Obamacare, the Individual Mandate and MMT

Wendy Connett | Robert Harding World Imagery | Getty Images

By most accounts, the Obama administration’s efforts to require all Americans to purchase health care had a rough day before the Supreme Court. If the individual mandate gets struck down by the high court, many intelligent people will be simply astonished.

On the face of it, it seems absurd that the government could directly pay for health insurance for all Americans and levy a tax to support that program — but may be barred from requiring Americans to personally purchase insurance. Don’t they amount to the same thing?

In a sense, they do. Under either scheme, Americans would be required to be insured and they would be paying for it.

But that’s only what it looks like on the surface. If you keep in mind that the United States government and private-sector households are fundamentally different when it comes to financing their spending, this result is not absurd.

American households are budget-constrained. They can only spend as much money as they earn or borrow. If the government directs an American citizen to purchase a specific item like insurance, she must curtail her spending or saving elsewhere. Or she must borrow more money, raising her debt obligations to creditors. She is, quite literally, less free because of the directive.

The federal government is not constrained in the way households are.

It hardly earns anything at all, yet it spends billions. So we know right away that the government isn’t earning-constrained like an individual is. The funds in its bank account come mostly from taxes and debt sales.

The federal government can spend far more than it taxes. It can spend more than it borrows. It can even spend in excess of the total amount taxed or borrowed, because the Federal Reserve will buy its bonds as necessary to meet interest rate targets.

In other words, when the federal government spends, its own freedom of action isn’t curtailed in the same way as a household forced to spend.

It can curtail its own freedom through debt ceilings or spending caps.

But the mere act of spending on health care doesn’t do it.

This is one of the key insights of Modern Monetary Theory.

Governments are not solvency-constrained — households are.

Keep in mind that our courts have long recognized an expansive role for government spending, while insisting that the power to levy taxes or mandates on households and individuals is limited.

Although our founding fathers aren’t known to have been MMT advocates, they were politically astute. It’s possible that the system they built includes an implicit recognition that private spending and government spending a very different things. And a government authorized to spend in pursuit of the general welfare may not be authorized to command solvency-constrained households to undertake that spending instead.

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