“Modern Monetary Theory is partly a description of how our modern fiat, floating exchange rate currencies actually work, and partly a prescription of what we ought to do with this knowledge. MMT realizes that many of the constraints we place on our money system today as well as many of our models for understanding it are actually holdovers from the era of gold-standards and fixed exchange rates that don’t apply at all today.”
Here’s my take on how MMT works to create a national balanced economy that results in full-capacity, full employment, and low-inflation.
Imagine that America’s economic capacity is a swimming pool. This swimming pool is filled with liquid US Dollars. When the US economy is at full capacity the money in the pool is at just the right level. This right level for a full capacity economy is where the number of available jobs equals the number of available workers. Thus the economy is at full employment.
If more jobs exist than workers, the government must reduce the level of money in the pool to full employment levels by reducing the money supply and/or increasing taxes (draining the pool of money). If there are more workers than jobs, the government must pour more money into the pool and bring the level back to full employment, but without raising taxes (draining the pool), which would defeat/slow increasing the flow of money into the economy.
This effort to maintain a balanced economy changes when the deficit, the flow of money into and out of the pool/economy (money supply and taxes) becomes a problem. As long as the economy is at full capacity, the money flow is properly balanced. If that leads to a deficit, more spending than taxing, it’s OK, because the economy is balanced by additional spending from full employment and the purchase of goods and services that would otherwise not happen. The extra money is circulating and maintaining full employment. It also allows people to save money for retirement and pay for health insurance.
On the other hand, if the deficit occurs while there is any imbalance in the full capacity of the balanced economy, it’s a problem. For example, DJT is increasing defense spending by a small amount and decreasing taxes by a much larger amount. This means money is being added to the economy but not it a way that will promote full employment. The economic capacity, or money in the pool, will rise but it won’t result in a balanced economy because most won’t be spent on jobs, goods and services. It will be spent to enrich the one percent.
In other wards, deficits are good if they result in full employment and bad if they result in increased austerity and growing economic inequality.
Also, a balanced federal budget means bad deficits, an economy far below capacity, lots of unemployment, lower wages, under employment, global warming without end, no universal health care, no greening of our energy sources, and perpetual austerity except for the one percent.
The unfolding climate crisis demands that we make an urgent and just transition to a green economy. The question many are asking is, “How will the U.S. government pay for this transition?” In this talk we learn how the U.S. has used “modern money” since we came off the gold standard in 1971, which offers substantial new options which have not been utilized. Modern monetary theory can be used by the federal government to create new green jobs, build a green economy, and fund social programs in a surprisingly affordable and complete way.
Randy Mandell works on Modern Money Revolution, a campaign of 1 Sustainable Planet and 350Seattle.org, and actively works for climate recovery.
Recorded 11/12/17 at Prospect Congregational United Church of Christ, Seattle. Thanks to The Faith and Climate Team.