Sovereign currency and non-sovereign budgets: the Modern Money Theory approach to provincial, state, and local government budgets

Modern Money Theory explains that a national government with sovereign currency does not face a financial constraint. While this was well understood in the early postwar 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 “entitlements”. As austerity measures were increasingly adopted at the national level, fiscal responsibility was shifted to state and local governments through “devolution”. To reverse these trends, we need to redevelop our understanding of the fiscal space open to the currency issuer—expanding its responsibility for both national social spending and 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, and the rise of Trumpism.