus. As Kelton often repeats, “the government’s red ink is our black ink.” In other words, as long as the government (public sector) spends more into the economy (private sector) than it taxes out (the definition of deficit spending), the economy itself will enjoy a money supply large enough to stimulate productivity and growth. By contrast, if the government were to tax more out of the economy than it spent into it, the economy would suffer from its own deficit, a risk of deflation, and a potential crisis of underconsumption. In other words, the deficit by itself is not a bad thing, and it is here to stay.
With this perspective, the policy debate should shift away from the question of whether the government should spend so much and towards the question of what spending choices are the most prudent for a government to make. What types of spending might avoid causing inflation? What types of spending can avert the risk of inflation by stimulating supply in tandem with demand? Might a little bit of inflation sometimes be good or at least tolerable? What types of spending can both raise people out of poverty and create productive jobs? Is there ever enough “wiggle room” to stimulate demand and raise people out of poverty without investing immediately in production? These and other questions about how the government should spend are what conservatives should be asking, rather than raising objections to government spending as such.
The common conservative objection to government spending is not only based on a faulty economic model, but it also serves as a mental obstacle to using government capacity for purposes conservatives are supposed to care about. The debate around family policy is a particularly relevant case in point. Industrial policy is another. These are policies that would bring concrete material benefits to families and help to rebuild many of the communities and social ties that conservatives claim to hold dear. With the obstacle of an outdated economic paradigm removed, objections directed against policies that would clearly benefit thousands of American families can be recognized to be ideological.
Jonathan Culbreath is a writer living in Southern California. He is an assistant editor at The Josias, a site dedicated to the recovery of Catholic Social Teaching. He may be followed on Twitter @maestrojmc.