Keith -

To a man with a hammer, even one as powerful as MMT, everything looks like a nail. The reason we have to ask where the money will come from is that we have found no other way to prevent government from overspending. Yes, the result is probably underspending, but it probably was not always thus. Fiat money is a technology that relies on other technologies, including central banking and information flows adequate to prevent undue inflation. Those are relatively recent arrivals.

We can the MMT notion that taxes are necessary only to keep government spending from causing unwanted inflation. But if that’s the case, “Where will the money come from?” simply becomes shorthand for “Why does this expenditure justify the tax that will be needed to offset its inflationary effects?” We still need some mechanism for deterring stupid or corrupt spending. Pretending that the inflows cannot exceed the outflows is the best solution we have come up with so far. When you find a way to measure the output gap, you may have another.

Nixon’s so-called “full-employment budget” actually adopted this MMT approach: spending as if we were at full employment made MMT sense because it created demand that could be met by putting people back to work rather than suppressed by raising prices. Nixon basically plumbed through money into the output gap until it filled up. Then the oil shock happened, and he imposed price controls, but that’s another story. [The linked article may be pay-walled. But it cites Nixon as arguing that his deficit spending plan was OK because it would not be inflationary given the slack in the economy. If that isn’t MMT, what is? Nixon said “We are all Keynesians, now.” What he meant was “We are all MMTers now”; he just didn’t know it.]

The policy solution to the “balance budget” problems is not to eschew balanced budgets but to redefine them. We need a capital budget that allocates a significant portion of Federal spending to capital account, so that the “deficit” shrinks or disappears while spending in excess of revenues does not. The year most people buy their homes is a year in which they spend far more than they make.