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.