In discussions on fiscal policy, it is common to hear participants describe the economy with the word “we.” Consider the following quote, from a prominent advocate of Modern Monetary Theory (MMT), offered in defense of increased fiscal deficits:
“There is no economic reason for a grand bargain. We are living way below our means. We are told we are living beyond our means. We are living way below our means. The red line is our potential GDP. The blue line is where we are. The difference is the output and income that we sacrifice every day we fail to bring this economy to full employment. We have tons of spare capacity. Factories are not operating anywhere near historically high capacity utilization rates. There is all kinds of extra capacity to produce. We have millions of people who want to contribute. And we have useful things for them to do.”
The author speaks of the economy as if it were a single, unified entity, seeking out its own interests. But if this is what an economy is–an self-contained person of sorts–then what is the need for money? Since “we” are the ones for whom “we” are doing work, it would seem sufficient for us to just do the work, and leave the situation at that. Instead, we print up pieces of paper, put them in our pockets, take them out to pay ourselves for the work that we do, and then put them back in as we receive them again. A pointless round trip from the perspective of “we.”
The sophistry in this way of speaking should be obvious. In an economy, there is no unit “we.” There are only individuals–separate and self-motivated. These individuals each feel their own pleasures and pains, and act on behalf of their own desires and aversions. Rarely are they willing to do meaningful work for others, endure meaningful sacrifices, for free. If you wish to test this claim out in practice, then do the following: dress up like a bum, go into a nice New York restaurant, and ask a couple that is having dinner there to pony up another $50 so that “we” can enjoy a nice meal. When the couple tensely turns away, remind them how hungry “we” are tonight. “We” want food, and “we” have the means to put it on the table. What a waste that “we” would instead starve ourselves (austerity!). See what the couple says to you.
The fact that people are only willing to do work that they themselves benefit from is the very reason that money is necessary. Money allows individuals to efficiently trade their work, and to track obligations to reciprocate each other. It identifies how much of the pie each person has produced, and how much each person has a right to consume.
Suppose that I am a doctor, and you are a lawyer. There is work that you want me to do for you. But, at the moment, there is nothing that I want you to do for me. Must you therefore go without my services? No. I may not want any legal help right now, but there is surely work that I want done that others can do–for example, someone to cook me dinner. Some of those other people want the legal help that you can provide. So I give you my medical services, you give me the money that you earn from providing those people with legal services, and I use that money to go to a restaurant. We are each made whole, having efficiently exchanged our contributions among each other, over different times and places.
The problem is that not everybody has the ability to contribute, create things that people need and want, and attract for themselves the resources necessary to live in a dignified way. A world in which such people are left to suffer abjectly insults the moral sense. At the same time, if given a choice, very few of us would be inclined to help such people–give up meaningful chunks of our time and labor–for nothing in return. So the population chooses a political system that takes a slice of every person’s income–which represents a piece of every person’s time and labor–and gives it away. If you are sick or injured, and I am a doctor, I will do work for you, even though you cannot afford to compensate me, or improve my circumstances. This is not a problem; others will do work to compensate me on your behalf, through the taxes they pay into my coffers. Those taxes are a loss for them, but it’s OK. The loss is tolerable because it is not that large, because the cause is noble, and because there is a hidden benefit for everyone: an insurance against the many evils and misfortunes that life presents. For all that we know, any of us might one day end up in the unenviable situations that we currently give support to–we would be glad that the support is there.
There is a growing movement in economics to topple this naive understanding of fiscal policy, replace it with something more “modern.” Members of this movement argue that the services of the doctor don’t need to be paid for by anyone. The patient doesn’t need to pay, nor does the community, through taxes. Instead, the government can run the printing press, and give the newly created money to the doctor for his services. Everyone will benefit from the approach, especially taxpayers, who will be relieved of the burden of having to part with a portion of their income in order to pay for an activity that they do not want to pay for.
When we hear the suggestion–or implication, or hint–that such an approach is possible, that an economy can systematically finance large portions of its expenditures with money created from nothing, or with debt promises to pay money in the future (that are eventually fulfilled through the creation of new money, rather than through tax collection), we get nervous. The scheme sounds fishy, sketchy, ponzi, something likely to come with undisclosed costs attached, and also hidden windfalls for those who advocate it.
There is no question that the approach comes with hidden costs. But, because of the way money works, because of the meaning that it takes on in the minds of the individuals who exchange it, a meaning that transcends its actual use as a claim on the time, labor, and assets of others, there is space to exploit the approach before the costs become truly problematic. In the posts that follow, I will carefully expound.