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🤔 How we think the budget works

Usually when we think about the federal government’s budget, we think of it like any other budget.

A ‘NORMAL’ BUDGET: In order to spend money, a person or business has to have money first. They make that money by selling products, services, or their own labor, or they borrow money from a bank or take some form of credit.

• For nearly everybody, all spending has to be paid for—either now or eventually.

We tend to think the U.S. government’s budget works exactly the same way.

• Although the amount of money collected and spent is vastly larger, the government must take in money (via taxes or debt) in order to spend money (government programs and essential services).

THE GROWING DEBT: Lately, a lot of the money the government has spent has been in the form of debt.

Thanks to a series of Republican-led tax cuts and endless wars, that debt has grown exponentially.

• In 2001, the national debt was $5.8 trillion.

• Today—thanks to Bush’s tax cuts in 2001 and 2003, Trump’s tax cuts in 2017, and the invasions of Iraq and Afghanistan—the national debt is close to $37 trillion.

That’s a terrifyingly big number, and it’s often trotted out to scare people into thinking the government should spend less money.

• So-called “deficit hawks” from both parties warn that this “crushing debt” will eventually have to be paid back, and that every penny spent on credit is a penny stolen from our children or grandchildren.

Of course, when lawmakers cut spending it’s almost always to social safety net programs that keep working-class Americans insured or fed—and never to the astronomical defense budget—which goes straight to defense contractors and their shareholders.

BOTTOM LINE: The warning of the “deficit hawks“ makes sense if the federal budget worked like a household budget or business’s budget. Too much debt can be a very serious risk.

• But the federal budget isn’t like any other budget—because unlike us, it can never go broke.

🤑 How the budget actually works

The federal government’s budget is not like a ‘normal’ budget because unlike any other user of money, the government is both the creator and controller of that money.

It therefore cannot—by definition—run out of money.

THE BIG DIFFERENCE: According to the constitution, the federal government is the only entity that can create U.S. currency.

• If you or I (or NOTICE News) wants to spend money we either have to get that money first or get a loan or take out a credit card.

The federal government does the exact opposite. After the federal budget is approved by Congress, someone at the U.S. Treasury types numbers into a computer, and poof! The money is created. 

That money is then paid out to employees, contractors, and businesses for doing the work the government has approved.

• The government does not first go out, collect taxpayer money and sell bonds to pay for spending first. They spend the money, and then try to recover that money through taxes and the selling of debt.

Essentially, public spending creates money. And—as former Federal Reserve chairperson Alan Greenspan testified nearly 20 years ago, there are no laws that prevent the government from creating as much money as it wants.

• So by definition—because it is the issuer of currency, the government can never “go broke” like you or me (or NOTICE News) can.

BUT BUT BUT: That’s not to say there are no constraints on the amount of money that can be created.

• If the government creates too much money, that will drive up the cost of everything—inflation.

Proponents of this theory say controlling inflation is the real role of taxes and selling debt—taking money out of the economy to keep prices low.

🤯 What this shift in thinking means

Needless to say, this is a massive shift in how we think—not just about the federal budget, but about the role of government in the economy and in society.

• If inflation—not debt—is the real limit to what the government can spend, then it means something profound: The government can spend far more than we’ve been led to believe.

This framework is called Modern Monetary Theory—and it directly contradicts everything we’ve been taught about money, deficits, and the economy.

WHAT IT MEANS: Whenever progressives propose Medicare for All or expanding Social Security or a universal employment guarantee, the first question—from nearly everyone, from politicians to journalists—is how will you pay for it?

• MMT supporters say we would pay for it simply like we do everything else—we just create new dollars.

The limit on how far we could expand healthcare coverage or guarantee employment isn’t how much debt we’re willing to take on, but how much we can do so without driving up inflation.

WE DID THIS WITH COVID: When Covid hit, in two months the U.S. economy lost 22 million jobs. The U.S. lost only 9 million jobs in the 2008 financial crisis.

• In response, the federal government, under both Trump and Biden, took the unorthodox move of approving stimulus packages worth $5.5 trillion.

That massive stimulus—inconceivable only months before—not only put money in the hands of working class Americans, but bailed out businesses large and small, expanded healthcare for the people who needed it most, and lifted nearly 4 million children out of poverty.

• At no point while these stimulus packages were being pushed through Congress did anyone say—but how will we pay for it?

The result: The recession lasted only 2 months—March to April 2020—the shortest recession in American history.

• The government’s unprecedented intervention into the economy also helped dramatically bring back jobs: It took just two years to fully recover the 22 million jobs lost from Covid, compared to the more than six years it took to recover the 9 million jobs lost in the Great Recession.

BUT BUT BUT: Didn’t the Covid stimulus packages cause the inflation spikes of 2022 and 2023? This is a common misbelief—pushed by conservative propaganda outlets.

In reality, economists say the stimulus contributed to inflation, but it was not the sole driver—or even the biggest driver—of inflation.

• Economists from the Federal Reserve say government intervention contributed anywhere from 2.6 to 3 percentage points of inflation increase—or less than one third of the total inflation increase of 9 percentage points.

The rest was caused by other factors—notably supply chain disruption (Covid shut down factories and shipping), Russia’s invasion of Ukraine (which pushed up energy costs in Europe), and price-gouging (greedflation).

BOTTOM LINE: Experts say that while the stimulus contributed to inflation, it also prevented much bigger problems: mass unemployment, bankruptcies, and economic collapse.

🤩 What we could do

If this new framework were fully understood and embraced by our country and its leaders, it would be akin to a second American revolution.

• Embracing Modern Monetary Theory would unburden the government from imaginary debt limits, allowing us to spend money on programs that would focus on eliminating poverty and inequality.

It’s a necessary first step on the road to building a moral economy.

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