Taxes as Money Shredding
An overview of the principles of Modern Monetary Theory
Dave and Busters has its own internal economy. Players enter the establishment and perform various tasks — throwing balls into a hoop, pressing a button at a specific time, or guessing the outcome of a wheel spin. Players who do those tasks are rewarded in the form of tickets. But what are those tickets useful for? They only become valuable once the player goes to turn in their tickets in exchange for whatever prizes are offered. Without that gift exchange corner, the tickets are just useless scraps of paper.
Knowing this, the player walks over to the cashier and the employee asks them to hand their tickets over. We know that the player benefits because of the prizes, but why does Dave and Busters even want these tickets? Aren’t they the ones that printed them? What are they even going to spend it on? If Dave really wanted 1000 tickets that badly, couldn’t he just ask Buster to print a thousand more?
Ignoring the financial aspect of attracting people to the establishment, it really doesn’t matter how many tickets they have stored away in the back rooms. The reason they require you to spend tickets is so that you need to earn more. The gifts are there to create demand for tickets, not the other way around.
The Right to Print Money
If we think of Dave and Buster’s as a government, we’d call them a monetary sovereign - an entity that issues its own currency. The United States is in that exact position: we can print as much money as we want.
One important feature of a monetary sovereign is that they have an exclusive right to create and issue their currency. For example, the United States issues the Dollar, the United Kingdom issues the Pound, and Japan issues the Yen. If anyone else tries to print their own versions of those currencies, the nations in charge will retaliate with criminal charges. (Does anyone know how Dave and Busters deals with counterfeit tickets?)
Not every nation, however, is a monetary sovereign. Any of the 21 countries in the eurozone use the euro, so no single country in that agreement can choose to print more of their own currency at will. Other nations in this group include those that peg their currency to another nation’s — for example, the U.S. dollar is used in Ecuador and Panama.
Another limiting factor is when a country decides to guarantee an exchange rate for some kind of real life object. The United States used to constrain spending through the gold standard, which allowed dollars to be redeemed for a set amount of gold. Ever since the gold standard ended in 1971 under Nixon, we no longer have that guardrail in place.
If we no longer have the gold standard limiting us, what do we really mean when we say that we “can’t afford” something?
The Government as a Household
To build an understanding of how the government budget works, I’ll present what I take to be the “common sense” view of how the United States spends money:
The government wants to do something
They figure out how much it’s going to cost
They raise that amount of money through taxes and borrowing
They use that money to do the thing they wanted
This means that the government has two ways to do anything, neither of which sounds appealing: either we (the people) have to give up more of our hard-earned cash, or we have to run the government at a deficit by borrowing money from Wall Street or China. Our spending capabilities, therefore, are just like those of a household: we have to get the money from somewhere (like a job or a credit card) and make sure our checkbook is balanced in order to keep our finances tidy and in order.
This makes sense at first glance. After all, we’ve been conditioned through decades of rhetoric surrounding “balanced budgets” and “deficit hawks” to believe that government spending (except for our military) is either irresponsible or deeply unfair. That being said, there is one crucial hole in this household analogy: households aren’t allowed to print money.
The Government as a Government
Although analogies can be useful, they can also be misleading if we don’t understand the ways they do and don’t map on to real life. In terms of budgeting, it’s more useful to view monetarily sovereign countries like the United States as something more like a bank in Monopoly or the house in a casino. Real-life households have obligations that require them to obtain dollars from someone else, whether it’s their boss or the bank. They need those dollars to pay for food at the grocery store, property taxes on their house, fees and registrations for things like driving or operating a business, among most other parts of life to some extent.
The United States doesn’t need to do any of that. If there’s some massive expense that needs paying, the government doesn’t need to run around begging people for work or a loan. The government controls the means to bring more money into existence at any time it wants (whether physical minted or digitally transferred).
So, if the government doesn’t need to actually take our money before spending, what are taxes really doing? Rather than thinking about cash moving hands from a person, to a government, to a recipient, it’s more accurate to think about taxes as not transferring money at all. Instead, the analogy fits better if we think of cash moving from one person’s hands into a giant shredder. When money is taxed away, it’s essentially taken away from the economy — each dollar taxed is a dollar not spent on groceries, hospital bills, or mega-yachts.
Beyond taxes, understanding the United States as a monetary sovereign changes our conception of government deficits and debt. Whenever the government spends more in its budget than it decides to collect in taxes, we refer to it as running a deficit. While this conjures to mind images of being deficient in something/not having enough, all that it really means is that there’s more money flowing out of the government to us than the other way around.
Furthermore, the word “deficit” is often used interchangeably with the government “debt”. While the deficit represents the total flow of spending from the public to the private sector, the debt is the running total of all of those budgets from across the years. Therefore, we can understand the debt as the result of deficits over time.
This conversation is also made more confusing when people describe government bonds in the same language as the budgetary debt. This is reflected in how people describe the process of buying bonds: we often describe this process as the government “borrowing” money from the people. The traditional logic is that the government wants to spend money, but doesn’t have enough and doesn’t want to raise taxes. Therefore, in order to spend money on social programs, the military, and so on, the government has to beg for people’s money on a promise that they’ll be paid back with interest. With the Dave and Buster’s analogy, this would be like thinking that the establishment ran out of tickets and couldn’t afford to run their games unless they could borrow tickets from the nearby players (or nefarious ticket lenders from overseas).
So, if the United States government is a monetary sovereign (it can print its own currency) why would they ever need to borrow dollars? Rather than borrowing, we should instead think of the bonds system as a service offered to promote saving money. If we’re looking at the spending process in order, it would look as such: the government budget runs a deficit, the government spends money on programs, then money enters the economy to operate those programs. Once money enters the economy, it finds itself in the hands of people who want somewhere safe to save those dollars. The government offers bonds as a way to guarantee access to one’s money in the future. The interest rates come as a result of political/fiscal goals, whether it’s slowing down spending or encouraging saving.
We Can Always Pay for Anything
One of the roadblocks familiar to anyone who’s ever been in favor of the government spending money on anything is a question so commonplace that it operates less as a question and more as a universal rebuttal: how are we going to pay for it? The common sense here is that the government has a limited amount of dollars in its vault, so we need to go find money out there. While this logic makes sense when you’re buying something expensive for yourself, we again run into the core of the problem: you can’t print your own dollars. This focus on financial constraints not only limits our political imaginations, but deflects attention from the real, material costs that government programs actually run into.
Instead of this, the question we should be asking is this: do we have the resources? This brings our attention to the real costs and deficits we need to solve. Are there enough willing workers available to run the program? Do we have the technical capacities to achieve this? Do we have the materials and expert knowledge required in this field? What’s required to make sure this program is environmentally sustainable? Money is almost inconsequential in the broader considerations required for responsible and effective spending policies. Monetary sovereigns can always print more bills or create more money with a few keystrokes on a spreadsheet. The people, material, and infrastructures have real needs and costs. We can raise all of the money we want for a government project, but that money has nowhere to go without the real, material conditions outside the financial sphere.
This, however, doesn’t mean that money can be spent infinitely on anything for no good reason. Rather than giving us a free ticket to be financially irresponsible, recognition of these facts requires us to challenge the notion that reducing government spending is always responsible. By understanding the real constraints at play, a true responsibility goes beyond the financial constraints we naively inherited from the gold standard system. If our spending isn’t constrained by how many bars of gold we have buried underground in a vault, then our spending instead needs to be constrained by our own ability to analyze and deal with the real-life consequences of government policy.
The one guardrail that we need to be worried about is inflation. If the government prints money without removing a corresponding amount from the economy, then each individual dollar will have a lesser claim to the totality of goods and services that can be purchased with dollars. This can present real challenges to people if not adequately dealt with. For example, increased prices on certain goods like housing, food, and medical care can cause severe harm and even death if not accompanied by increased wages, social safety nets, and so on.
Thankfully, we already have the perfect tool to deal with inflation: taxes. Since the U.S. government doesn’t have a limited stock of dollars, it’s misleading to describe taxation as a process of collecting money for spending. Instead, it’s more accurate to say that taxed dollars are removed from the economy. If inflation is the result of an increased supply of dollars pursuing an unchanging stock of resources, we can counter inflation by just reducing the supply of dollars. We can think of inflation as something like a speed limit: spending too much money too fast has a risk of excess inflation, so limiting inflation through taxation keeps our economy safe.
With this view, taxation is no longer a system of the government taking money from people in order to spend it. Instead, taxation is like a society-wide agreement to all throw a portion of our dollars into the giant shredder in order to create space for the government to operate without risking excessive inflation.
What Becomes Possible?
The obvious application of this is for some of the well known social-democratic policies that have been popularized by people like Bernie Sanders and the Justice Democrats. Medicare For All and a Green New Deal are good examples. Progress on these has largely been denied by Republicans and moderate Democrats under the guise of financial responsibility. They claim that we simply don’t have enough money to do these things, even if the goals are noble. I would argue that the opposite is true: we can’t afford not to spend this money. If we look from a purely financial standpoint, there are cost savings associated with both of these policies that have been empirically demonstrated for a long time, but I think these points (while important) somewhat miss the point. If we have the people required to do the labor, the time, the knowledge, and the resources, the financial price tag need not apply. The only thing required beyond that point is the political will to bring these projects from concept to reality.
Furthermore, economists in the school of thought of Modern Monetary Theory often propose a solution to the problem of unemployment: a federal jobs guarantee. Unemployment is a condition created by capitalist market systems in which a person wishes to have a job, but does not have access to one. Their solution is to guarantee a job with a livable wage to anyone who asks. Imagine being able to walk into a federal employment office and leaving the same day with a well-paying job suited to your personal abilities, desires, and interests! First, this would be a way to create jobs which are socially desirable or necessary that might not be profitable in the private market. For example, caretaking, environmental preservation, and teaching are roles in which there isn’t much short-term market value generated. However, we can still have willing people provide these valuable services if we democratically agreed that such work was worth having in our society.
A federal jobs guarantee would reduce the power that employers have to abuse their workers. Unsafe working conditions, wage theft, and low pay are all taken as givens for the majority of the American working class since it’s often seen as nearly impossible to quit one’s job without suffering a massive financial burden. If employment at a decent wage were guaranteed, employers would actually be required to treat their workers with some amount of dignity rather than relying on keeping them captive with their reliance on wages and health insurance.
Conclusion
Our political imagination has long been captured by the neoliberal compromise. Republicans like Reagan and Bush and Democrats like Clinton and Obama have operated under the same core assumptions for decades: we have a limited supply of money to spend, and spending more than we collect is therefore inherently irresponsible. In order to respond to the enormous problems we face today, we cannot continue to abide by a false understanding of our true capabilities to respond to those challenges. To be properly equipped for the future, any political movement that hopes to harness the power of the federal government will need to adapt to the realities of today’s political economy or else risk being left behind with the gold standard.