Sovereign Currency and Non-Sovereign Budgets: The Modern Money Theory Approach

This paper will present the Modern Money Theory approach to government finance. In short, a national government that chooses its own money of account, imposes a tax in that money of account, and issues currency in that money of account cannot face a financial constraint. It can make all payments as they come due. It cannot be forced into insolvency. While this was well-understood in the early post-war period, it was gradually “forgotten” as the neoclassical theory of the household budget constraint was applied to government finance. Matters were made worse by the development of “generational accounting” that calculated hundreds of trillions of dollars of government red ink through eternity due to what neoconservatives label “entitlements” (largely, Medicare and Social Security). As austerity measures were increasingly adopted at the national level, fiscal responsibility was shifted to state and local governments through “devolution.” A “stakeholder” approach to government finance helped fuel white flight to suburbs and produced “doughnut holes” in the cities. To reverse these trends, we need to redevelop our understanding of the fiscal space open to the currency issuer—expanding its responsibility not only for national social spending but also for helping to fund state and local government spending. This is no longer just an academic debate, given the challenges posed by climate change, growing inequality, secular stagnation, and the rise of Trumpism.     

The feasibility of a desirable minimal state

Dwight Lee (1989) argues on utilitarian grounds that the minimal state of classical liberalism cannot be both desirable and feasible: if desirable, it is not attainable; if attainable, it is not desirable. Lee's article provides an intriguing new perspective on the long debate about the optimal size of government. His conclusions, however, do not hold if some of his restrictive assumptions are relaxed. In a more general model, the minimal state can be both desirable and feasible.     

Veterans interests and the transition to government growth: 1870–1915

Civil War veterans were the first interest group to use their political power to obtain substantial monetary transfers from the U.S. Treasury. Veterans supported the Republican party, and in exchange Republicans provided increasingly generous veterans benefits, placing a strain on the Treasury that led toward a demand for increased taxes. Veterans also established a precedent that other groups could follow to petition the goverment for economic benefits, shaping the transformation of American government in the Progressive era which led to the substantial growth of the federal government in the 20th century.