Economic Issues

The Federal Government is like Chuck E. Cheese: MMT as Analogy

I was recently at a Chuck E. Cheese with my wife and kids and, considering that I am always thinking politics and economics, I ended up realizing that Chuck E. Cheese is a great analogy for the fiscal policy of the federal government because they are both “currency” issuers. What? Seriously! Obviously, the currency they issue is not in any way on the same level, but they both function in much the same way.

This made me think that I can help explain Modern Monetary Theory (MMT) to those who are new to it by comparing Chuck E. Cheese with the federal government. MMT is the mathematically and historically backed understanding of how money works in the modern world. To be clear, it is an evidence-backed theory much like evolution and gravity are theories.

The first part of the analogy is how Chuck E. Cheese (let’s shorten that to CC from now on so I’m not rewriting it over and over again) used to be restricted by its reliance on a physical-resource-pegged currency. For anyone who may not have been there in a while, CC no longer uses physical tokens to play the games. However, those tokens acted similarly to how US currency used to work under the gold standard.

One thing to keep in mind is that the federal government has always been monetarily sovereign, which means that due to the power given to it by the Constitution in Article 1, Section 8, the federal government has the sole authority to issue US dollars and has no limit to the amount that it can spend. So, to make this absolutely clear, the federal government cannot ever run out of money. Ever.

The connection between CC tokens and US dollars under the gold standard is that the amount of currency issued is restrained by the physical resources they’re connected to. In terms of US currency, the restraint was since each dollar was worth a specific amount of gold, the government had to be careful about printing more money than they had gold in reserves to back that money. For example, in the beginning of 1934, one troy ounce of gold was worth $20.67 in US currency, and with 29,166.7 troy ounces in a ton, one ton of gold was worth $602,875.69. If the US had only 1 ton of gold in reserve, then there could only be $602,875.69 in the economy or else risk having not enough gold to back the money.

What would happen if the government created more currency than they had in gold? It would have been disastrous because if everyone wanted to trade their money in for gold, then the gold would run out, and the rest of the money would be essentially worth nothing because there is nothing to exchange it for.

With CC tokens, the same was true, in a sense. The individual locations were constrained by the amount of tokens they had on hand, and they had to pay for the tokens to be minted so it wasn’t a completely free enterprise; however, they could as the currency issuer just hand out as many tokens as they wanted to without restraint to their customers. To be sure, their business model is built in part on people paying for tokens, so it wouldn’t make sense for them to just give them away, but as an example of their ability to do so it was not uncommon if a machine “ate” a token for them to just hand tokens out to certain kids. Beyond their business interests, there are no internal or external limitations on that decision. If those in charge wanted to, they could.

To bring this analogy further as of relatively recently, CC now has cards with “Play Pass points” on them which are used to play the games. These Play Pass cards work in a similar way to a debit card. The points are loaded onto the card; there is no physical representation of this “money”, and you just swipe it at games, etc. to use the points. This change mirrors what occurred for the US and certain other countries once we abandoned the gold standard and all other kinds of currency pegging in the 1970’s.

There is no longer a physical resource restriction in place. For CC, what this means is that if you had a really bad experience at one of their places, the corporation could technically load your Play Pass card with a hundred points. As the issuer of Play Pass points, and because there is no cost to generating those points, they have no constraint on the amount of points they can award.

This is how it is for the US federal government as well. Because there is no longer any gold pegged to your dollar, the federal government could direct the treasury to credit $1,000 dollars into every single person’s bank account. Like the Play points for CC, there is a limit to how much they can spend, but it is not based on their ability to do so, it is based on the consequences if they do so. Like the Play Pass points, now that we are living in a largely digital world, there is no cost even to “make” the currency because they can just add it to bank accounts with a keystroke.

For a federal government that doesn’t directly set prices, inflation is a real risk. What people tend to misunderstand about inflation is that they believe the very act of putting that money into the economy will cause the devaluation; however, that is not true. If that were true, then China’s money would be worth nothing considering how much the Chinese government has spent on infrastructure and other massive projects. They have had times where the inflation has risen slightly, but it always goes down. The same holds true for the US even if Congress won’t accept it yet.

The reason why this is true is that the economy is like a sponge that can soak up money and can be squeezed to be drained at times. Inflation, or technically hyperinflation, is caused only when the sponge is completely saturated and cannot absorb any money, and you can’t squeeze enough out of it to avoid just wasting it. What that means is that the currency of the United States of America is backed not just by how much gold is in a vault somewhere but by the size and strength of the entire domestic economy. Which sounds better? As long as there are people looking for jobs, things to be made, work to be done, then the government can keep spending. This does NOT mean that we can spend indiscriminately, but what it does mean is that we know the levels at which we risk causing inflation and can use mechanisms, like taxes and bonds, to avoid going too far.

Speaking of taxes, beyond all of this the fact that you exchange the tickets you have won for prizes and not the Play Pass points also works into the analogy because they are like taxes. For CC, when you are done playing, you take your tickets and exchange them for prizes. The “money” being “spent” into the economy is transformed and then extracted from the economy as something else. Your tickets, like taxes, are shredded after use.

Taxes are not reused; they don’t need to because there is no constraint on federal spending. They are used for other things, like as noted in the sponge analogy to drain money from the economy to avoid inflation.

Hopefully, the above analogy helps you understand the basics of MMT. The reason why this is all so important to understand is that MMT has far ranging implications for the progressive movement not just nationally but globally. Appreciating the reality MMT represents is a fundamental change in how we approach our government and its spending. It eliminates the debate over HOW we’re going to “pay” for something, and lets us ask if program X will improve our lives, then why is the government refusing to spend when it has no constraint? That will drive this revolution beyond complaining about the state of the world to demanding that the government spend in support of the public purpose.

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