Resource constraints and economic policy

This chapter discusses the Modern Money Theory (MMT) approach to evaluating the affordability of government spending, comparing it to the mainstream approach. MMT rejects that taxes are needed to pay for government spending. Instead, it demonstrates that the function of taxes is to create real resource space in the economy to devote to the public purpose. Mainstream economists often claim that MMT brings us back to square one - you still need to raise taxes when the government is spending more. Using the examples of green transition, Build Back Better and Medicare-for-All, this chapter demonstrates how the MMT approach leads to conclusions different from the mainstream “pay for” approach to spending. It concludes by explaining the functional budgeting approach championed by MMT economists.