Free Money? An Introduction to Modern Monetary Theory

by Rohin Mishra ’21

Created by: Joyce Wang ’22

Published Mar. 22nd, 2021

The notion that the federal budget has financial constraints is agreed with by most American politicians. But modern monetary theorists disagree.

Modern monetary theorists believe that government spending is limitless. They don’t, however, believe that there are no real limits to fiscal policy. Rather, they believe that anything that has the votes to pass through Congress can be funded. 

The eternal question, “How are you going to pay for it?” often arises when progressive politicians propose extensive fiscal change, like Medicare for All and tuition-free college; two ideas are quickly and invariably dismissed.

It’s intuitive to believe that limits should be imposed on the spending budget, and it’s become accepted by most that these limits are natural. This rationale tends to be ignored, however, whenever Congress decides to spend copious amounts of money in the military, for example, which costs U.S. taxpayers $732 billion.

Why many accept financial restraints boils down to politicians and their use of simple rhetoric to justify U.S. spending measures and confuse their constituency regarding governmental economics. 

Modern Monetary Theory (MMT) challenges the conventional perception that “There is no such thing as public money,” as said by Margaret Thatcher.

When evaluating this concept, one must realize that the federal government is different to a household or to one’s tax dollars, as it has the power to issue a U.S. dollar. 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’s power comes from the fact that the U.S. dollar, as a fiat currency, is not bound to gold, to international banks, or to another commodity – it’s only bound to the whims of its own banks.

Inflation is often used to rebut this mode of thought, yet MMT thinkers indeed look to inflation as an important factor. Rather than looking at whether the government can afford a certain policy, though, they look at to the extent that policy will cause economic side effects.

In the 2008 Recession, the American Recovery and Reinvestment Act of 2009 cost $831 billion between 2009 and 2019, despite ideas pursued by members of former President Obama’s cabinet to spend over $1 trillion. 

Spending this little amount of money was a net negative as over $8 trillion was lost in housing wealth during the crisis, and an estimated 6.3 million people were pushed into poverty between 2007 and 2009. 

When there is a spending deficit, the resulting surplus is not a zero-sum game. The extra money that results from extensive spending policies goes into the economy and into the hands of working families. 

Saving the livelihoods of everyday working families through the means of deficit spending is a sign of fiscal responsibility, even when the majority of today’s economists argue the opposite.

EDITOR NOTE: To get an alternative perspective on this issue, check out Ben Zhao’s article: https://themontgomerypawprint.com/the-dangers-of-modern-monetary-theory/

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