Neither Democrats nor Republicans officially subscribe to “modern monetary theory,” or MMT — the idea that the US can print or borrow as much money as its elected officials desire. Former President Donald Trump proposed several spending plans that purported to balance the budget over 15 years, and President Joe Biden campaigned on financing his spending plans with tax hikes. Yet in practice, both parties govern as if MMT is now the law of the land, with tax policy entirely unrelated to spending policy, both in good times and bad.
The United States is now running its biggest budget deficits since World War II: 14.9 percent of GNP last year, and 10.3 percent this year. Total debt easily exceeds 100 percent of GDP. It’s natural to wonder whether this can go on forever. In her 2020 book “The Deficit Myth,” economist Stephanie Kelton has a surprising answer: not really.
Several academic authors have published MMT books in the past half-decade, but Kelton’s is the first to target a lay audience rather than students or academics. An economics professor at Long Island’s Stony Brook University and a former adviser to Bernie Sanders’ Senate Budget Committee, Kelton aims to demolish what she calls “the household myth”: that is, as we’ve often heard from politicians, that we should balance the federal budget the same way we balance our family budgets.
Kelton explains why, to MMT theorists, the US government is nothing like a household. Unlike the average person, the US government doesn’t need to earn money, she argues. The government doesn’t tax people and companies because it needs money, contrary to popular myth. It literally makes money with the central bank, the Federal Reserve, creating electronic currency out of thin air.
Why, then, does the government tax anyone? Four reasons: first, to maintain a monopoly currency. If American citizens and companies didn’t need to pay taxes in dollars, they wouldn’t need to earn money in dollars, and the US wouldn’t find a market for the dollars it makes. Second, to control inflation, raising taxes to take money out of the economy and lowering them to put money in. Third, to redistribute income, levying a negative income-tax rate on poorer parents, for example, or a higher tax rate on millionaires. Fourth, to encourage or discourage certain behaviors, via tax credits for solar panels or high tax rates on gasoline. The government doesn’t tax people to balance the budget, though. It can fulfill the above goals with tax rates that take in far less revenue than needed to make ends meet, and it can do so for years — even decades.
This piece originally appeared at the New York Post
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Nicole Gelinas is a senior fellow at the Manhattan Institute and contributing editor at City Journal. Follow her on Twitter here. This piece was adapted from City Journal.
This piece originally appeared in New York Post