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Businesswoman Signing Cheque
Businesswoman Signing Cheque

Mental Models for What Government Does With Our Money

Models used by pedantic experts, even if more accurate, confuse instead of clarify the key difference between taxation and government debt

We live by mental models. Although we rarely take the time to think about it, any time we reason about something we are using a mental model. Sometimes those models are close to reality, and sometimes they are not. When you turn your steering wheel, it does in fact turn your tires — but power steering adds quite a bit of assistance. So the mental model is close to correct but not exactly true.

Similarly, in chemistry, multiple models of the atom are usually taught. In the widely used Rutherford model (also called the “planetary model”), electrons “orbit” the nucleus at different distances. However, this model was not found to be precisely true. A more precise view of the atom is the quantum mechanical model, in which electrons exist in orbitals (not orbits), where they might be anywhere within a specific volume of the atom.

Atom Particle
Planetary model of the atom

What’s interesting is that, even though the quantum mechanical model is more precise, it is often more difficult to work with, especially for basic chemistry. Therefore, the planetary model is often taught and used to describe chemical reactions, especially to non-chemists. The advantage of the planetary model is that it is simple, relates well to other common ideas that most people understand, explains most of what people need to know, and provides a framework that helps them predict what chemistry should be like. The fact that it doesn’t work on the edges isn’t much of a problem.

As you can see, there is a difference between the technical reality and the frequently used model. Unfortunately, however, public intellectuals have begun to insist that everyone use the more complicated models for everyday purpose. While there are times when the public needs to know the boundaries of a model, or maybe even replace a widely used model, many public intellectuals seem to do this to boost their own egos through a pretentious pedanticism.

A good example of this is the phenomenon known as Modern Monetary Theory or MMT. Most people, when they think of government spending, envision a “family checkbook” model of government spending: there is only so much money, if you overspend you go into debt, and if you can’t pay your debts, you will have problems in the future. MMT points out that this isn’t technically true with government spending. Because the government can issue currency, treating government spending the same way that we treat a family checkbook doesn’t work. Governments don’t need to raise taxes, they can just add to the debt. And, since they are in control of issuing currency, they don’t have to worry about not paying it off.

All these points are technically true. However, while they may hold true for economic and monetary models, they provide a terrible model for the average person thinking about government spending.

Even though there is no limit to the amount of money that the government can spend, there is a limit to the amount of goods available in the economy. That is the real checkbook. While we talk about money (because that’s the mental model everyone is familiar with), the reality is actually goods and services available in the economy.

It is also technically true that it doesn’t matter economically whether money comes from debt or taxation. Mathematically, they are equivalent: the loss of potential future compound growth through taxation is basically the same as the increase in debt through interest. However, while they are technically equivalent, there is a huge moral divide. The moral issue is transparency.

Taxes make what government spends transparent. That is, if the government relies on taxation, then everyone can see where the money is coming from and how it impacts the economy. We decide on it through policy and can hold policymakers accountable. If the government relies on debt, then, essentially, only economists can figure out who is being impacted by the policies, making it invisible to ordinary people.

What is missed here (and often overlooked by MMT experts) is that both taxes and debt take money away from future generations. The difference is that debt means that government officials are taking the money in an unaccountable way while taxation means that they are transparent about how their actions impact ordinary individuals and the future.

As you can see, while not technically accurate, the “checkbook model” is not as distant from the truth as MMT theorists like to imagine. Perhaps it is actually better than a true model for good decision-making.

Adopting the MMT model for public conversation, on the other hand, leads to numerous ill effects. First of all, it means that fewer people can participate in public conversation. Because the model is more distant from ordinary experience, fewer people will be able to take the time to understand it. Second, it causes people to forget the limitations of reality. People naturally think in terms of money, not goods and services. If you tell them that there is no limit to the amount of money, this naturally translates for them into a lack of limits on the goods and services available.

As economist Thomas Sowell likes to say, the goal of economics is to help people make better use of scarce resources that have alternative uses. The focus of MMT is on modeling the money, not the resources. On the other hand, the “family checkbook” model combines the concepts of money and resources and presents it in a way that makes sense to most people.

Again, this isn’t to say that we should always keep the old or easy models. Sometimes there are models whose expiration date is long past. However, it should be the goal of public intellectuals to provide mental models which are useful for decision-making, not take them away. The public intellectual should not shroud the profession in jargon and castigate those who don’t know it, but rather provide a bridge between public and professional understanding, and translate the concerns of each for each.

You may also wish to read: Central banks vs. cryptocurrencies: Why the growing tension? Modern Monetary Theory (MMT), which is gaining ground, holds that government should just print as much money as it feels it needs and then raise taxes to cover shortfalls. The growing popularity of Modern Monetary Theory (MMT), which does not control for inflation, is spurring interest in cryptocurrencies.

Jonathan Bartlett

Senior Fellow, Walter Bradley Center for Natural & Artificial Intelligence
Jonathan Bartlett is a senior software R&D engineer at Specialized Bicycle Components, where he focuses on solving problems that span multiple software teams. Previously he was a senior developer at ITX, where he developed applications for companies across the US. He also offers his time as the Director of The Blyth Institute, focusing on the interplay between mathematics, philosophy, engineering, and science. Jonathan is the author of several textbooks and edited volumes which have been used by universities as diverse as Princeton and DeVry.

Mental Models for What Government Does With Our Money