Modern Money Theory/Practice – Fixing an Under-capacity Economy.

From Intro To Modern Money Theory:

“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.  The balance is between employment and inflation – not income and spending.

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 capacity.

If more jobs exist than workers, the level of the pool is too high and the government must reduce the level of money in the pool to bring employment and jobs back into balance by reducing the money supply and/or increasing taxes (draining the pool of money) to reduce the number of jobs. If there are more workers than jobs, the government must pour more money into the pool, creating more jobs, and bring the level back to full employment.   Raising taxes (draining the pool) in this situation would defeat/slow increasing the flow of money into the economy and make creating jobs difficult.

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 employee 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. The extra money also allows people to save 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 to keep/grow jobs while decreasing taxes by a much larger amount – not draining the pool. This means money is being added to the economy but not it a way that will promote full employment and more consumer spending. The economic capacity, or money in the pool, will rise but it won’t result in a balanced economy because most or the money won’t be spent on jobs, goods and services. Instead, it will be spent in investment markets to enrich the one percent and inflate the stock market which doesn’t help balance jobs and workers to attain a full capacity economy.

In other wards, deficits are good if they result in full employment and a balance economy but bad if they result in increased austerity, growing economic inequality and fewer jobs.

Also, a balanced federal budget translates into bad deficits, an economy far below capacity, lots of unemployment, lower wages, under employment and prevents solving problems like global warming without end, no universal health care, no greening of our energy sources, and perpetual austerity except for the one percent.

Good deficits lead to a balanced economy that minimizes economic inequality.

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More:

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.