Wednesday, October 26, 2011

How The Right and Left Keep Getting it Wrong

Because neither side of the political debates understands how the modern monetary system works, they each make mistakes that harms their arguments, credibility, and the country through their faulty solutions.  Both sides labor under the delusion that the U.S. government can run out of money.  Therefore they make decisions on what government should do based on dollar costs rather than real cost.  In reality the government can afford to do whatever it wants and the only limitation is inflation.  That inflation can then be controlled either by increased taxes or reduced spending.  Here are some of the results of both side's failed thinking.

Conservatives argue that things like Medicare and Social Security need to be slashed because they're in a "dire" financial bind.  They also argue for privatizing other government functions to balance the budget.  All of these things they claim must be done during a recession when inflation is very low.  Of course, they don't realize that inflation is the limit and only look at the fiscal picture which is nearly meaningless when one is the issuer of the currency.

Liberals make a similar mistake.  During a recession they think they can't lower taxes without offsetting them by spending reductions.  They also think they must raise taxes to offset more spending used for "pump priming".

Both groups make another, subtler consequences that has as much to do with political cowardice as it does with ignorance of modern money. Because politicians and their constituients belive that the federal budget is revenue/borrowing constrained, they will often attempt to do government "on the cheap". This can result in half assed initiatives that aren't completed because of lack of funding. It can result in government "partnering" with the private sector to save money, but then the results only favoring the partner and not society as a whole. It can also result in taking shortcuts in public policy that ends up having unintended consequences. All of these things happen because they are trying to "save" money. Because they don't want to be seen as reckless spenders, they make all these decisions that hurt us as a society.

Ignorance of MMT doesn't hurt us only because it means we don't know how to get out of a recession. It hurts in many other ways when politicians try to cut corners. I'll be exploring some examples of the subtler consequences on this blog.
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