Biden Announces An Additional $6 Trillion In Spending

Last night the Nation was addressed by President Biden and followed up by the Progressive response, Jamal Bowman, and the Republican response, Tim Scott. Biden announced plans for infrastructure and the new American Families Plan, which total about $6 trillion. He plans to pay for it via raise in ultra wealth tax and some deficit spending. Tim Scott said it was too much. That Republicans were willing to do infrastructure but only on a limited scope of what Democrats are proposing. Jamal Bowman said Biden’s plan was a great first step but does not go far enough to address the issues at hand. Never has there been a clearer distinction in the three prevailing ideologies in America. So whose right? Can we afford $6 trillion or more, or should we compromise and do less than the bare minimum?

A new way of looking at government spending and our economy, which has been gaining traction over the last 30 or so years, says these are the wrong questions. Modern Monetary Theory (MMT) may be a new economic school of thought but its principles are not new! It is divided into two parts. One is a description of how government spending works and the powers they currently have. The second part is the theory of how governments should use those powers.

So what does MMT think is the right approach?

First MMT would say we are asking the wrong questions. It’s not “how are you going to pay for it?” But rather how will you resource it?

These might appear to be the same question but are actually quite different. The first implies that the federal government is budget-constrained like a household. The second says the real constraint is not money but rather real resources (raw materials, labor, etc).

Let's use President Biden’s infrastructure proposal to demonstrate how this works. Currently, the price tag is around 2 trillion dollars. Congress, with the power of the purse (Section I Article 8), could vote to pass that proposal into the budget. They would send a request to prepare funds for the project to the Treasury and the Federal Bank would issue the funds into existence via a few keystrokes. And that's it. The new infrastructure bill would be funded. What Congress cannot do is use more steel, for example, than we have available or employ more construction workers than the economy has. If they attempt to do this we run into the real constraint, inflation.

At this point, most of you are saying “wait up a second! You did not mention anything about taxes. Where are they going to get the money?” You are right! But I did not forget them. MMT shows us that sovereign currency-issuing governments (US, UK, Japan, etc) do not have to raise taxes in order to spend. Mainstream economists teach that government tax and borrow (TAB) before they can spend, but if the government is the sole issuer (monopolist) of currency how can they tax or borrow what they have not first spent? California cannot issue dollars nor can you or I. So how would we pay the tax if the government did not spend any money or worse ran a surplus? This is one of the key differences between mainstream economists and MMT, governments spend then they tax and borrow (STAB).

Now you are saying “hold on the government doesn’t need my taxes!!????!! Why do I even bother paying them?” This is the second big differentiation between MMT and mainstream economics. MMT says taxes are what gives money value. And I know this goes against everything we are taught, but think about it for a second. Why would you ever give up your car, for example, for some paper with dead presidents' pictures on it? I don’t know about you but I wouldn’t. Our currency hasn’t been on the gold standard since 1971 so it has nothing of worth it is tied to. The only thing that gives currency value is the obligation the government poses on its citizens via taxes. Otherwise, why would we use dollars we could use rocks or pesos or whatever you and another person agreed as an exchange of value.

Governments impose taxes to create demand for their currency so their citizens will be willing to trade their time and resources for that currency.

Taxes are also a real tool to be used to fight inflation. If government spending pumps money into the economy, and if that spending creates inflation, then the natural countermeasure is to tax, destroy, money out of the system.

This week I had someone comment that I hate rich people and that if MMT is right then wealth taxes are just a war against the rich. While Bernie Sanders often says the rich do not pay their fair share I think it's much worse! They take more than their fair share. Rich corporations disproportionately utilize infrastructure, benefit from high-speed broadband, and many of the other programs the right loves to label socialist. So why does Warren Buffet pay less than his secretary (his words)? Taxes are used to balance out the wealth distribution. So while we don’t need Jeff Bezos to fund the infrastructure spending we can as a society decide what we think the wealth distribution should be.

There is a lot more that goes into MMT but for the purpose of this conversation, we have established government is the sole issuer of currency and that taxes give that currency value. With this monetary understanding, we now understand the difference between the two original questions. Our government could endless issue money, but won’t because of inflation. So the only thing we need to determine if Biden’s infrastructure plan is affordable is whether we have enough resources and labor to complete the project without causing inflation.

There is probably at least one thing you are still wondering if you have agreed with me up to this point, “why would natural resources and labor cause inflation?” Unlike money, you cannot print more labor into existence once you have reached full employment. Likewise, there are limits on how fast we can create real resources like steel, concrete, etc. You have to look at both the private and public sectors. If there is high demand for those resources in the private sector and adding Biden’s infrastructure package would take resources from the private sector in MMT’s view this would lead to inflation.

Instead of asking can we afford it we actually need to do the harder work and say can we resource it? I am not an economist so I do not know the answer to that question but based on what most MMT economists teach the US government is living far below its means.

I wanted to write this article because it changes the fundamental way we view government and our economy. Any political ideology can use this framework to get its policies passed. So instead of fighting over whether we can afford it, we should be debating the real issue of what our priorities are as a society. What projects can we take on now that will increase our real resources and labor in the future (increasing our spending power)?

By no means am I an expert in economics or MMT. I have learned a lot from Stephanie Kelton, Waren Mosler, Randy Wray, and Bill Mitchell. All have written extensively on the subject and have tons of content on Youtube. If you found anything I said somewhat interesting I would highly recommend checking out their work, especially Stephanie’s book “The Deficit Myth: Modern Monetary Theory and the Birth of the Peoples’ Economy.”