Government Spending and Monetary Theory
It is well known the United States government can create money out of thin air. If it wanted to it could literally pay all of its bills with newly printed dollar bills, without borrowing or taxing any funds from anyone.
It would also be inflationary, in the strictest sense. It would increase the supply of money. Whether or not this would result in rising prices would depend on other factors, such as whether consumer spending was contracting at the same time.
There’s a school of economic thought called Modern Monetary Theory that tries to draw out the implications of the fact that governments that create currency are not fiscally constrained in the way households, businesses, or governments that don’t control their currencies are. The most readable version of MMT can be found over at the website Pragmatic Capitalism.
One problem I have with MMT is that I fear its key insight—that government is not revenue-constrained—would tempt politicians to spend more and spend badly. The notion that dollars spent by the government are dollars taken away from people who earned them (or, in the case of deficit spending, dollars that will have to be taken away from those who will earn them in the future) seems to impose some discipline.
Likewise, the idea that spending must be backed by taxes or borrowing imposes spending restraint. If you believe, however wrongly, that you can only spend what you can borrow or tax, you are forced to choose between spending projects rather than spending on any old thing you like.
A lot of MMT types seem to have a rather naïve view of government.
They think their insights would help government provide jobs during economic downturns, creating a permanent situation of full employment.
I suspect the government would view the chance to operate without revenue constraints as an opportunity to enrich well-connected big businesses and other special interests, wage wars, fund massive anti-crime and incarceration projects, and make life more difficult for anyone out of favor.
In other words, MMT-enhanced government would look a lot like the actual, real government we have today—only more so.
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