Economic Issues

Flint, Michigan and Modern Money

Known as the “Vehicle City,” Flint, Michigan was once an auto manufacturing epicenter. At its peak, Flint had a population of nearly 200,000 people. Flint represented a true embodiment of the American Dream and the American middle class. Today, the city is in disrepair. As automotive manufacturing has departed to locations that offer less costly labor, Flint’s population has dwindled in size with a median household income of only $25,650 according to the US Census Bureau. As the city’s tax base has eroded, so has its capacity to fund basic public services.

Netflix recently released a documentary on Flint, simply titled “Flint Town.” The documentary focuses on the predicament of the city’s miserably short-handed police force, which is made up of roughly 100 officers who responsible for policing a city of nearly 100 thousand residents. The city is frequently ranked as one of the most dangerous cities in the United States. While it’s not the primary focus of the documentary, the city is also in the midst of a contaminated water crisis that has been going on since 2014.

I found it shocking that a relatively large American city could be facing these issues in 2018 — issues that largely stem from a shortage of money. I found one segment particularly emblematic in this regard: Flint’s police department is so cash-strapped that it sells the weapons it confiscates from criminals back to retailers in order to raise the money it needs in order to operate!

While Flint’s problems surely run deeper than its lack of local tax revenue, it’s difficult to overstate what a substantial injection of capital could do for the city. The question: where does Flint “find” the money? Enter Modern Monetary Theory. 

Modern Monetary Theory (MMT) is a school of economics that describes and analyzes modern economies, specifically those in which the national currency is fiat money controlled by a sovereign government. Under our monetary system, the federal government is the currency issuer, meaning it is the sole creator of the US dollar. Everyone else (individuals, corporations, local and state governments) in the system is a currency user.

Flint, for example, is a currency user because it does not have the authority to create US dollars. This means that in order to fund public spending, Flint must raise revenue by taxing its residents, selling bonds, selling confiscated guns, or whatever other means it comes up with to raise revenue in order to pay for services like infrastructure, schools, police, and fire departments. The federal government, on the other hand, has no such constraints. Congress and the President simply create and approve a budget and the money is literally spent into existence by crediting bank accounts. 

If you’ve never heard of MMT, this may come as a shock or seem wrong to you. You might ask why the federal government bothers taxing us if it doesn’t need our money in order to spend. The answer is three-fold: taxes (1) create demand for US dollars, (2) control for inflation (they’re a mechanism to reduce the money supply), and (3) can be used to achieve social equity.

So what happens when we pay our taxes? The money is simply (and literally) deleted from the system. Contrary to what most politicians say, the federal government can never run out of money. It creates the money and can always afford whatever is for sale in its own currency. In order to tax, the government must first spend its currency into existence.

What does MMT mean for Flint and other municipalities facing similar struggles? It means that in the same way the federal government spends on other initiatives (e.g., the $700 billion it will spend on the military in 2018 alone), it can spend on federal aid for poverty-stricken municipalities. Once one has an understanding of MMT, these become questions of political priorities, not affordability.

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