Modern Monetary Theory is a new way of thinking about economics that takes into account the massive changes to our economy that happened when Nixon left the Gold Standard. Its a hard concept to get your head around and there is so much nuance that I cant even hope to cover it all here, but it is VITAL that progressives understand the basics because it could be the one thing that allows the goals of the Progressive Movement to be realized. In other words...its important, REALLY important.
August 15, 1971 is the date the US left the Gold Standard. It marked a cataclysmic change in how money operated in the US. Gone was anything that backed the value of The Dollar other than the government saying it had value. Suddenly the US was operating under a fiat currency. This had several advantages. It allowed The Fed to increase the money supply without having to worry about whether there was enough gold in the vault. In a downturn getting currency into the market can be vital to lessening the damage in the form of fiscal policy and running deficits in the form of strengthening the social safety net.
The problem is that politicians and some economists have been slow to account for this change. Lets not forget Keynesian economics was a theory that came out of the Great Depression and Monetarism is older still. Neither of these accounts for a fiat currency, and neither did a very good job predicting the Great Recession. So what does MMT tell us?
First is that the US is a Sovereign Currency Nation. This means that the government alone creates our currency, we owe any obligations in that same currency, and you are forced to use it for a mandatory obligation (paying taxes). We cant go broke. We can refuse to pay our obligations via an act of Congress, and most of us you’d think would see the stupidity in that.
Second, and this is key taxes do not pay for spending. All new spending comes from new money. I know this one is hard to grasp because it runs counter to the infamous “kitchen table” where you have to balance your checkbook and you cant spend money you dont have if you dont borrow it. Thats not how our federal government works. In fact, it doesnt borrow. Why would you need to borrow money that you in turn create? We cant become Greece because Greece gave up their currency as a condition of joining the EU. They do not control their currency and thus were forced to endure (and still endure the consequences of) punishing deflation. I’ll talk more about this at a later date.
Third the deficit is the wrong metric to look at. That’s the thing that's so misleading and is the crowning jewel of propaganda that says we cant afford things. Inflation is the proper metric to look at. Inflation as defined as too much money chasing naturally scarce goods. The “give everyone a million dollars” example explains this. If everyone had an extra million dollars, what would they do? They buy a heck of a lot more stuff. More stuff than the private sector could produce. That in turn would force prices to rise...perhaps a lot. At that point MMT advises that it is time for the government to pull back on the spending and raise taxes. Now just to be clear...prices can rise for reasons that are quite different. Companies that have monopolies can create scarcity to make prices rise because they have no competition (just look at you cable or internet bill year over year for a good example of this). For real inflation, taxes are a way to pull excess currency out, or think of your tax dollars being shoveled into an oven (that's essentially what happens).
In the absence of inflation the government should continue to spend on things that provide for the common good. Infrastructure, Green Initiatives that fight Climate Change (did you catch that one progressives), expanding the social safety net, or Universal Basic Income. There is no “crowding out” because every dollar the government spends goes into a private sector account as surplus, and there are large multipliers on that kind of spending. That’s why Austerity has failed so spectacularly in the EU as well as here. Austerity or cutting government spending takes money out of the private sector and causes them to run a deficit which in turn explains the huge increases in the need for business credit which unlike the government runs the risk of default.
AOC has educated herself about MMT. I’m not sure if she has mentioned it by name, but she is certainly referencing its principles. Dick Cheney in the possibly one true statement that ever came across his lips said “Deficits dont Matter”. Republicans on some level have always known this. That’s why they pass tax cuts for the wealthy and blow up the deficit in a way that does very little good, but use it as a way to justify cutting social programs people depend on. Democrats have time after time fallen into the fiscal responsibility trap feeling like they have to show people they are not adding to the deficit. Pay-go is one example of this, and its a big mistake. It’s far past time for democrats to get educated about this because it has always sown the seeds for their next loss. If you are busy trying to pay for stuff that its unnecessary to worry about paying for you aren’t passing meaningful legislation that does what you say you want to do...like the Nike slogan says…
Just Do It!
Learn more about MMT here