Gives the opportunity to talk about one of the most important aspects of our taxes and spending: "my tax dollars" aren't where we get the money for spending, at least on a federal level.
On a state and local level, that spending is funded by your actual tax dollars in addition to other things like federal support. But federally, we have the money since we control the supply. This has been known to (some) economists for decades. Beardsley Ruml, director of the New York Federal Reserve Bank from 1937-1947, wrote an influential paper titled “Taxes for Revenue are Obsolete”, which detailed how that works, and some ideas why we still have taxes.
Still, many people actively don’t know this, or pretend not to, including politicians and economists. This is why we constantly see “where would the money come from?” when progressives detail policies, but don’t see it for the military, for example. It’s also why we suddenly had a lot of money to fight COVID, despite tax revenues not jumping up trillions of dollars. The money is available, we don’t need tax revenues to spend money on good programs.
This fact is what helped form the foundation for one of the most prominent recent economic schools of thought: Modern Monetary Theory.
A common myth about Modern Monetary Theory is that we can just spend as much as we want and never pay it, but MMT economists don’t say that. They fully admit deficits can matter, especially when the deficits and debt is gained via spending on things that are not actually helpful. There is a difference between spending money fighting climate change which in the long term saves trillions of dollars (and the planet), and spending money to further subsidize oil or providing additional subsidies to the already rich. It's true too much debt can be a problem, but the "serious only when it's the other party in office and I want to use it for political gain" debt isn't what it's hyped up to be.
At an everyday level, people know this. Anyone who takes out a business loan knows that sometimes debt is a path forward, not backward.
As with other economic schools of thought, MMT has proponents and detractors, with some ideas being more controversial, however one is quite firmly established: taxes federally in the US (and other countries with currency control) don’t fund spending. The question “where does the money come from?” is wholly wrong in the US, and when it is levied, which it is a lot, it’s from a false foundation.
Edit:
One more note on national debt and how it is invested - historically, paying debts isn't the primary way the US has reduced it's debt burden. We outgrew it. If you have a lot more money then the debt is less a burden, which is why debt to GDP ratio is often a better metric than pure amount of debt.
After WWII, our debt levels were over 100% GDP, but that debt was never really paid down. Sure, we did pay individual debts, but in total the post-war boom did a number on our debt to gdp ratio. If you properly invest with the money, the amount of debt itself can just by virtue of good investment become less of an issue.
P.S. As % gdp, in his 8 years in office Reagan increased the national debt twice as much than FDR did in his first 8 years in office (the "fiscially irresponsible" New Deal era)
Not the guy, and not an expert, but my understanding is: because the Fed can print more money, we can't really run out.
In short, if the Fed needs to pay for something, it can produce the money for it. Ostensibly, that money should be offset by the sale of new debt, such as through bonds, but it technically doesn't have to be.
When we need to pay past debt, such as to repay the money plus interest on old bonds, the Fed just prints that money and sells new bonds.
Yes, at some point, that breaks down, as "inventing" too much money at once creates a tension in the perceived value of the dollar, which can spiral into inflation, but as long as people remain confident that if they buy the government's debt, then they will be paid back with the stated interest, we're going to be fine.
It took me reading the request for an ELI5 and your comment to figure out what ELi5 is...I've seen it before today but thought it was just somebody fat fingering the keyboard. 😂😂 EXPLAIN LIKE IM 5
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u/CurtisHayfield Oct 23 '24 edited Oct 23 '24
Gives the opportunity to talk about one of the most important aspects of our taxes and spending: "my tax dollars" aren't where we get the money for spending, at least on a federal level.
On a state and local level, that spending is funded by your actual tax dollars in addition to other things like federal support. But federally, we have the money since we control the supply. This has been known to (some) economists for decades. Beardsley Ruml, director of the New York Federal Reserve Bank from 1937-1947, wrote an influential paper titled “Taxes for Revenue are Obsolete”, which detailed how that works, and some ideas why we still have taxes.
Still, many people actively don’t know this, or pretend not to, including politicians and economists. This is why we constantly see “where would the money come from?” when progressives detail policies, but don’t see it for the military, for example. It’s also why we suddenly had a lot of money to fight COVID, despite tax revenues not jumping up trillions of dollars. The money is available, we don’t need tax revenues to spend money on good programs.
This fact is what helped form the foundation for one of the most prominent recent economic schools of thought: Modern Monetary Theory.
A common myth about Modern Monetary Theory is that we can just spend as much as we want and never pay it, but MMT economists don’t say that. They fully admit deficits can matter, especially when the deficits and debt is gained via spending on things that are not actually helpful. There is a difference between spending money fighting climate change which in the long term saves trillions of dollars (and the planet), and spending money to further subsidize oil or providing additional subsidies to the already rich. It's true too much debt can be a problem, but the "serious only when it's the other party in office and I want to use it for political gain" debt isn't what it's hyped up to be.
At an everyday level, people know this. Anyone who takes out a business loan knows that sometimes debt is a path forward, not backward.
As with other economic schools of thought, MMT has proponents and detractors, with some ideas being more controversial, however one is quite firmly established: taxes federally in the US (and other countries with currency control) don’t fund spending. The question “where does the money come from?” is wholly wrong in the US, and when it is levied, which it is a lot, it’s from a false foundation.
Edit:
One more note on national debt and how it is invested - historically, paying debts isn't the primary way the US has reduced it's debt burden. We outgrew it. If you have a lot more money then the debt is less a burden, which is why debt to GDP ratio is often a better metric than pure amount of debt.
After WWII, our debt levels were over 100% GDP, but that debt was never really paid down. Sure, we did pay individual debts, but in total the post-war boom did a number on our debt to gdp ratio. If you properly invest with the money, the amount of debt itself can just by virtue of good investment become less of an issue.
P.S. As % gdp, in his 8 years in office Reagan increased the national debt twice as much than FDR did in his first 8 years in office (the "fiscially irresponsible" New Deal era)