Modern Monetary Theory for Social Studies Educators: A New Perspective on an Old System

Modern Monetary Theory for Social Studies Educators: A New Perspective on an Old System

Erin C. Adams
 

Economics is a discourse built on figurative language, metaphors and folksy sayings (McCloskey, 1983). Former U.S. Representative Jack Kingston (Republican, GA) repeated one of the field’s best known sayings when he suggested that K-12 students should “pay a dime, pay a nickel” or better yet “sweep the floor of the cafeteria” in order to learn “there is in fact no such thing as a free lunch” (Kim, 2013). Although many economists, economics teachers and politicians are apt to repeat this popular metaphor, Modern Monetary Theorists would claim that such a sentiment is simply untrue. According to them, current federal programs like the National School Lunch Program, Social Security, Medicare, and the Postal Service can actually be fully funded in ways that have little to nothing to do with tax revenues. Economist Stephanie Kelton (2020) argues that these funding issues are more political than they are financial or economic and derive from a mixture of ignorance about how money actually works and voter pressure.  

Modern Monetary Theory (MMT) “has achieved something quite rare for heterodox economics: it was in the headlines all over the world and in quick succession first denounced by all respectable policymakers, politicians and economists and then suddenly embraced as the necessary response to a global pandemic” (Wray, 2020, p. 3).  The Covid-19 pandemic has prompted discussions about issues that concern MMT; deficit spending, job guarantees, the availability of currency and the government’s role in aiding the public. These ideas “may be the economy’s only hope to get through the pandemic… a final test of MMT will come when the current pandemic ends, and the U.S. economy begins returning to normal” (Pressman, 2020, n.p.). Thus, it may be too late for the federal government to pursue any other course of action other than the deficit spending and other policies that MMT economists promote.

It has been said of Modern Monetary Theory that “once you get it you never see things quite the same way again (Kelton, 2020, p. 31). This is because MMT upends everything we think we know about how the economy works. In this article, I consider the contributions Modern Monetary Theory (MMT) can make to the fostering of the informed citizenry promoted by social studies education. MMT offers a new lens through which social studies educators and their students can view economics, politics and current events (Author, 2020). The goal of this article is not to convert or proselytize or to create MMT acolytes MMT, but to consider how MMT can prompt new and different ways to think about the economy. I highlight the way MMT can illuminate a current issue, the payroll tax deferral and the future of social security and other federally funded institutions.

Modern Monetary Theory: A Short Introduction

Modern Monetary Theory, a “once fringe idea” has suddenly “vaulted into the national conversation” (Bryan, 2019, n.p.). Although developed in the mid-1990s, Modern Monetary Theory, or MMT, gained a following when U.S. Representative Alexandria Ocasio-Cortez proposed it as a financial solution for the Green New Deal (Horsley, 2019 see also Seitz and Krutka, 2020).  In fact, although it is called a “theory” MMT “isn’t ‘theory’ at all” but “an accurate description of the monetary system that has already been operating in the United States and other sovereign nations with sovereign fiat currencies for decades” (Svetlik, 2019).In other words, MMT describes the system already in place and seeks to debunk myths about how money actually works. Thus, economists who promote MMT say that it is not an effort to change the financial system but to provide the public a more accurate picture of how it works.

Modern Monetary Theory was developed by University of Missouri-Kansas City economist Warren Mosler in the 1970s with the publication of the essay “Soft Currency Economics.” Bill Mitchell, who runs the Center of Full Employment and Equity at the University of Newcastle in New South Wales, Australia is credited with the term “Modern Monetary Theory.” Mosler and Mitchell’s ideas are drawn from the chartalism movement which originated in Germany in 1905. Chartalism means “ticket or token” “items that may be accepted as payment, but which do not have intrinsic value” (Hayes, 2021). This is an accurate description for modern United States currency. Since the United States went off of the gold standard in 1971, money is not backed by anything tangible and only functions because it is an agreed-upon currency backed by the sovereignty of the state.

Think like a currency issuer

You and I are currency-users. For that reason, we think like currency users. We have to access the national currency because we cannot print our own money. Unlike currency-issuers, we have to find ways to obtain the currency we need to buy the things we need and want and, most importantly, to pay taxes. Usually, this means we work to obtain the currency we need to participate in the economy. We also have to balance our budgets. This also means when we do not have enough money to pay for something we need or want, we must take out a loan and we must save money for things we want and need in the future. Budgeting, saving, borrowing and working in order to spend are very familiar concepts in K-12 economics education and comprise the crux of financial literacy. From a very early age, children are taught to make personal budgets, to make choices because they cannot have everything they want and to spend and save. The following quiz tests readers’ knowledge of everyday monetary “truths.”

Table 1. Monetary Policy Quiz

BeforeQuestion After
T/FThe purpose of taxes is to pay for government expendituresT/F
T/FSocial security, the United States Postal System and other federal programs can run out of moneyT/F
T/FGovernments introduce(d) currency as a way to make trade easier [than barter]T/F
T/FHouseholds, states and the Federal government must maintain    balanced budgets T/F
T/FTaxes must precede government spending (i.e. governments must collect money before they can spend it). T/F
T/FThat dollar in your pocket is yours T/F
T/FThe Federal government should reduce spending during recessionsT/F

Most people would answer true for most, if not all, of the questions. MMT, however, offers a different point of view, that of the currency-issuer.  Thinking like a currency-issuer means flipping everything we think we know about how the monetary system works, making all of the quiz answers false.

The issues with this curriculum have been noted (e.g. Sonu & Marri, 2018). However, some knowledge of how a person or household can manage their money may service currency-users fairly well, but it does little to help students develop into informed citizens who understand how their government makes decisions.  Kelton (2020) argues that this singular currency-user perspective is the key to Americans’ misinformation and to a continued state of needless austerity. One of these pervasive misunderstandings, and a “fundamental rule” taught to children, is that “money doesn’t grow on trees.” Thinking as a currency issuer is key to understanding both Modern Monetary Theory and U.S. monetary policy. This is because currency-issuers, play by entirely different rules than the currency-user rules taught in financial education. For example, using a currency-issuer’s point of view, MMT argues that the federal government can never actually run out of money despite “going broke” narratives thrown around by politicians. It cannot go bankrupt because “that would mean it ran out of dollars to pay creditors; but it can’t run out of dollars, because it is the only agency allowed to create dollars. It would be like a bowling alley running out of points to give players” (Matthews, 2019). This is a fact corroborated by Alan Greenspan in 2005 testimony before Congress regarding social security “there’s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody” (Kelton, 2020, p. 256).

Taxes

In the United States, any talk of taxes is going to spark heated debate and strong feelings. Tax policies are at the center of any politician’s platform and the “taxpayer…is at the center of the monetary universe because of the belief that the government has no money of its own” and therefore needs ours (Kelton, 2020, p. 2). Taxes and taxpayers are indeed at the center of the monetary universe, but not for the reasons we may think.

The federal government doesn’t actually need to take our money from us, physically. Warren Mosler (2010) put it this way:

What happens if you were to go to your local IRS office to pay your taxes with actual cash? First, you would hand over your pile of currency to the person on duty as payment. Next, he’d count it, give you a receipt and, hopefully, a thank you for helping to pay for social security, interest on the national debt, and the Iraq war. Then, after you, the tax payer, left the room, he’d take that hard-earned cash you just forked over and throw it in a shredder. Yes, it gets thrown it away. Destroyed! Why? There’s no further use for it. Just like a ticket to the Super Bowl. After you enter the stadium and hand the attendant a ticket that was worth maybe $1000, he tears it up and discards it.

The story above demonstrates how the federal government doesn’t actually take in “our” tax money because we pay our taxes in the dollars that it prints. It is simply a matter of pluses and minuses on a spreadsheet. MMT stresses that the government doesn’t need our money, we need its money. 

However, this does not mean that taxes do not matter. In MMT, taxes play more of a social, rather than revenue-raising role. Ideally, taxation should serve not necessarily as a redistribution of wealth but as a tempering mechanism that curbs outsized wealth accumulation. Thought about this way, tax paying is more of a civic duty for the health of the economy rather than as something to avoid or that is “taken.” Taxes, then, are part of a socio-economic contract that has to do with, among other things, creating feelings of entitlement-creating a demand for government and gov’t spending as well as tending to the health of the economy by curbing inflation and, ideally, rebalancing distribution of wealth and income (Kelton, 2020, p. 71).

The main thing, though, is that taxes create a demand for currency.  This notion is based on money usage in ancient Egypt and Greece. These origins are evidence that taxation and social relations, not a replacement for barter, was the real origin of money. In Egypt, the deben (value of goods and labor services) was paid as a tax to fund the public and public works. Bookkeeping was developed as a way to keep track of these debts and obligations (Semenova & Wray, 2015). Basically, the theory is that people must find a way to earn currency in order to pay their taxes. The government, in turn, gets a population that is employed and engaged in public works but that is also reliant upon the government for currency. This is just like a token economy in classrooms. A teacher introduces a currency, offers tangibles to create demand and outlines a way to obtain it. The teacher does this not because she needs pieces of paper to return to her (they are worthless) but because she needs their compliance and their work.

Creating a supply and demand for currency is a classic colonizing tactic; “currency-issuing colonial governments did not need tax payments for revenue but imposed them to force Natives into the wage relation; tax-driven money was a colonial governance mechanism that enabled the mobilization [of currency]” (Feinig, 2020, p. 2).  Although the Tea and Stamp Acts are well-known in American history, the Currency Act of 1764 is not. The Currency Act is essential to understanding the more famous tax acts. A colonizing strategy is for the colonizing nation to impose taxes for the same reason all governments impose taxes-to create a demand for currency. The Currency Act banned the colonies’ practice of printing their own paper money. The tax not only helped Britain locate offenders, but forced Americans to pay their debts to British merchants and to the Crown in pound sterling (see Murphy, 2017 and Office of the Historian, n.d.). Thus, the issue was perhaps not so much the taxes as the currency with which those taxes were to be paid.

 Teachers can lead students in a reconsideration of the role of currency in the colonies and investigate current-day iterations. For example, students can investigate the current anti-CFA movement (see Konkobo, 2017). The CFA Franc, established by France for its colonies and now tied to the Euro, is used by fourteen African nations. Proponents say it stabilizes the nations’ currencies. Opponents say it robs these nations of say over monetary decisions and funnels more money to Europe than received in aid.

Payroll Taxes and Social Security

On August 8, President Trump signed an Executive Order, Deferring Payroll Tax Obligations in Light of the Ongoing COVID-19 Disaster, which deferred the employee portion of Social Security payroll taxes for certain individual. To many Americans, this measure seemed strange and unnecessary. For one, it only deferred, not forgave, payroll taxes. Second, it only “helped” those who pay payroll taxes. Third, the amount of money seemed insignificant, especially when Americans were expecting relief checks, not tax breaks.

With this measure, though, President Trump introduced a tactic to defund social security. However, without knowing the history of social security, this agenda would not be obvious. No President, especially one up for re-election and courting the elderly vote, would threaten social security outright. After all, the program was designed to be defund-proof, as Franklin Roosevelt famously stated, “no damn politician can ever scrap my social security program.” This is because FDR designed a funding scheme built upon a little psychological trick that played on the public’s currency-issuer mindset.

Seeing is believing [that you earned it]

In response to the payroll tax deferral, House Ways and Means Social Security Subcommittee Chairman John B. Larson acknowledged this defunding scheme in his “Save our Social Security Now” hearing on September 24, 2020, stating “and so, when some on the other side of the aisle talk about ‘terminating’ Social Security’s payroll contributions, they are threatening the very existence of this bedrock program.” What does a payroll tax deferral have to do with dismantling social security? The answer has to do with the power of perception.

            Today, 59 million Americans receive retirement, disability and/or survivors’ benefits. Social Security was signed into being by Franklin Roosevelt in 1935 as a measure to alleviate poverty. The history of social security and the debates surrounding it are demonstrated in this EconEdLink lesson, which can be a useful supplement to this inquiry.

FDR knew that the federal government could fund social security. This has since been corroborated by Alan Greenspan (see Norman, 2016).  Instead, he needed to ensure the public demanded this funding (supply and demand). FDR knew the power of perception. Even though the federal government could fund social security without personal contributions, a payroll tax ensures workers see their contributions to social security leave their checks each pay period; “We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program.” Basically, FDR wanted to foster a sense of entitlement among workers who paid into the system in order to destroy what he saw as a “relief attitude” or the working person’s resistance to accepting charity. Those who felt they earned their social security payments would not only demand those payments but would hold politicians to ensuring their continuation.

Politics all the way through

“Entitlement” has undergone a transformation in connotation since the Reagan administration. In FDR’s time, the term was “earned entitlement.” “Earned” was then dropped, and, with it, the reminder that social security is something owed to people because they meet the qualifications for receiving it, to be able to live a dignified life in old age and because it is owed to them for not only what they paid in but also for working.

FDR’s “trick” is expressed in a 1941 memorandum from Luther Gulick. In the memo, Gulick proposes the institution of a sales tax as opposed to the payroll tax. In the memo’s last paragraph, Gulick stated “I raised the question of the ultimate abandonment [of] the pay roll taxes in connections with old age security and unemployment relief in the event of another period of depression.” This is a notable parallel to the economic situation in 2020. To this proposal, FDR is reported to have responded that the economics “are politics all the way through.”

To begin the lesson, teachers can have students examine a paycheck stub, asking them to notice the various taxes paid by the worker. Today, with the popularity of direct deposit options, workers may pay less attention to these numbers than in the past. Teachers and students should discuss the psychological effect of these taxes. Likely strong feelings will be elicited. Teachers can use this emotion as an example of “earned entitlement.” Although “entitlement” is often used pejoratively today, it was originally meant to signify someone’s right to collect on what has been promised, or owed, to them. Then, teachers can introduce Social Security, guiding students through the final paragraph of the Gulick letter. Students can consider whether or not FDR’s decision to “fund” social security through payroll tax made the program successful. Finally, discuss the September 2020 CARES Act, specifically the intricacies of the payroll tax deferral. Students can compare the stated aims of this measure, which in reality would make little substantial difference to the average worker to its longer-term effects. Students can analyze H.R. 8171, the “Save our Social Security Now” Act. The document outlines 17 “findings” related to the efficacy and purpose of social security. The final three, numbers 15-17, specifically cite the deferment of payroll taxes as “the first step in his announced plan to entirely defund Social Security by eliminating payroll contributions altogether beginning in 2021.” Primary sources related to Social Security can be found at http://www.sa.gov/history. Students can conclude the lesson by considering whether or not FDR’s “funding” scheme was a mistake, in that “entitlements have fared especially badly…partly because of early decisions that were intended to protect them” (Kelton, 2002, p. 158).

Conclusion: What to do in times of economic downturn?

Once we realize that the federal government’s role is to provide currency not-collect to it, our whole perspective changes. For example, it reminds us that federal institutions like the U.S. Postal Service and Social Security aren’t intended to be profit-generating, but to serve the public. MMT, and the currency-issuer’s perspective help us consider the Federal government’s responsibility to its people, especially in times of economic downturn. Proponents of MMT suggest that “since the government imposes the tax that causes people to look for wages to earn currency, the government should make sure there is always a way to earn currency” (Kelton, p. 65). Currency comes from the Federal government, therefore it is the Federal government’s job to ensure people have a way to obtain it. As Kelton further argues, without a jobs guarantee, minimum wage is not actually $7.25/hour but $0.

The ability to see through these initiatives and to critically read economic policy is a crucial component of economic literacy (Author, 2021). MMT, and the perspectives it fosters, help develop citizens’ ability to understand the political agendas being enacted through economic and monetary policies by taking a currency-issuer’s perspective. The United States doesn’t need our money, we need its. We, in turn, provision the government through circulating currency and engaging in public works. MMT reminds us that we are entitled, and that entitled is not a bad word.

References

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