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An economic philosophy for the modern leftist

Don’t miss Dylan Matthews’ piece on Modern Monetary Theory, which argues that deficit spending is essential to economic growth. Here’s the crux of the philosophy:

This claim, that money is a “creature of the state,” is central to the theory. In a “fiat money” system like the one in place in the United States, all money is ultimately created by the government, which prints it and puts it into circulation. Consequently, the thinking goes, the government can never run out of money. It can always make more.

This doesn’t mean that taxes are unnecessary. Taxes, in fact, are key to making the whole system work. The need to pay taxes compels people to use the currency printed by the government. Taxes are also sometimes necessary to prevent the economy from overheating. If consumer demand outpaces the supply of available goods, prices will jump, resulting in inflation (where prices rise even as buying power falls). In this case, taxes can tamp down spending and keep prices low.

But if the theory is correct, there is no reason the amount of money the government takes in needs to match up with the amount it spends. Indeed, its followers call for massive tax cuts and deficit spending during recessions.

Fighting our recession with austerity measures is failing horribly and yet favoring austerity is widely perceived as the serious-minded approach to our current economic woes. Modern Monetary Theory provides a framework for thinking about fiscal policy in a different way and shifts the Overton window away from austerity.

3 Comments

  1. Thanks, that’s a very good read.

    I’m not sure if it deserves to be labeled as “leftist” though – or “rightist”, or anything else that appeals to notions of subjectivism and ideology. I think it’s just good intellectual reasoning, and if instead it would have led to “rightist” conclusions, it would still have been, or?

  2. I think it would have been very good and interesting regardless. I think that it’s “leftist” in the sense that it’s an economic philosophy that could underpin a progressive political philosophy without necessarily being “anti-free market” or whatever.

  3. Speaking of Austerity, I was listening to This American Life when they interviewed Grover Norquist.

    Talk about a traitor to the country. This guy wants the rich & corporations (who/which already pay extremely low taxes) to pay less–or nothing–at the expense of the rest of us. He wants to “force” the government to become more efficient by starving it. When directly questioned (several times) by the host, Norquist evaded answering which government programs he’d eliminate.

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