Here is a brief explanation of why MMT is important.



There's this little equation or if you prefer, rule of thumb:



P = (MV)/S



where P is prices , M is the amount of money in the economy, V measures the frequency that money changes hands usefully, and S is the amount of the amount of stuff, goods and services, we can produce in some time period.



One of the myths that leads any discussion of taxes astray is the idea the taxes pay for government operations. If someone proposes a federal government program, the first question asked is, “How do we pay for it?” This idea is believed by practically everyone. In fact, so thoroughly do they believe in it, they never offer any facts or even arguments to support this belief. "Everybody knows!" I understand that they believe this because it is true that they must pay for the stuff they buy. This belief, however, is responsible for not only many of our economic problems today.



The reason these "kitchen table" economic ideas are wrong for the federal government are because there are significant ways the finances of the government differ from our family finances.



One is that (through the FED) the federal government can create as much money as it needs out of thin air. I am fond of saying that the US government will run out of money the day after the NFL runs out of points. Unless you have a printing press in your basement, you cannot do this.



Because of this fact, the government does not need your money to pay for government operations. It has an infinite supply. We do have to be careful since too much money chasing not enough stuff will cause prices to go up. We may get excessive inflation. Well, one way to avoid that is for the government to take some back, to tax it back. We may not, however, have to have high taxes.



The above equation shows that prices are proportional to the amount of money (times its velocity) in the economy, but they are also inversely proportional to the amount of stuff we can produce. If we spend the new money in a way that facilitates more production that will yield more money chasing more stuff which does not lead to excessive inflation.



Note that if S is constrained, if production cannot be increased, then increasing M will lead to excess inflation. Some reasons the economy may be constrained are shortages (oil in the early 1970), a sea blockade and lack of enough arable land (Weimar), taking farms from the people who knew how to run them and giving them to those who did not (Zimbabwe).



Why is this important?



Using the "kitchen table" ideas, if we want free child care, say, and it costs $X, then we have to tax or borrow $X dollars to pay for it. If we use the way the finances of our government actually work, we have to see how much free child care would increase the value of our production which is probably quite a bit since it would allow more people to work. When we do the figures, it may turn out that if we have to raise taxes at all, it may be a lot less than $X.



The point is that we are asking the wrong question. "How do we pay for it?" The right question is "How much will it increase our production?