WHY YOU CAN GO BROKE BUT UNCLE SAM CAN'T

There’s a widely believed and dangerous myth that hampers our ability to envision and enact an economy that promotes and protects the well-being of all of creation. The myth (TM), which we hear all the time, analogizes the financial governance of Uncle Sam— the federal government— to that of a household. At the heart of this analogy is the belief that the federal government, like a household, business, and state/local government, has the capacity to become insolvent and ultimately bankrupt. All it— the federal government— has to do is to persistently behave in such a way that its expenditures exceed its revenues.

If it does this— persistently more money than it receives as revenue— it’ll go belly up. No different, so the story goes, than a household whose" outflow consistently exceeds its inflow. Or a business whose balance sheet and cash flow statements are wack. Or a local government that fails to balance its budget.

It bears repeating: According to TM, Uncle Sam is no different from the local business, household, or municipal government: Each and every one of them is “revenue-constrained,” in the specific sense that if they don’t pull in enough money to cover their expenses, their fate is that of insolvency and bankruptcy

As Mitchell and Fazi recently observed:

One of the most pervasive and persistent myths…is the assumption that governments are revenue constrained— that is, they need to “fund” their expenses through taxes or, if they register a fiscal deficit (i.e., if expenses exceed revenue), through debt. This leads to the corollary that government have to “live within their means, since on-going deficits will inevitably result in an “excessive” accumulation of debt, which in turn is assumed to be “unsustainable” in the long run.

For those under the spell of The Myth (TM)—and that probably includes most of us— the federal government must always “find the funds” prior to undertaking expenditure and “live within its means.” That’s no different, again, then from what your household, your local businessperson or the government of the city or state within which you live must do. Spending without “finding the funds” first is seen as the paradigmatic example of financial recklessness. It’s a financial “sin” that, if committed, eventually catches up with you— and when it does, you’ll suffer the consequences of your impetuous behavior.

Uncle Sam, then can find himself so strapped for cash, so revenue constrained, that any substantial upgrading of the nation’s infrastructure is out of the question. Ditto for universal health insurance. Likewise for abolition of student loan debt. Same for Martin Luther King’s dream of a “total, direct, and immediate abolition of poverty.” Things like high quality, affordable childcare are also probably out of the question.

Having “nice things,” things are that are essential to human and non-human flourishing, may very well be out of the question because, according to the logic of TM, a lot of this stuff we simply can’t afford.

Right now, it’s important that “Unc” tighten up. Because “he” has a case of busted pockets.

Or at least that’s what we often hear from devotees of TM.

The problem, though, is that the myth crumbles under scrutiny.

A FALSE ANALOGY: YOUR UNCLE AIN’T LIKE A HOUSEHOLD

Over the last few years, it has been proponents of Modern Monetary Theory (MMT) who’ve been perhaps the most vocal in underscoring the fallacious nature of the analogy that TM consistently makes between the operation of Uncle Sam’s budget and that of the household.

The analogy is false because, first and foremost, the federal government is characterized by monetary sovereignty. A monetarily sovereign government issues its own currency (dollars in the US) and has its debts denominated in the very currency that it issues. In contrast, your household (mine too), the businesses where you shop, and the state and local governments under which you live— all of those are users of the currency, not issuers.

The government has a monopoly on the issuance of dollars. In fact, if it ever crosses your mind to get your hands on some top of the line equipment and jump into the business of issuing dollars, I’d strongly suggest that you immediately banish the thought.

That’s a good way of ending up in the joint.

But here’s the point, and it bears repeating: As an issuer of the currency, the federal government cannot run out of money. There’s no secret vault that contains a fixed amount of dollars. There’s no room where an authorized person—or persons— can enter, take out the amount of money the government needs to meet its budget, and debit Uncle Sam’s account by the amount that’s wheeled out and placed in a fleet of armored trucks.

The issuer of money has no need to “find” the money to finance its expenditures any more than the scorekeeper at a basketball game needs to find points to keep track of who’s winning and losing the game.

The money is already “there” and can be “issued” and spent on whatever congress decides. And, following a favorable vote, the Treasury and Federal Reserve collaborate to make the necessary computer strokes to debit the Treasury’s account at the Fed and credit the accounts of some specific others. [For a more detailed discussion of this point and, more generally, MMT, see this or this or this or that.]

Again, this is not the case for currency users. A household can run out of money. So can a business or, to cite another example, so can a city or state government. Unlike currency issuers like Uncle Sam, currency users need to “find” the money before it can spend.

Stephanie Kelton, an economist and leading proponent of MMT, puts it this way:

The truth is, the federal government is nothing like a household or a private business. That’s because Uncle Sam has something the rest of us don’t – the power to issue the US dollar. Uncle Sam doesn’t need to come up with dollars before he can spend. The rest of us do. Uncle Sam will never go broke. The rest of us could. When governments try to manage their budgets like households, they miss out on the opportunity to harness the power of their sovereign currencies to substantially improve life for their people.

L. Randall Wray, another leading proponent of MMT, makes the identical point when he observes in a 2013 interview:

Well the most important thing, especially from the policy perspective, is the recognition that a sovereign government that issues its own currency is not like a householder or firm. So whenever you hear someone say you need to run the government’s budget the same way you would run a household budget, that cannot apply to a sovereign government like the United States. The analysis is completely flawed, even though that analogy is used all the time. You hear politicians saying, “well if I ran my household budget the way that the federal government is running its budget I would go bankrupt,” and of course that is true, the difference is that the household is not a sovereign government and it doesn’t issue its own currency.

A legal scholar and a philosopher, Robert Hockett and Aaron James, drive home the same point in their recent text, Money From Nothing:

A government that issues its money doesn’t need to “get money” or “have money” in order to spend it. It simply issues it, at will. That is the original source of money the people have. There’s no big pile of money sitting around in a warehouse that could be used up, vault anywhere on US territory being filled or emptied. When the United States pays for an aircraft carrier and social insurance benefits, crediting bank accounts, it doesn’t make further payments in the future. At the direction of the Congress and Treasury it issues fresh promises—which is to say, new dollar IOUs. It never runs out of promises, or loses the ability to issue more of them.

The constraints, then, confronting government spending has nothing to do with whether or not the money is “there.” If you’re a currency issuer, it’s always there. Just congressional votes and computer keystroke away.

The constraints faced by the government have do to with whether the real resources are available and capable of being employed without setting off an inflationary spiral, whether our technical knowledge is sufficiently capable of aiding us in securing the goals we set for the economy, and whether or not the moral will is such that it inspires and sustains our efforts to create an economy that protects and promotes the well-being of creation.

SUMMARY

So, to recap: The federal government— Uncle Sam— is Not bankrupt. Nor, for that matter, is “he” headed toward such. The federal government is monetarily sovereign and, as such, issues its own currency and has its obligations denominated in the very currency that it issues, namely, dollars. It can meet all bills that come due—which, of course, is a capacity that individual households, businesses, and sub-national governments simply don’t possess.

None of this means that Uncle Sam should spend recklessly. But it does mean—and this point merits repeating— that we can effectively rebut those who, for instance, seek to stop progressive economic policies in its track by claiming that the cupboards are bare, by asserting that Uncle Sam’s got busted pockets and therefore doesn’t have the money to “spare” for such things as the abolition of student loan debt or a living wage jobs program that ensures good gigs are available for all those able, ready, and willing to work or a Universal Basic Income (UBI) program or the Baby Bonds Program that has been pushed and popularized by economist Darrick Hamilton.

More broadly. meeting the “pay for” objection head on and breaking out of the shackles imposed by The Myth (TM) enables us to dream more broadly and more vividly about designing an economy wherein our basic needs are secured, and creation’s well-being is protected and promoted.

Exposing the fallacious nature of the analogy between the federal government and the household, between the currency issuer and the currency user, has the potential to make it increasingly clear that the fundamental constraint confronting Uncle Sam is not finance. As economist L. Randall Wray recently put it:

"The truth is that the government faces political constraints. It faces resource constraints. It faces technological constraints.

But it does not, cannot, face financial constraints.

Whatever is doable is financially affordable.

Take that idea and run with it."