A political introduction to real-world economics.

This post provides a basic introduction to real-world economics and its political ramifications.

(This post was originally written to start off my interview with Gregg Stebben [parts one and two].)

GO BACK TO ALL MMT RESOURCES These resources were created by Activist #MMT, the podcast (Twitter, Facebook, web; please consider becoming a monthly patron). This post was last updated April 20, 2022. Disclaimer: I have studied MMT since February of 2018. I’m not an economist or academic, and I don’t speak for the MMT project. The information in this post is my best understanding but in order to ensure accuracy, you should rely on the expert sources linked throughout. If you have feedback to improve this post, please get in touch.

Before we start:

• Unless otherwise stated, the word “government” refers only to national governments.
• Yes, banks also create (a certain kind of) money and play an important role in the financial system. I’m setting that aside for the sake of this post. Everything remains true whether or not banks are considered.
• This post was copy-edited by Ben Szioli.

Everything the government purchases^{footnote 1} is paid for^{footnote 2} with newly created money. For example, the government uses wages to hire (purchase the labor of) construction workers, Congressmembers, teachers, soldiers, and so on. This labor results in real-world benefits such as well-maintained bridges and roads, an educated populace, and national security^{footnote 3}. The government delegates its purchasing power through transfer payments, such as food stamps, child benefits, COVID relief checks, and pensions (such as for the elderly, retired, and disabled).

It’s impossible for the government to purchase anything except by creating more money. Conversely, it’s impossible for money to be returned to^{footnote 4} the government until it’s first created by the government. This includes taxes, student loan payments^{footnote 5}, legal penalties, Congressional bribes – and even so-called “government borrowing”.

Since the government can only purchase something by creating new money, then conversely and by force of logic, it follows that all money returned to the government is money deletion. This is detailed by economist Stephane Kelton in her 1998 paper called Can Taxes and Bond Sales Finance Government Spending?. Here’s a quote (from pages 2-3, emphasis in original):

… newly-created money is revealed as the source of all government finance. It is further argued that the proceeds from taxation and bond sales are not even capable of financing government spending since their collection implies their destruction

(There are similar sources for the U.K. and Denmark.)

Unlike the government, you and I must collect money before we can purchase something. The national government is the only entity that must purchase something before that money can be returned back to it^{footnote 6}. To say it crudely: you and I^{footnote 7} must collect before we can spend. The national government must spend before it can collect. We use the currency; they issue it^{footnote 8}.

So where does the government’s money come from? The same place as the scorekeeper’s points. The same place as the math student’s numbers. The same place as the writer’s (and speaker’s) words, phrases, plays, novels, and poems. That’s where^{footnote 9,footnote 10}.

The idea that the issuer of a thing can “run out” of those things, or be “in debt” for trillions of those things, is nonsense^{footnote 11}. Aside from sharing a name, debt in the national context is completely and utterly different than it is in the personal context^{footnote 14}. The same is true with the deficit^{footnote 12}.

Now, let’s start again, but from a different angle:

Money is a manifestation of power^{footnote 13}. Those who create money choose who to give power to and who to withhold it from. For example, providing everyone with healthcare, education, and a job would demonstrate our money creators want to empower those with the least. By withholding these things, it shows they want to empower those who benefit from keeping people unhealthy, uneducated, and unemployed.

Finally, money is the tool the government uses to communicate which workers should do what, with which resources, when, and under what conditions. (What compels them to do it is taxation.)

The idea that money creation by the government always and inherently causes prices to rise is both plainly inaccurate [see one and two] and, essentially, anti-government propaganda. There’s very little the government can do without creating its money as part of the process. Therefore, if one assumes government spending to be inherently and always bad, then it’s nearly equivalent to saying that if the government does something, it can only be bad. Because government inaction consistently results in even more suffering for those who already suffer the most, anti-government propaganda is more precisely anti-poor.

We clearly have the real-world capacity to provide everyone with healthcare, education, and a job. So withholding these things is not “unfortunate, but necessary,” but rather a deliberate choice. It’s a choice to prevent real and financial costs for the privileged by pushing them onto the poor. It’s a choice to make it even easier for the poor to be exploited. We can choose differently.

Unfortunately, most of the public has been deceived by myths. Many of us who are doing okay perpetuate and don’t question these myths, because we falsely believe – desperately fear – that providing for the poor is only possible by taking something away from us. Since there are millions of them, it can only mean devastation for us.

Caring for the poor is not just a virtue; it’s critical to saving our species. If we don’t start providing for the poor, then soon enough, the poor will include those of us currently living comfortably in our McMansions. The capitalist-neoliberal parasite is running out of hosts to exploit.

The question cannot be, “how can we save everyone?” The question must be, “how can we not try?” Otherwise, we must choose who will live and who will die – and we all know who gets to do the choosing, and who gets to be chosen.

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For an introduction to real-world economics, I recommend looking into Modern Money Theory (MMT). The best place to start is the popular bestseller The Deficit Myth, the several layperson-friendly academic papers curated in this post, and many mainstream-economist-friendly academic papers in this post.

For even more, check out my own set of resources for average people to learn MMT. I also host a podcast “about real-world economics, including Modern Money Theory, and how life changes when you discover it.”

Footnotes:

1. [Return] or buys (with thanks to Neil Wilson for the idea to change “the government spends/funds” with “the government buys”)
2. [Return] or funded by
3. [Return] It can also result in real-world harm, such as a belligerent military used not to protect citizens but as a tool for plunder and profit, leaving many third-world nations colonialized and devastated.
4. [Return] redeemed by
5. [Return] more than ninety percent of all student loans are owned by the US Department of Education.
6. [Return] To be precise, all money returned to the government was created by a previous government deficit. (However, as Brian Romanchuck describes in this interview, whatever the sequence, the larger point is that the government can never default on its obligations.) A kind-of exception to “the government must spend first” is if someone takes out a bank loan and then uses that money to pay taxes (which would first be converted by the bank to currency/reserves). However, this does not eliminate the borrower’s liability to the bank. It’s also true that commercial banks are only permitted to create that money (credit, or loans) because the law allows it.
7. [Return] Plus all companies, local and state governments, and other countries.
8. [Return] Between the time money is created and deleted by the government, all it can do is exchange hands. The unrealistic fear that China may “dump its debt” can at worst only mean that another country takes ownership of it. China can’t change the maturity dates of US Treasuries!
9. [Return] In the words of Dirk Ehnts: “Deposits in the account of the government are not “money” (a tax credit), just as a cinema ticket in the hands of the owner of the cinema is not a “cinema ticket”. I.O.U.s only emerge when owned by someone else. Otherwise it‘s just paper.”
10. [Return] Gold is out of human control, but our choice to link our money to it is a human decision. The numbers we use may come from a textbook or teacher’s recommendation, but it is up to us to choose to use them. If the numbers we create happen have the same digits as those on the page, it doesn’t mean they’re the same numbers. The points may come from the rules of the game, but it’s up to the scorekeeper to follow those rules. Finally, our money is a legal construct but our lawmakers (and enforcers) must choose to abide by those laws. All these things are concepts which cannot exist in physical form. (Related is this this 2022 article by Rob Hawkes on the concerns of the phrase “a government makes money out of thin air”, which is is often said in support of MMT.)
11. [Return] Yes. It takes some resources and energy to make even electronic money. It also presupposes the existence of the universe and the human species, that those humans are alive and have functioning brains and fingers, a breathable planet to live on, and (for modern economies) electricity. These things are all an unspoken givens in my view.I mean, thinking takes resources, too, but we don’t question the idea that the mere thought of doing something consumes resources in any way comparable to the amount required to act on that thought.

    The amount of effort and resources required to create a spreadsheet entry (that’s nearly all of what’s being referring to in this post) is infinitesimal compared to the resources that money is ultimately intended to activate.

12. [Return] In addition, as described in this 2019 written Congressional testimony by L. Randall Wray (and discussed in the second half of this interview) it’s not possible for lawmakers to target the level of the federal deficit.
13. [Return] Said another way, money is a manifestation of our decisions.

Footnote 14

[Return] A wrong understanding of the history and nature of money itself is the seed from which all economic myths bloom. One of the most common myths is that the national debt can only be harmful. This is closely related to the fear for the long-term fiscal sustainability of government spending (and its dent and interest). Both are based on several false assumptions.

As one example, the idea that the interest in the debt, no matter how intergalactic its size, somehow can’t be paid (or would be harmful), is false. The following is from the 1943 paper by Abba Lerner, Functional Finance and the Federal Debt (emphasis added):

This means that the absolute size of the national debt does not matter at all, and that however large the interest payments that have to be made, these do not constitute any burden upon society as a whole. A completely fantastic exaggeration may illustrate the point. Suppose the national debt reaches the stupendous total of ten thousand billion dollars (that is, ten trillion, $10,000,000,000,000), so that the interest on it is 300 billion a year. Suppose the real national income of goods and services which can be produced by the economy when fully employed is 150 billion. The interest alone, therefore, comes to twice the real national income. There is no doubt that a debt of this size would be called “unreasonable.” But even in this fantastic case the payment of the interest constitutes no burden on society. Although the real income is only 150 billion dollars the money income is 450 billion: 150 billion in income from the production of goods and services and 300 billion in income from ownership of the government bonds which constitute the national debt. Of this money income of 450 billion, 300 billion has to be collected in taxes by the government for interest payments (if 10 trillion is the legal debt limit), but after payment of these taxes there remains 150 billion dollars in the hands of the taxpayers, and this is enough to pay for all the goods and services that the economy can produce. Indeed it would do the public no good to have any more money left after tax payments, because if it spent more than 150 billion dollars it would merely be raising the prices of the goods bought. It would not be able to obtain more goods to consume than the country is able to produce.