This is not an easy blog to write. I am well aware some people will not like me for writing it. And I am going to say it anyway, because I think it is necessary.
I have thought a lot about modern monetary theory of late. I think I can rightly claim to have introduced quite a lot of people to this idea in the UK. I arrived at the thinking that is, in effect, modern monetary theory via work I did on money fifteen or so years ago (before this blog existed) and through my thinking about taxation.
People's Quantitative Easing was one of the manifestations of that process, which I do think is an MMT variant even if some would appear to deny it.
What I wrote about tax and money in The Joy of Tax is further evidence of this direction of travel. The tax angle, in particular, is very unusual amongst modern monetarists. In fact, it was precisely because many modern monetarists showed little or no appreciation of the importance of tax justice in their work I was very wary of directly aligning with MMT for quite a long time.
Eventually, I took that risk. And I have to say that right now I beginning to regret having done so. I am not alone: I know others who I respect, and who wholly understand what MMT is saying, who are asking why it is worth having anything to do with MMT.
Let me be absolutely clear. I am not moving from my belief in what I think MMT says. There is something elegantly simple and radical about what is called modern monetary theory, even if nothing it has to say is modern, theoretical or in some ways much to do with money. What MMT says, as far as I am concerned, is as follows.
First, in a country with a fiat currency, which means that there is no asset backing to the money in circulation, which money does as a result only get value as a consequence of a government's promise to pay, there is, at least in theory, no limit to the amount of money that a government can create.
Second, a government creates money every time it spends because it instructs its central bank to extend it the credit to do so on every such occasion. It is not constrained by the availability of taxation funds when doing so: money can always be created by a bank on demand and at will, and central banks will always do this when instructed to do so by the governments that own them.
Third, to prevent this new money creating excess inflation a government has to tax to withdraw currency from circulation. This is the primary fiscal purpose of taxation, although tax also has other, as significant, purposes as noted below.
Fourth, the government does not need to borrow if it runs a deficit. Firstly that is because it can, at least in theory, simply run an overdraft at its central bank, on which no interest may be charged. This negates the need for borrowing. Second, government borrowing actually makes little apparent economic sense in an economy using the fiat money of the national government because the money that is supposedly borrowed has already been created by the government when injecting cash into the economy through its spending. But, and I stress the point very strongly, that does not mean that a government should not appear to borrow. A government has a social duty to be the borrower of last resort to its population and financial system. That is the function of government borrowing, and it is vital to the efficient operation of any fiat currency using economy.
Fifth, the same social obligation means the government is not indifferent to the way in which taxation is levied, or to non-payment of tax, even if sufficient tax is collected to secure the fiscal balance that it desires. Tax might have a primary goal of controlling inflation, with the secondary advantage that the tax charged for this reason provides the currency with value, but tax also has the other deeply significant social purposes of correcting income and wealth inequality; repricing market failure; delivering fiscal policy by incentivising or penalising certain activities and by reinforcing the social contract that exists between a government and its electorate. Tax is a reflection of the values of the society we live in and is the primary mechanism any government has for reinforcing them. For MMT to be indifferent to taxation is, therefore, completely incorrect. It would also mean that MMT was indifferent to the distribution of impact of taxation, both nationally and internationally, and I cannot accept that this is its intention.
Sixth, the fact that the government spends first, and taxes second, means that the answer to the question 'how are you going to pay for it?' is always available to anybody who understands this process. A government decision can always be paid for, presuming the actual resources required to deliver it exist within the economy, simply by commanding the central bank to pay for it and then arranging, if necessary, for the additional tax due on the income that has been generated (because all government expenditure is, by definition, somebody else's income) to be collected.
Seventh, the realisation that a government that only borrows in its own currency cannot, as a result of this understanding, ever default on its own debt because it can always issue the instruction to its central bank that the payment of that debt be settled, is also of considerable advantage. Such a government should never be beholden to financial markets if they do not overheat their economies.
And that's it. That is modern monetary theory in a nutshell. In essence: the sectoral balances balance. Government debt is private wealth. If you want government created money the government has to run a deficit. There is nothing to worry about in this policy so as long as the economy is not overheated as a result. And the art is not over-heating. But the risk of doing that is much smaller than the risk from putting the economy in the fridge to avoid the chance of doing so. This is a universal truth wherever the conditions for the use of MMT understanding apply.
By saying so I make clear a great many other things.
The first is that modern monetary theory does not apply, and cannot be used, when the government does not have a fiat currency, or has to borrow in the currency of another country, or lets the currency of another country be used in common circulation within its economy; then the preconditions for modern monetary theory to work do not exist. There is no point pretending that they do when they do not. A failing tax system also prevents MMT functioning in practice.
Second, modern monetary theory does not eliminate exchange rate risk. It still exists. That is in large part because most exchange rate risk has nothing whatsoever to do with government economic action. It is created by political risk, as has been the case with the substantial down-rating of sterling since the Brexit referendum took place; or it is created by external price shocks, as for example are commonplace with regard to energy and other raw material prices; or it can arise because of short-term speculation, which is only sustainable if economic fundamentals of the type previously noted have changed. But, and I do make this clear, if a government that thinks it believes in modern monetary theory believes as a consequence that it can create money without limit, then it is fundamentally wrong. Likewise, if it thinks it can spend without taking into consideration the limit of available resources within the economy itself and ignores entirely the impact upon imports then the use of MMT can, and usually will, have a downward impact upon the balance of payments and the long-term value of the currency. This may not be a problem if the process of change is gradual: many economies have and will sustain themselves despite such long-term declines in value, but it is pointless to pretend that the risk does not exist.
Third, there is absolutely no necessary relationship between modern monetary theory and a jobs guarantee, or any other left of centre economic policy come to that. They are, in my opinion, completely unrelated, even if it is obvious that modern monetary theory does permit the government to pursue a policy of full employment at fair wages if that is its wish. But the last words are critical: this may not be a government's wish, although few parties are honest enough to say so. To presume MMT requries a left-wing agenda is just wrong: it is a description of actions, not an agenda for left wing governments, albeit that it can usefully inform the decision making of those who want such a thing.
Fourth, there is also no relationship between modern monetary theory and anti-neoliberalism. Modern monetary theory is not a theory or a philosophy, which is why it was so badly named. It is simply a description of a process that, as a matter of fact, happens, even if that is not widely appreciated. In that case there is no conflict between modern monetary theory and neoliberalism and the neoliberal could, in my opinion, as readily prescribe to this idea as anyone of left of centre persuasion.
Fifth, there is also no link whatsoever between modern monetary theory and Brexit. If you believe in MMT you do not have to want out of the European Union. The simple fact is that there are far more factors to consider when discussing such a complex issue than how the government funding cycle works (which is what MMT addresses). It's true that some aspects of EU policy appear antagonistic to MMT, but as quantitative easing showed, most things can be worked around where there is the political will to do so within the EU. And that is the important point: it's creating the political will to change the international environment that matters and MMT can only be one factor in that process of change, at best.
Many MMT adherents do not now seem to appreciate these points, which I think are facts. I have found myself at the sharp end of their comments as a result. I find that just a little bit ludicrous. Those less persuaded than I am by MMT simply take offence when such comments are directed at them, and in many cases I can see exactly why they do that.
MMT is a fact. It does not require aggression to explain it.
Nor does it require the presumption that a person not yet persuaded is a neoliberal. Or a Blairite. Or any other term of abuse that comes to hand. That just alienates people. And that is not the way to change the world.
And a little humility about MMT would also be good. As Frances Coppola said the other day (and she was right on this, in a twitter exchange where I otherwise disagreed with much of what she said), MMT has not got its head around tax. That is true. It largely ignores its social functions, the tax gap, why it is important, and why tackling tax abuse is a fundamental task of government. That is because far too many MMT proponents think the government can simply print money instead of taxing. And that is not true. MMT cannot, in my opinion, function without an effective tax system.
So I am making a twofold plea. The first is that MMT understands tax. The Tax Justice Network and I are discussing how we might assist in this process. There will be more to follow on it.
The second is that MMT proponents do not think that espousing politics that are supposedly the consequence of MMT (when they are not) and which are unlikely to be unacceptable to most in the electorate is necessarily good for MMT. It isn't, and will simply alienate the vast majority, including many of those who are utterly opposed to neoliberalism and all it stands for.
To put it another way, however good MMT might be as an explanation of an aspect of the economy, it does not answer all questions and is no substitute for sound political judgement.
And please note, abusive responses offered here will be highlighted as such, or will simply be deleted. I know only too well that the world is changed by politically sound argument. That's what I have been engaged in doing for a long time. MMT will only succeed by following that path, in my opinion. Discussion is good, of course. But let's not make it personal.
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GREAT stuff. Thanks. I’m just a casually employed geezer with no power sat in my kitchen but I find all this so exciting. I understand MMT but haven’t appreciated the tax link properly. But your pleas are the important part here imo, particularly the “no left/right” statement. Ralph Nader relentlessly pushes the same political point in the US: we (and our grandchildren) are all screwed by the system as it stands, and must understand our common interest in progressive economics. There’s no other way.
Thanks
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I’m not entirely sure why you wrote this, maybe you read Bill Mitchell’s offering from yesterday but my take on this matter is that most of the abuse and aggression flows in the opposite direction. Thanks for the summary, anyway, but still consider writing the book.
I wrote it because MMT is not reaching the targets it needs to reach by making claims about it that are policy interpretations ( which is fine, and fair) but which are not necessary parts of MMT and some are then castigating thosevwho do not share their political view, saying this is justified by MMT, which it is not.
I did not read Bill Nitchell yesterday. There is nothing unusual about that. I do only occasionally read his blog. That is largely due to pressure on time.
Bill had a rant about all the abusive tweets he’s received but I notice that he’s taken the posting down. Probably cleared the air with his rant and felt better for it. About your MMT book, I think an integration of MMT and Tax policy is the way to go. The tax policy seems more important in my view than Job Guarantee but I think he’s right preferring that to UBI in that it preserves the dignity of the otherwise unemployed.
I can’t read it then….
It was not what I wrote about – this blog post was begun on Tuesday (unusually – most start 20 minutes before being published, at most)
As you say, policy prescriptions such as Brexit, the job guarantee do not necessarily follow from MMT’s analysis of how an economy works, and proponents of MMT should stick to the basic economic truths you have outlined above. However, whether this will ever be enough to challenge the prevailing economic groupthink is debatable. Frustrated by the torrent of nonsense issuing from the political commentariat following the Autumn Statement, I posted the comment below on the Guardian website, which was removed without explanation. This is not the first time I have had such a post removed, without ever knowing why. I’m not a conspiracy theorist, but it seems to me that the corporate media are terrified of any discussion of this subject.
“Polly Toynbee reinforces the household budget analogy by asserting that increased public spending has to be financed by higher taxes. This is not the case, as the Bank of England acknowledged in an email which can be seen on the Tax Research website (September 19th, 2017): “Regarding whether taxation is necessarily required to finance government spending, the answer is no. Along with raising money via taxation, governments can borrow money and they can create money outright.” And, as its own website says: “Quantitative Easing is an unconventional form of monetary policy where a central bank creates money electronically …. This process aims to directly increase private sector spending in the economy ….”.
In other words, taxes don’t fund government spending. Their purpose is firstly to control inflation and secondly to redistribute wealth. Instead of taxing and spending, the UK government spends first, using electronic money which the Bank of England has created out of nothing, and taxes later to take money out of the economy. All tax money is destroyed as soon as it is collected.
Nor does the government need to borrow money by issuing bonds since it can create digital money at will, as private banks do under government license when they buy government bonds. The purpose of these bonds is not to finance spending but to provide a safe haven for savings or, as cynics might say, to keep private banks in business. Indeed, through its QE programme, the government has already eliminated a quarter of its debt by magicking out of thin air £430 billion, which it has used to buy back government bonds.
Recognition of these economic truths would make it much easier to show that austerity is a political choice rather than an economic necessity. Conversely, framing the debate about public spending as a choice between cutting public services on the one hand or increasing taxes and/or borrowing on the other plays into the Tories’ hands and makes it more difficult to hold them to account for using austerity as a weapon in their class war against the poor.”
I should add that I also submitted the above for publication in the Observer and Guardian (with a few minor alterations), but without success. I appreciate that there is limited space for readers’ letters, and there may have been many more useful contributions than mine, but I’ve had several less relevant letters published on other economic issues.
I have to say I can see no reason at all why the Guardian could object to that
Good post. What fo you think the actual inflationary effect of running large deficits of say 10% would be? If this happened over a reasonably extended period?
If there were resources this would nit be an issue
The reality is I doubt such resources exist
I doubt deficits of that scale are needed
So the question cannot usefully be answered
Allan suggests funding investment in renewables by printing money which seems to make some sense. But what about using 10% deficit funding to fund annual public spending on health, schools etc. Surely that can only be inflationary?
Such supimplustic conclusions cannot be drawn
If there are no available resources in the economy all attempts at additional spending can be inflationary
The condition for a deficit is the availability of resources. That is it
How convenient! Your examples are continually used to say Scotland could fund its 10% public sector deficit so how about looking at that country as an example. If it sets up its own currency next year and seeks to print money to fund its public spending deficit, in your opinion, would that lead to significant inflation?
Scotland has considerable excess capacity right now
I very much doubt it would have a 10% deficit
James, one of the things I want to do, if I win the lottery is to get someone like Richard to do a proper “what does it cost” to fund more police or nurses.
My simplistic version is;
The government employs more police at cost x.
Immediately the government taxes their “new employee” so actually get about 1/3rd of their money back straight away.
The employee spends most of their money to live.
The people they spend their money on get taxed too so % of the nurse/police salary is back with the government.
Some of the things the employee spends their money will generate VaT, again money going back to government.
Pretty soon most of the money goes back to government so why would that be inflationary?
It actually helps generate more tax returns by stimulating the economy?
This is why austerity was wrong.
The above is simplistic but you get what I mean. Would love Richard to do a proper map, outgoings and returns. Pensions will be an interesting area. Which is “debt” to the government but not really when it gets spent years later to live, so is it debt?
Alan. The argument would be that seeking to recruit more nurses, police etc would lead to competition for labour, push general wages up which would inflate prices for goods and services etc etc etc
Yes
But only if productivity did not rise as a result
And it might
Please be multi-faceted
EWconomics requires that of us
Allan, your comment about money maps made me think you’d appreciate Alan Hutchinson’s fantastic blog essay about spending chains, graphically illustrated by his use of Sankey diagrams:
http://www.matchesinthedark.uk/spending-chains-sankey-diagrams/
His general introduction to MMT – ”We Pay For It By Spending Money” – is also really good:
http://www.matchesinthedark.uk/we-pay-for-it-by-spending-the-money/
I would have thought there would be diminishing returns on health outcomes and crime outcomes per nurse/policemen employed once you pass an optimal point (which may well be less than the number currently employed in Scotland’s case). This would suggest that each new nurse/policeman employed would reduce productivity and hence be inflationary. As you say it’s not hard…
The evidence is that the multiplier on health spending is just about the highest return available in the UK economy
It would seem you are in an evidence free zone
Please don’t bother to waste my time again
Jim (Green) those look on a brief scan close to what I was thinking will bookmark them to read properly, later, thank you.
How is NHS or Police productivity going to rise by recruiting more staff at higher wages? I get that parts of the non public sector economy may invest in capital items rather than compete for labour and hence improve their own productivity but across the whole economy?
Have you heard of better health and crime outcomes?
And that society gains from them?
This stuff is really not hard…….
First up excuse what may be an incoherent ramble from a non-economist but;
I’ve thought for a while proponents of MMT (and I count myself as an uneducated fan) should be working to get the universal acceptance of MMS (system) instead of T.
Secondly I have always understood productive capacity of a nation to be the natural (although abusable) limit for money creation under MMS. Abuse leads to hyperinflation.
The bit I’ve never understood is why would a government with under utilised productive capacity not then use MMS to build wealth creating (profitable) businesses? Possibly all state owned or create the conditions for industry to own them.
Why not do that.
Take for example Scotland, uniquely placed in the world to benefit from renewable energy sources.
They become an independant nation with their own currency as you have suggested.
The government creates the conditions to maximize energy creation funded by MMS.
They then have the cheapest energy in the world.
They export energy.
With abundant cheap energy they create the conditions for heavy energy using industries (steel, aluminum, for example) to locate in Scotland.
They create the conditions to turn the now cheap steel and aluminum into higher value products, like bodies in white for the car industry.
Car companies relocate to Scotland.
All of the above become value creating industries for Scotland, creating wealth for the whole population?
A bit crude but why couldn’t that work with vision from the Scottish government and MMS?
It could
Common Weal buy that vision
They have tweeted this blog post approvingly this morning
Thank you. Pleased to know it might not be a ramble after all. Seems too simple but I can’t think of a reason why this could not work for an independant Scotland leveraging it’s unique geographical opportunities. I live in Wales now but would love to return to Scotland to help with a project like this. I would have voted “No” in 2014 because there was no viable economic plan but if cheap energy could be realised via renewables all bets would be off and I’d happily vote yes. Did my Industrial Design degree at Napier University and with the project management skills learnt there would love the challenge of a big project like this.
If you’re interested, please have a look at: Modern Monetary Theory for an Independent Scotland: https://www.facebook.com/groups/1466864300089196/?ref=group_header
Will do, thank you.
Malcolm,
The Facebook item you link to is simply a cut & paste of Richard’s essay at the head of this blog and doesn’t set Richard’s points specifically in a Scottish context or offer any observations on them. Obviously if Scotland were independent and had its own fiat currency his points would apply.
“why would a government with under utilised productive capacity not then use MMS to build wealth creating (profitable) businesses?”
Very good question. The usual answer is that it’s for the private sector to make profits. There’s a reasonable fear that if government, with its unlimited access to money, could enter any business, then private businesses would get steamrollered flat. Alongside Monetary Theory, we also need government that works toward reasonable goals for public benefit, with limits somewhere to its behavior.
Counter to the usual answer, Canada created a Crown Corporation during WWII (and perhaps created more than just the one) to produce artificial rubber. It kept operating afterwards, and wasn’t made private until maybe the 1980s, and the world did not end up to that time.
Where is the evidence that a government has actually crowded out business?
I’m curious to know. It was not the case in the UK even in the era of nationalised enterprises as far as I can see.
No evidence. Just “the usual answer.” “Not inconceivable” is the maximum approval I personally can give it. A wise government will not stifle it’s own populace, even the populace that are in business.
But that wise-government point is part of one of two zingers people come out with when they think they’re refuting MMT: that the government will never do the right thing. Another zinger is that when MMT assumes the national market is kept, it allows the financier-criminals to keep victimizing us same as always.
Would you like to try that again in words that I might follow?
Sorry. My point isn’t profound. Just that “the usual answer” is one that I often see from other people.
My own belief is that good government, like any kind of good management, can choose good measures and achieve good things.
And I agree
Sometimes politicians do the right thing. Two Tories have resigned for the right reasons in the last week or so
Trying again after my first post went off into cyberspace!
Excellent post, Richard. Easy to understand and points made in a logical sequence to help it all fall into place. Allan Paterson raised the context of MMT in an independent Scotland. This blog should be essential reading for Scottish Finance Secretary Derek Mackay and his advisers. How can that best be ensured?
I guess I could send it to him
Or you could….
I’ve now sent it, so fingers crossed.
Thanks
Wow! You’ve excelled yourself this morning. Only you could be so heterodox about an idea that has heterodox applications!
To me you have thoughtfully explored some of the issues that I had not quite got my head around (not the tax angle BTW as Bill Mitchell’s stance on tax has always troubled me somewhat).
You have saved MMT from itself as far as I am concerned. Or another way of putting is that you have saved it from becoming a political football and therefore being lost as it is kicked over the fence and forgotten about as a new ball found.
You have de-ideologised the use of it for want of a better word. Having said that though – not using MMT may still point to some form of ideology in a Government.
Nonetheless I think that is really superb blogging performance. Bravo! This underlines the fact to me that yours is such crucial blog.
There is no sycophancy here – I mean it – this is clear, clear thinking. If only there was a prevalence of it in Government. If I was a politician you’d be on my list of ‘must listen to’ people.
Enough.
PSR
This blog was not an easy one to write. Not for the technical aspects, but because of why I felt the need to write it.
Unusually it went through a number of drafts.
Even more unusually I sought another person’s opinion on it before publishing, who suggested changes but shared much of your sentiment.
MMT is far too important to be lost in disputes over claims that it requires political policies that I agree it enables, but which are not implicit in it
I am seeking to make that point.
Argue MMT
And argue it’s consequences
But make sure the difference is understood and then respected.
An outcome will be more work on tax and MMT
Richard
Spot on PSR, a much needed statement. Excellent blog.
Relativity is incomplete (I have read) because it doesn’t (yet) take account of Quantum Mechanics. MMT seems to be in the same position, incomplete, because it hasn’t taken account of taxation and integrated it into a more comprehensive theory or explanation of how a modern economy works. Perhaps it should also point out that these things are politically neutral: governments spend, governments tax. The big question, a largely political question is how they decide how much to spend and on what, and then how much to tax, who to tax and for what purposes.
I suppose some of the frustration arises because governments have been lying about “tax and spend” and “household” economics when all along they had the levers available to make a difference to inequality and unfairness, but chose not to on the basis of ideological mythology.
I’d second PSR’s point. Not just one of your best pieces Richard, but very helpful as PSR puts it, to ‘de-ideologise’ MMT, and see it as a framework for thinking rather than a belief system. Moving mindsets on from today’s misunderstandings is going to be a longer process and its not helpful for MMT to be seen as belonging only to one select group of ideologues.
Thanks all for the wider discussion it has prompted – a thread to be kept and re-read, and shared
Thanks Robin
I commented below the nice video you posted yesterday, that in a functioning economy, the money collected in tax and the new money created to fund services almost balance each other out. This means that the role of tax is maybe only 5% adjusting the amount of money in the economy, and 95% redirecting the flow of money. If this is true, it means that the social role of tax is many times more important than we think. And as you point out, tax is neutral, it can be used well or badly.
The question becomes, how does money fall out of the system? I can suggest four mechanisms: 1) Insolvency, which simply turns thin air money back into thin air. In practice, could this be a more important mechanism than tax? 2) Leakage, moving money out of the country, without receiving anything worthwhile in return. 3) Blockage, tying money up in assets with a high degree of nominal value, creating unstable asset bubbles. 4) Whirlpools, for instance derivative trading, where enormous amounts of money go round in circles, without getting anywhere.
Sorry Michael – please just go and do the necessary reading and stop wasting your own time
Money is made by loans and cancelled by their repayment
And made by government spending and cancelled by tax
It is made and destroyed at will
Yo are pretending it has tangible worth. It does not. It is debt and when debt is repaid it is cancelled
There is nothing more to say, except you are wrong
Richard, I hesitate to disagree, and In a one-off situation what you say is completely correct. Government-created thin air money is mopped up by tax. Bank-created thin air money is mopped up by repayment. These will also be the major processes when the system is seriously out of kilter. But in an ongoing situation the Government is both creating new money and mopping up old money at the same time. Banks are creating new thin air loans and mopping up old loans at the same . These processes largely cancel each other out. What you are left with is a different and simpler system, which should be more useful in understanding what tax can achieve and how things can go wrong. If I can’t persuade you of this, how will I persuade anyone that the pensions industry involves an even more precise cancelling out between new contributions and pensions in payment? Failure to understand this results in a massive and unnecessary donation to the “Financial Services” industry.
Simplicity can simply hide what we really need to see
It has done us a disservice on money for a long time
It is for you
And you will not persuade me
Hi Richard,
When we wrote the Gower Initiative introduction to MMT we were careful to include the following paragraph,
“We have to be clear that nothing in the above restricts any policy choices that any government may make. A party intent on low state intervention, allowing private sector providers to compete for public service contracts and a low tax regime has as much right to their political stance as a statist one or one which promotes subsidiarity or full public ownership. However, all should be obliged to argue their case on grounds other than ‘affordability’, ‘sustainability’ and ‘how are you going to pay for it’.”
And on discussing tax in the context of public spending in the Budget “Deliver the tax policies needed to ensure a balanced economy that matches the productive capacity of the nation without inflation, that wealth is redistributed fairly through progressive taxation and express the government’s social and environmental goals”
In our Public Matters blog on tax and its relationship to government spending we wrote, “In simple terms, the Government tells the Bank of England to credit its departmental accounts to pay for whatever it has decided needs to be paid for. It ensures that inflation is controlled and other policy objectives are met by a combination of taxation and issuing Treasury bonds. It has complete control over each of these actions — the creation of the reserves, the level of taxation (and who gets taxed) and whether or not to issue bonds. This does not mean that tax has no purpose or is not important nor does it mean that the Government can just spend at will on whatever takes its fancy.”
But it is surely not an unreasonable conclusion to say that government makes its best interventions in the economy when it spends on public sector projects, as these are actually under its control, whereas interventions in the private sector (large tax exemptions for moving a factory to an area of low unemployment, for example) are always going to be subject to competition from other countries.
You are right that tax policy should be addressed by MMT activists in a more considered way. There is a tendency amongst some to write as if tax isn’t necessary, rather than being a central component of a just society. If we are not careful we will find that rather than MMT being adopted by the progressive side of politics, it will be more attractive to the free market types who will celebrate being told they don’t need to pay their taxes. Of course MMT does not say that. But without care and attention it might be interpreted that way.
The only thing I would take issue with you on is the Job Guarantee. All macro has to take unemployment into account. There is a choice. Use full employment as the automatic stabiliser for the economy (for which you need the job guarantee) or use NAIRU. It has to be one or the other, it can’t be absent.
We would be very sorry indeed to lose you as an MMT ally. I sincerely hope we don’t.
Deborah
You are not losing an ally – although I admit I have not enjoyed some of the rather personal attacks from some in MMT. I am in fact more committed to MMT – but feel it needs to tackle the real issues and not squabble about left wing policy – which some are inclined to do
It is very obvious that MMT liberates the left – because the austerity narrative and small state claims fall away. All I am saying is that this being said, we need to be a big camp. Those trying to define a ‘pure’ MMT line are making a big mistake in my opinion: it can support a range of judgements and still eb fundamentally useful.
And it really does need to understand tax and far too many in it do not. GIMMS is not guilty of that, and I support the way you are presenting the case
But we will have to disagree on the JG. I buy it. But it is not an MMT issue. It is an MMT consequence many might want to make. But that’s not the same thing.
Best
Richard
Good article, Mr Murphy.
I would like to ask a couple of questions, and I genuinely want to know the answers. Forgive me if they seem obvious to you.
First, you wrote:” A government has a social duty to be the borrower of last resort to its population and financial system. That is the function of government borrowing, and it is vital to the efficient operation of any fiat currency using economy.”
Why do you think that is true? I genuinely do not understand why there needs to be a “borrower of last resort” to make the economy work efficiently. On the face of it, it seems to imply that an economy cannot work efficiently unless an artificial demand for debt is created and maintained, regardless of any genuine need for such debt. I appreciate that our financial services depend on debt and interest for their profit. I do not understand why it is in principle essential to support those services when they fail to operate profitably in the private market. Is that not akin to the “support for lame ducks” which was ditched in the 1980’s as a daft idea? At that time it was big manufacturing companies which benefited, and I deplore the change in policy which allowed such companies to die, with all the consequences, including increased dependence on financial services for national income, that entailed. But support for govt intervention to support “real” economic activity does not mean that the argument applies to financial services on the same basis: and this is inherent in the MMT analysis, as I see it.
I know that Norway does borrow, despite having no need to do so: and there must be a reason for that. Can you explain what is behind that decision in more detail please.
Second: I agree that tax is important to society, and MMT does not address it. I agree that MMT does not address political questions of distribution, and perhaps does not seek to do that. But I am puzzled by your view that one can be neoliberal and accept the truths of MMT. What definition of neoliberal are you adopting in making that claim? It is true that “neoliberal” is a vague term but I think it is inescapable that it in its economic aspect it is indeed antithetical to MMT. Neoliberals do not see the economy as akin to a household budget as an optional extra. They believe it is a true (if simplified ) picture of how an economy works. It is fundamental, is it not ? Similarly, they take the view that the economy always tends to “balance” if left free to operate as the market dictates. Not all believe the extreme version of that tale, that it is self correcting all the time and that govt should never intervene: but at bottom they do not really accept the market fails: ever. Rather they make concessions to politics and social purpose you describe in certain areas: but with a heavy heart. I do not think that political centrism leads to the conclusion they can accept MMT and continue to be neolibs, if that is correct: for their economic understanding is profoundly at odds with MMT and they do not agree that MMT is a description of facts, though I do.
Fiona
I posted a blog to answers the first
I will try to get to the second
Remind me if I do not
I am a little busy
Richard
As a non economist who came to MMT via your tweets this accords with all my understanding of MMT, tax and job guarantee so I see no difficulty here.
For me MMT helps primarily to help inform those less versed in the issues to understand that tax does more than just ‘fund services’ which is so commonly misused by politicians to justify dubious policies which can actually damage the political and global view of a country and hence the value of its currency.
Indeed one factor which is of concern to me is whether the value of Sterling as a reserve currency will be severely damaged by our leaving the EU and hence adversely affect the ability to finance any economic revival. Given the global concern already evident over the dominance of the USD and the US economy it seems logical to me that the Euro is the next largest alternative and therefore I can even see a strong argument for strengthening our EU ties yet I have not seen anyone presenting a clear argument as to why size and economic strength is vital in an internationalised world. Instead we have a government obsessed with the Irish border.
As to job guarantee I agree it is separate to MMT but for me it seems the only logical way for a government to actively manage its most important financial resource i.e. its people, in an environment where technological change such as self driving vehicles, may create mass unemployment in the future. Any government not actively managing the people dynamic and relying solely on private enterprise alone seems set to face huge problems which so far no political party has been willing to properly tackle. I had thought there was an oppportunity to do this with the current opposition party but the changes required are significant and I don’t sense the will to present a more radical alternative which clearly puts people firmly alongside money as the key driver of economic revival.
To say I despair of where we are currently heading would be putting it mildly.
‘Why would a government with under utilised productive capacity not then use MMS to build wealth creating (profitable) businesses?’.
Because of ideology. Neo-liberalism completely ignores the output of the state – for all practical uses the state does not exist in the N-L world. This is why when the N-L Tories brought in austerity they did not see how the public sector interacts with the private sector. Their austerity policies have hurt the private sector that they apparently love so much. It is ideological blindness of the highest order.
The other issue is history – bad history. State sponsorship of the industry is often seen as incompetent and in-effective – think of British Leyland or British Rail. It is true that there was bad management and labour relations here were joke when compared to say Germany or Japan.
But the other side of the story is the oil shocks in the 70’s caused by of all things the Arab-Israeli war where we through in our lot in with the side that did have the oil. And we were punished as oil prices (which had been kept low after WW2) were raised and we had inflation. You will not find this in many history books but it is a fact. Inflation was the biggest social and economic problem at the time. It was a huge pressure and the politicians at the time lost their nerve.
What you will hear instead is that the welfare state became unsustainable and was bleeding the country dry, Government was incompetent , unions were the biggest evil ever and the IMF had to be brought in as it was magically forgotten that Government can (and should) spend out of a crisis. The IMF insisted as they always did then on cuts to Government spending so the public sector became even more crap than the oil crisis made it.
This is despite the fact that States around the world have developed new ideas, products and services and done it successfully – read Ha-Joon Chang’s ’23 Things They Don’t Tell You about Capitalism’ or Mazzucato’s ‘The Entrepreneurial State’ if you want to find out more.
BTW – being a non-economist is a really good thing believe you me. Economics is too important to be left to economists.
The Gower Initiative has a short FAQ addressing tax. Does it do the job properly?
The question is “MMT says that public spending comes before taxation. So, what’s the point of taxation then?”
The Answer:
How we are taxed, the level to which we are taxed and the kinds of tax which are imposed on the different sectors of the economy is not a static issue. There are serious debates about the relative value of income taxes, land value taxes, corporate taxes, indirect taxes but despite these arguments the principles behind these taxes remain the same.
The basic role of tax is to remove spending power from the non-government section of the economy so that the government can spend without inflationary consequences. Tax is a counter-inflationary tool in the economy.
Tax also has a redistributive effect. This is often interpreted as money being taken away from the rich to spend on the poor. In fact, the redistribution comes from using tax policy to leave the lowest income earners a larger slice of their earned income than the rich. That redistribution is not being effective when we see a situation such as we have at the moment globally. We can see that those at the lower end of the income scale may need two or three jobs to make ends meet whereas at the top-end the rich are making so much excess wealth that they can donate large amounts of money to political parties in order to influence their policies. Redistribution can either increase or reduce inequalities depending on how it is used.
Thirdly, taxes can be used to punish or reward certain behaviours. Tax credits such as family allowance or child benefit vary according to the government policy requirements for families to have smaller or larger families. Rates increase to encourage childbirth and drop to discourage it. Similarly, we have ‘sin’ taxes which are indirect taxes on such things as tobacco, alcohol and sugar. There is a popular belief that these taxes ‘pay’ for the additional burdens on our health services from smoking, alcohol and obesity related diseases but in fact, their purpose is to minimise these behaviours in the first place.
For MMT the question of taxing the rich and how much to tax the rich is a political question which is not directly related to the government’s ability to spend. Taxes do not fund government spending.
Deborah
You have striven to get this right
I wish all in MMT would do the same
I support the GIMMS project, as you know
Best
Richard
Well, I will also add that I think that you have de-packaged it as just a ready made answer. It is now more than before a point of debate and exploration and therefore refinement. You have started a deeper journey to knowing. MMT is a journey. It is now not going to be a replacement ideology or article of faith to be unquestioned like other (bad) ideas.
That to me is what you have done which is why I am so effusive.
I just hope that it can be used in the real world in a reflective practitioner sense. There is a common quote in strategic thinking that says that ‘No plan survives first contact with the enemy’. So why should MMT be any different?
If we treat MMT like a ready made answer to everything, then we are no better than the Neo-libs and their fanciful theories.
If the Government have to borrow why do they and why do they at such high interest rates. It apparently pays billions in interest charges every year. WHY?
Some is historical legacy
Current real borrowing costs are negative
You do realise private pensions would collapse without these payments, I presume?
Ok…The demand for a currency is based on many things including the level of interest rates, or should I say the level of relative interest rates with another currency. If the U.K. had a zero interest rate policy then Sterling would fall against other currencies and we would import inflation – do you agree or disagree?
In the scenario when Sterling falls sharply – what is the MMT policy (assuming rising interest rates being a no no)??
We have had a zero rate policy, in effect, for a decade
Have we imported inflation?
And if sterling falls sharply the response depends on why. As I said, many such variances have simply to be accepted e.g. that from Brexit
You are making up MMT issues that may not exist here
You always refer to absolute rates when it is relative interest rates that matter..the US are increasing rates & the $ is strengthening… if as a permenant condition we reduced rates to zero then our currency would weaken..
I repeat if it is not interest rates what is the MMT solution to a weak currency (to the point we import inflation)???..or do we just pretend it will never happen?
Has Japan failed?
Or these states with actual negative rates?
Do you live in an evidence free world?
It would seem so
Why not discuss what actually happens, not myths?
It would seem so
I do wish you had published this the day I started following your blog. It would have saved me so much time and effort picking up snips and trying to put them together, to gain a simple understanding.
Thank you. Off to distribute the good news.
Sorry…..
Excellent blog Richard, I think removing MMT from politics is very important. I’ve read a lot of comments from people right of centre who consider it to be some sort of left wing fantasy but then unable to explain why it is wrong. They generally say “Zimbabwe” and “governments can’t be trusted”.
I’ve often thought my ideal system would be MMT combined with an automatic transaction tax on every bank transaction at a level needed to keep inflation at an agreed level.
Governments could campaign based on the level of inflation they wanted to operate at and the transaction tax level at what services they would be providing.
Thanks for this Richard. Your summary accords with my understanding of MMT. I broadly and enthusiastically accept the MMT contention that governments with fiat currencies don’t have to tax or borrow to finance all of their spending. I have raised the issue of a radical Labour Government which financed at least some of its spending through money creation , in the way that MMT advocates, being subject to an ‘attack on the pound’ by international finance, for political rather than economic reasons. My concerns have been dismissed along the lines of “ currency speculators will recognise that they can’t beat a sovereign government committed to defending its currency and the UK electorate will accept a short term decline in the value of sterling” but I am not so sure .
I made the point deliberately that there is a risk
MMT takes a too US centric line on this, influenced by the dollar, that such a risk cannot exist
It can
And so measures to manage it are an essential part of applied MMT
A new term – applied MMT…..
The issue of proactive management of MMT is the main point here and also the reason why the orthodox trolls get agitated.
Orthodox neo-liberal management of the economy tells us to deregulate and leave the invisible hand of the market to deliver the goods. Government should not get involved as it just makes things worse. Set it (deregulate and step away) and forget it.
But we know (and especially after 2008) that the efficient market hypothesis is actually the efficient markets fallacy. Rationality is limited to individuals attempting to work for their own short term self interest – not for the greater good.
MMT will need all the protection of Government power for it to work, from tax policy to exchange controls maybe? It calls for Government to interact proactively (commit) with the policy and nurture the benefits.
The only question I would ask is are there any courageous politicians in any party in the UK willing to be brave enough to try it like that?
Ooooh! – Now there’s a question?
Indeed
Exchange controls? Maybe…..but I am not yet convinced
…. applied MMT I’m okay with that version. Most think a “theory” hasn’t happend yet, even though often it has, it’s why I think system would read better to a wider audience.
Anyway, I didn’t say “thank you” for the original blog piece which as others have noted is excellent, so thank you.
Thanks
Can you expand on this bit? “But, and I stress the point very strongly, that does not mean that a government should not appear to borrow. A government has a social duty to be the borrower of last resort to its population and financial system. That is the function of government borrowing, and it is vital to the efficient operation of any fiat currency using economy.”
The government is the only person you can deposit with in the U.K. who cannot go bust on you
The price of that security is low interest rates
But individuals, banks and especially pension funds are utterly dependent upon that security
Now if we think we do nit need banks and pension funds we can do without gilts
I happen to think we need both
I also think people should be able to deposit securely
You mention one risk, In bond world there are three risks.. credit, duration and purchasing power. Fiat currency Government I accept eliminate credit risk. In your world to eliminate duration risk everything would be near dated treasury deposits. How to you overcome purchasing power risk?
I am not seeking to eliminate duration risk – long dated bonds are incredibly favourably priced right now , for the issuer
And purchasing power risk depends on productivity and proportionate capacity usage, which MMt would drive upwards, increasing exchange value
But you cite gilts are only needed to allow pension funds and individuals somewhere to invest securely..then you say you want long duration gilts issued as they are favourable to the issuer??.. that makes no sense as under MMT the government can print it doesn’t raise money.
Are individuals owning long dates gilts are carry massive duration risk and significant risk to their capital.
To protect purchasing power you cite the currency will strengthen under MMT – nice so foreign holidays and petrol get cheaper!! I actually thing PSR is closer to the mark when mentioning capital controls.
Finally domestic purchasing power for gilt holders will be protected as under MMT we will have no inflation – nice.
I have seen some Goldilocks scenarios presented in my time but I think this tops the lot..,
Simon
You know the market wants long-dated gilts
The government wants a stable market
When the net cost of that long dated gilt is effectively zero what is your objection to a government issuing it?
You really appear to have almost no understanding of what you are discussing, at all. That makes debate somewhat difficult.
Richard
“The government is the only person you can deposit with…who cannot go bust on you”
Why not allow savers to directly save tax-credits with the government?
I have no problem with that
You may use national savings products now, of course
Agree Richard. I found MMT liberating politically, simply because there are many important jobs that need doing (esp socially & environmentally) that we all know about but somehow don’t happen because of money – especially limited government money. MMT demonstrates that without having a revolution much more is possible. However, I am concerned that the MMT crowd, in the current frebrile political environment, can sometimes come across like the Hayekians. Next we’ll be screaming Zimbabwe. A deep breath and some reflection is required before hitting send. We should all learn from the climate change scientists. Shouting loudly and nastily does not change people’s minds. Good solid logical argument will do the trick eventually (hopefully not too late).
That is my point
It is how tax justice won in the end – we built solutions, patiently
Oops – hit a key in error and don’t know what happened to my incomplete post. I can’t retrieve it or even see what I wrote.
Not here…..
Lost in cyberspace. I will try briefly to recover the point I was making.
Obviously any theory needs to be tested for its integrity before being adopted. I’ll leave the technicalities of MMT to all you economic experts. Suffice to say that, having ‘studied’ it for several years as a layperson, I have accepted its fundamentals as argued by the academics. At this stage it’s all I can do.
However it’s is a touch ingenuous to say that MMT is politically neutral. Theoretically it is. But in practice not so. And as far as a nation is concerned, it’s what happens that matters. Whether Neo-liberal politicians understand how a sovereign fiat monetary system works or not is irrelevant. “To know and not to do is not to know”. They push the Household Budget analogy because they know it works effectively in furthering their Ayn Rand inspired agenda. It is elegant in its simplicity, not requiring any leap of faith by the voter.
Translating MMT into simple, believable political policy at this moment in history is proving to be near impossible, and even increasingly difficult as Overton’s Window relentlessly shifts to the right. Only a progressive government would enact an MMT (call it what you will) inspired macro-economic policy because it is the only practical route towards achieving greater socio-economic equality, real democracy and environmental sustainability – none of which are of prime importance to Neo-liberals. So, in reality, MMT is inseparable from politics.
It’s a very tough sell for progressive politicians and I empathise (only a little) with Corbyn and McDonald because, even if they get it, they don’t have the ability to sell it. As I believe PSR has stated, it will require a very courageous politician to put his/her head above the parapet. The first ones to do so will be ‘killed off’ by the MSM. So it’s a war of attrition. Optimistically, for the sake of people and planet, one would like to think that time is on the side of progressive politics but, as with real democracy, it should not be taken as a given. Personally I’m more pessimistic now than at any time past. But maybe that’s an age thingy.
Just saying.
I recognise all the issues
I remain an optimist
Change can be created by a tiny number of people
Thank you Richard. I will add my voice to those above commending you on your clear explanation of the various parts of the money circuit.
It is interesting, and very satisfying, to see that my recent cogitations on MMT line up with what you have just written, especially the politically neutral nature of MMT — although, and I think this is important, I hadn’t got to the conclusion that the government is also the borrower of last resort. But thank you, it makes a lot of sense.
(As an aside, I wish people could get over misunderstanding what theory means – it is a general method for describing a system. Most people seem to think theory = hypothesis, but let us not get sidetracked.)
I don’t get why some MMTers think that tax can be ignored. The role of tax seems fundamental, as anyone who has had to deal with any form of feedback loop will be aware. If there is no correcting factor, things go bang very quickly.
But before I head off on a ramble with no end, thank you for this very cogent piece. Much appreciated 🙂
Thank you
The pint re theory is noted
General usage is what I referred to
Great summary, I originally thought along the same lines. But by not having a position on tax and its redistributive effects the advocates of MMT avoid being attacked by anybody that they just want to “take from the rich to give to the poor”. That has advantages, as everyone has to concentrate on their main message.
Now, why is job guarantee seemingly an integral part of MMT? First, it is not necessarily a left wing policy. Right wing governments can also offer a guaranteed job to everybody, and used it in the past to get to power. Lost economic output through unemployment is rightly seen as a great waste of human resources. It makes sense to aim to avoid minimising lost output. That should be the aim of any government.
Or, what should a government do if they do not have any financial constraints, (apart from the foreign exchange constraint) if currency managed without inflation? At a minimum, MMT says, it should provide a job to everyone who wants one.
I’m struggling somewhat with this post.
Leaving aside the claim of indifference to taxation, I really don’t see this anywhere in established writings, you really can’t talk about MMT as an entity – it is not “a fact”.
It’s simply a bunch of methods for conceptualising monetary systems, and there’s no biblical reference point, despite what some fanatics might appear to spout.
And it’s quite obvious that you can only buy what’s for sale in your own currency, therefore:
USA > UK > Iceland
Cut your cloth accordingly.
It’s sad, these stupid arguments are reminiscent of Marxist debate where the whole field (never a single school of thought) imploded over who was supposedly most credible. All while market capitalism just cracked on…
You are looking in the wrong place if you are looking in ‘established writing’
As the BoE said on money in 2014, all established text books had money wrong
They’re hardly a reference point then, are they?
But what’s really worrying is that you seem to assume that there is not such thing as FX. That’s just plain wrong
It’s not wise to call something stupid when your comment is ill-informed
Great post, Richard
I too follow the main thread of MMT, and am pretty much in line with the mechanics of a Fiat Economy from an MMT persepective
My problems have came from an intollerence of view related to things like Basic Income, and anti Europeanism. I believe any job guarantee requires some sort of basic income or else it is workfare. On Europe, the fact the European monetary system is badly designed, does not mean EU membership does not have vast benefits for Britain including those outside the economic sphere. The fact that many in the movement don’t try to bring natural allies along with them will always be a problem with MMT.
“I have no problem with that”
If savings can be 100% safe with no bond issuance, of course question is why have the government issue at all? Could limit to just issuing some gov annuity vehicle for savings (not for interest rate policy)…thoughts?
&
Do you believe government propping up the base rate is even worthwhile for any reason?
I have provided my reasons for this already
This is why the government needs to issue debt
http://www.taxresearch.org.uk/Blog/2018/06/20/the-country-wants-and-needs-more-government-debt/
[…] wrote this in June. In the light of my blog on modern monetary theory today and the comment I made in it that the government must act as the borrower of last resort I think it […]
Thanks for the link.
So the primary reason for gilts with interest over direct savings is “those with pensions need locked in and guaranteed income streams.”
Do you think the interest rate policy aspect (via gilts, bonds, or IOR, depending on country) is worthwhile? Or is the reason for paying interest primarily for income streams?
We have a convention of paying interest
Gevrnment has since 1694
It need not do so
The rate it pays is tiny
Do I think the convention worth continuing given its insignificant cost, some of which is immediately recovered in tax? Yes, I do.
I think we tend to misunderstand that the word “theory” has more than one meaning. A quick internet search comes up with this:
“a supposition *or* a system of ideas intended to explain something, especially one based on general principles independent of the thing to be explained.”
The word “or” is important. The word “theory” in MMT is meant in the sense that follows that “or”. A description of how modern money works, not a supposition.
So for example when we talk about “evolutionary theory” we are talking about a description of how evolution is observed to actually work, not the supposition that species evolve. And that leads people to the mistaken idea that evolution is merely a supposition – same problem that MMT suffers from.
I agree this is confusing, but I believe that “MMT” as a name came from people outside the group who devised it, and that they adopted it to avoid pointless arguments.
‘MMT has not got its head around tax. That is true. It largely ignores its social functions, the tax gap, why it is important, and why tackling tax abuse is a fundamental task of government. That is because far too many MMT proponents think the government can simply print money instead of taxing. And that is not true. MMT cannot, in my opinion, function without an effective tax system.’
I think that is a misrepresentation, Richard. By definition Tax is central to MMT as the theory shows that ‘taxes drive money’ and its acceptance. I’m not sure who you mean here by ‘MMT proponents’, do you mean the founding economists (Mitchell, Mosler, Wray) or ‘twitterati’ sounding off? I think you need to be specific here because there is a very important difference.
Having read your concerns about MMT and Tax Justice over the years, I can understand why you might think that and I think part of the problem is that Tax Justice campaigners tend to frame their arguments in a mainstream manner (we need their money for our public services) and, of course, MMT economists do not emphasise this because, as you yourself have blogged , using Stephanie Kelton’s words, ‘money doesn’t grow on rich people.’ So I think you should have pointed this out as part of the explanation otherwise you leave a misleading impression. It’s the framing of the argument not the social justice aspect of it that MMT economists are concerned with here. You, yourself have said that, in your Tax Justice work you ‘flip’ between the MMT and mainstream framing for practical ends.
I think one reason that MMT doesn’t obsess about getting hold of the financial assets of the uber-wealthy in secrecy jurisdictions is because this doesn’t stop the Government from acting in the social purpose in itself, nor does it stop Governments using capital controls to stop speculative money from sloshing around ( which Bill Mitchell recommends) and only allowing productive investment orientated financial assets to move around. If Bill Mitchell had his way, he would get rid of about 95% of financialised activity which he refers to as ‘wealth shuffling.’ It doesn’t get more radical and social justice orientated than that! James Meadway made a huge mistake recently accusing MMT economists of ignoring tax and thinking them neo-liberal because they didn’t emphasize the taxing of the rich to pay for things . Meadway was, again, using neo-liberal framing there without realising it. This doesn’t mean MMT economists are not concerned about wealthy people stashing assets away.
Economists like Wray and Mitchell have regularly spoke of the need to tax for healthy redistribution, time and time again one reads this. that we need to tax the rich so they don’t have access to too many resources, don’t pollute excessively etc. Of course, if you alter the fundamentals like the price of land and housing (which will have a knock on effect in the deivative markets) and regulate the financial services then you are implicitly taxing the assets of those in secrecy jurisdictions. because you have limited the ‘rentier’ activity that those assets can be part of and probably shrunk their value. SO you can tax them without even going after them by definancilaising. Change one part of the system and parameters adjust elsewhere. In any case, if they’ve got this ‘stuff’ stashed away in bank accounts all over the place they have, as Neil Wilson has put it,’ taxed themselves anyway’, and if those assets are spinning around the system then, as above, regulate as Bill Mitchell suggests and the spinning stops (or at least as far as your own sovereignty is concerned in the absence of international will). MMT economists support the idea of supranational institutions in dealing with these issues as well as balancing resource distribution globally (good blog here on it: http://bilbo.economicoutlook.net/blog/?p=32938)
Richard, when you say ‘ far too many MMT proponents think the government can simply print money instead of taxing’ I’m not sure which proponents you are talking about, again, in order to not be misleading you need to distinguish between the off the top of someone’s head twitterati , amateurs like me (who get things wrong!) and the professional economists who would simply not say things like that ( do you really think Mosler/Wray/Mitchell/Kelton/Tcherneva would simply say that?).
So I think the way you have put it could be misleading to people reading this post without any MMT knowledge which is a shame. I think you certainly do MMT economists a grave injustice by asserting they (unless you specifically mean the twitterati misrepresentations) by saying ‘It largely ignores its social functions’. I can’t see that being true by any stretch of the imagination. I accept you have differences but that’s another matter.
For readers who are interested (and to disabuse you all of the notion that MMT economists don’t think about tax) here’s a few links from leading MMT economists (rather than twitterati custard pie throwers):
http://www.nakedcapitalism.com/2014/06/randy-wray-tax-bads-not-goods.html
http://bilbo.economicoutlook.net/blog/?p=30215 ( Land Value Tax)
http://bilbo.economicoutlook.net/blog/?p=30219 (Land Value Tax)
http://bilbo.economicoutlook.net/blog/?p=38440
http://neweconomicperspectives.org/2014/05/taxes-mmt-approach.html
http://bilbo.economicoutlook.net/blog/?p=20337 (Off-shore tax havens — be sure we define the issues correctly)
It has to be said that Bill is the biggest custard pie thrower in MMT
He really does not help the cause.
I also dispute that he does treat tax appropriately
yes- I agree re the custard pies! But I can also appreciate his (Bill’s) irritation when people like Frances Copolla make glib assertions that MMT doesn’t deal with developing countries issues when Bill has written reams on it.
But I agree that the debate has become upsettingly uncivil on twitter (which I don’t use) -was going to write more but I can see your hands are full with this post!
I challenged Frances on that point
But Bill is a problem for MMT
Neil Wilson was another person who failed miserably to deal with tax appropriately.
We will have to disagree Simon, but I wholly stand by my comment – and all the people you name know of my concern which I have raised with them all over time, without satisfactory response excepting from Stephanie
Please note that my mentioning of exchange rates in the context of MMT was purely speculative and not based on any concrete opinion or assumptions. I’m not advocating it as am totally unsure of what happen!
Thanks.
Brilliant, clear summary of MMT.
Thanks
You talk about tax being used to curb inflation and if that is requirement then imv you cannot decouple this from the obvious point that cutting spending must be used to curb inflation.
Why are they linked?
Imagine a simplified world where everyone is equal, and you don’t need to consider redistribution, just Pigouvian taxes and general income and consumption taxes. Also imagine that the State is no better at allocating resources than the Private sector. MMT makes no claim that the State is better in this regard. It could be, it might not be, but it’s not what MMT is about.
In this model if you want to increase spending on a particular programme and to attract the resources to that project sector, then inflation will run through the macroeconomy and be taken out of the system by taxes, meaning the people who were not in that project sector marked for the extra spending end up by a small margin being worse off as their effective pay has increased by less than inflation.
In the end, everything is about productivity and the right policies ( also not an MMT claim ). Spending extra in selected areas by money creation in and of itself makes everyone not in those areas worse off, which is effectively the same as cutting spending.
You think cutting spending and raising tax are neutral choices?
Why?
And why are your assumptions valid? They appear intensely normative to me.
And ypu appear to ignore that the highest productivity multipliers come from state spoending
Sorry a bit late – Robert Sidelsky also thinks that money has ‘no permanent existence’, is a ‘system of credit creation’ and is created and then destroyed. He also has the lovely line that banks once served society, but now they serve only themselves:
https://robertskidelsky.com/2018/11/09/money-matters-a-money-and-government-interview/
“For MMT to be indifferent to taxation is, therefore, completely incorrect. It would also mean that MMT was indifferent to the distribution of impact of taxation, both nationally and internationally, and I cannot accept that this is its intention.”
Erm…..MMT doesn’t have intention. I think that is going to skew understanding of what follows. But I haven’t got there yet.
[…] Cross-posted from Tax Research UK […]
Richard, MMT scholars say over and over again in rigorous detail that taxation is crucial to a currency-issuer’s capacity to command the real output that it needs to provision itself and provide public goods and public services, control inflation, influence the distribution of income and wealth, and influence the behaviours of households and firms.
I believe that you would have written a very different post had you picked up the phone raised your concerns with these people first:
Stephanie Kelton
Warren Mosler
Bill Mitchell
Randy Wray
Scott Fullwiler
Pavlina Tcherneva
I havevraised the concern
I have never had satisfactory answers
I am quite specific about the points I raised. I do not think MMT addresses them
Indeed, I think some comments by MMT academics on tax are seriously damaging
I did not comment lightly. As I said, this blog was not easy to write
Nicholas
One thing to realise is that in the field of economics is that it is a very dynamic environment with competing theories and interpretations of what is actually happening. There is constant turmoil and you cannot also rule out elements of competition as well as ulterior motives and vested interests (the Financial sector is renowned for paying good economist lots of money to tell lies).
To me at least, the orthodox side (neo-liberalism, austerity) seems a more closely knit and coherent community than the heterodox side. This is both a strength of heterodoxy (in that it challenges orthodox theory with real world facts) and a weakness (a lack of consistency can somewhat lead to less coherence – more time debating each other than working together and presenting the alternatives).
The answer in my view? Well I think that only a courageous politician/political movement could answer that – act as a focus point for heterodoxy and thus realise its potential.
Fair comment
Full employment with price stability cannot be achieved without a buffer stock of employed people who are paid a living wage. There needs to be a price anchor in a monetary economy. At present we use a buffer stock of unemployed people as a price anchor. This is cruel and inhumane and economically wasteful. It is objectively much much better for the price anchor to be a buffer stock of employed people who are paid a living wage and doing jobs that are socially valuable, environmentally sustainable, meaningful, and suited to the abilities and interests of the worker. That’s why a Job Guarantee is a core feature of an MMT-informed economic policy. It is not an optional extra. Price stability is very important.
That is a decision that MMT makes possible
It is unrelated to what itself MMT says
It is a consequent choice
The two should not be confused
Nor does MMT mean UBI is wrong, as too many say
In a monetary economy taxation is crucial because it enables the currency issuer to:
1. Command the real output that it needs to provision itself and provide public services and public infrastructure. By enforcing tax obligations the currency issuer forces households and firms to sell things (labour, goods, services) in order to acquire the currency that they need to fulfil their tax obligations and avoid the penalties for non-compliance.
2. Control inflation.
3. Influence the distribution of income and wealth.
4. Influence the behaviours of households and firms.
Taxation is extremely important. But it is not how a currency issuer gets its money.
A currency issuer spends by writing up numbers in reserve accounts at its central bank.
A currency issuer taxes by writing down numbers in reserve accounts at its central bank.
The currency issuer supplies the private sector with money.
The private sector supplies the government with real output (goods and services).
That is the exchange that takes place between a currency-issuing government and the non-government sector.
MMT scholars have been making this point eloquently, rigorously, and repeatedly for a quarter of a century.
With respect, MMT does not make these points consistently or well
And too much MMT comment is utterly indifferent to tax
And some commentary -such as tax causing unemployment -will always mislead
I made my comment with good reason
MMT is not understood
And misrepresents itself
And it does so greatly on tax where in its desire to say tax does not fund government spending but is a fiscal balancing tool it ignores almost all the aspects of tax that concern me and which I mention in the post
I’ll more or less just add my thanks Richard. This has been my experience too. I recognise MMT as a decent convention at least closer than others – but want more it can’t give to sort out “groaf” and what we see as returns on investment to get on with greening. These are other concerns I don’t expect MMT to need to ‘cure’ or produce any killing criticism.
Precisely
It is a tool
A good one
But not a cure all
May I offer this? By way of a non-political summary…
The UK govt creates money via the Bank of England (BoE) in the form of notes and electronic / digital cash, and the Royal Mint in the form of coins. It does not “borrow” money from the BoE or Royal Mint because it owns them.
Because we can create our own money, we don’t need to borrow money from anyone else either. This means we don’t need to be in debt to anyone.
Because we can create money on demand, this also means the government does not need to collect a penny in tax before it can create money and invest it in the economy.
If the government needs to build a hospital, it can commission the work and pay the suppliers by instructing the BoE to create the money, depositing it into the government’s current account for subsequent payment to the suppliers as and when required.
This means that whenever we need to invest money in public services, the government can instruct the BoE to create it.
This means we can never go broke, because the government can instruct the BoE to create whatever amount of money it needs, whenever it needs it, for whatever purpose.
However, private households, businesses and individuals can go broke because they can’t create their own money, it’s illegal to do that. They have to work to earn the money they want to spend, or borrow it and pay it back with interest.
As well as being able to create its own money, the government also collects tax.
But, the amount of money created by the BoE and invested by the government in the economy is not derived from, or dependent on, the amount of tax it collects.
Which means it doesn’t need to wait for anyone to pay tax before it can create money and invest it into the economy.
As long as there is a product or service to buy, the government can create the money to pay for those things. If there is nothing to buy, there is little point creating money.
Tax
The vast majority of tax collected by central government is not redirected to public services. It goes into a clearing account at the BoE to pay down the amount of money that was drawn down by the government into its current account: the account it uses to pay for public services.
So, the government doesn’t need to collect tax before it can fund public services. One of the reasons it must collect tax is to regulate inflation, alongside interest rates.
If the government increases the amount of tax it collects, this reduces the amount of money circulating in the economy, which helps keep inflation under control.
If interest rates are increased, this also reduces the amount of money in the economy – further helping keep inflation in check – because it increases the amount households, businesses and individuals have to pay back on their loans, thus reducing the amount they can spend elsewhere.
Virtually all money the government creates /invests in the economy is eventually recouped as tax over time. Some may get lost down the back of the sofa though, or be stashed under the bed.
If the government creates / invests more money in the economy than it collects in tax, this results in a difference between what was created / invested, and what was collected as tax. That type of difference is usually called a deficit.
Conversely, if the government creates / invests less than it collects in tax, there will again be a difference between those two numbers, which is usually called a surplus.
However, those two words – deficit and surplus – imply a dependency that doesn’t exist.
If the government creates / invests more money than it collects in tax, the difference is not a debt (deficit) because a debt is something you owe someone else. The government can’t owe itself money that it itself created.
And because the government doesn’t need to wait to collect tax before it can create the money it needs for public services, there is never a shortage of money available either.
Because investment pounds are not derived from, or dependent on, the tax pounds collected, this also means there is no need to make the number of pounds created / invested by the government equal the number of tax pounds it collects.
The government also collects tax for other reasons. One of those reasons is to give Sterling its value. Because if we didn’t need to pay our taxes in Sterling, we wouldn’t be dependent on earning (and thus valuing) Sterling.
Private banks
Banks don’t lend individuals and businesses their own money, or other people’s money (e.g. savers’ deposits). They create the money on demand, which they are legally permitted to do by the government. The money they lend comes into existence at the point they agree to lend it to a customer.
The bank adds the loan amount to their ledger and then adds the same amount to the customer’s bank account.
No physical money is created. Only the BoE and Royal Mint are allowed to create physical money.
The money is electronic and created by drawing up a contract then tapping in the numbers on a ledger. The banks charge interest on these loans and make profit from doing so. Naturally, the more they lend, the more profit they can make.
I have reservations about your simplification but no time to say why as I must go to an important family event
But this is not a good summary for a great many reasons
Interesting. I would like to know why. It’s based ON, among other things, what I read in the Joy of Tax and the answers I received in response to my questions to the BoE and HMRC.
I am sorry – I cannot see what you are responding to when answering comments and as such cannot answer your question
Dear Richard:
I agree with your summary of the “descriptive” part of MMT. I do not agree that MMT is relatively unconcerned with taxes, distribution, exchange rate attacks, and offshoring of wealth. Nor do I agree that there’s no theory behind MMT. I do believe the theory behind it leads inexorably to policies concerning taxes, distribution as well as the job guarantee. The new textbook by Bill Mitchell, Martin Watts and me lays that out and in any case that is too big an issue to tackle in a comment. Finally, I have written (both in a blog and in my book) that MMT is for Austrians, too (the descriptive part) and so I have no objection to that part of your blog. However, to clarify the tax issue, here is the outline from Chapter 5 of my “Primer” (Modern Money Theory, 2nd edition, 2015, Palgrave): Tax Policy for Sovereign Nations; Why do we need taxes? The MMT perspective. What are taxes for? The MMT approach. Taxes for redistribution. Taxes and the public purpose. Tax bads, not goods. Bad taxes. I suspect you will agree with much of this–except perhaps my take on “bad” corporate taxes (and I’ll admit some MMTers don’t share my views on this). But the point is that I have indeed thought long and hard–and from the beginning–about taxes. And so far as I know you have never asked me my views on these–contrary to what you implied above. I am happy to share my views.
I did ask, a whole ago
I read the book
I hope others have
And if they have then my criticisms remain valid
The far too common perception is taxes do not matter in MMT. It is said too often for it not to have a hold
And I confess I do not think your book did adequately address the issue – indeed, I always felt dissatisfied with the treatment and still do
The reality is that, whether it is your intention or not (and I completely accept your assurance that it is not) tax is seriously underplayed by MMT and that is an issue
What I do not accept is that a tool (MMT is a tool more than it is a theory) can lead inexorably to a solution. That requires it to be used in a certain way. It can lead to the conclusions you suggest. It does not do so inexorably, in my opinion.
Claiming it does is harming MMT
If MMT talked tax more; JG less and some toned down the rhetoric (a lot) it would have much more sway in the UK at present. I know. I have asked those one to persuasion who are being seriously alienated when they are broadly sympathetic
That was the reason for my blog. Too much of the attention is in the wrong place and on the wrong policy consequences for MMT to win hearts and minds here
And if I think that then those who also want MMT to win should be worried because I am pretty well networked with those who need to be persuaded
Don’t get me wrong: I am not criticising MMT, per se (although we may differ on exchange rate risk). I am saying that the messaging is not working well and that concerns me. And I know a bit about campaigning on difficult issues
My take is that you are criticising MMT in a developmental manner. This should be a more friendly experience is all. Bill Mitchell has worked on framing (quite a difficult theme from elsewhere in social science) but this isn’t close (though welcome) to enough engagement for me. This said, that the rest of social science has largely ignored a tool that could get over our standard claims on lack of resources to implement is much worse (in argument rather than any magic money tree). My view is much wider critique is necessary for a wider dissemination. What neither of us is saying is the stuff is wrong, juvenile or bollox (unlike some).
It is not wrong
But it needs better framing than it is getting
That there have been so many (intelligent) responses to this one particular post is in itself very encouraging.
A lot of work involved in handling all that correspondence and supplying many responses to queries raised.
Well done you, Mr Murphy. Vote of thanks from this quarter.
It takes quite a while to read it all…..
Dear Richard: can you remind me of your attempt to get my views on taxes? I do not recall that.
I did not begin as MMT. I began as an Administrative Analyst with county government. I studied Econ late, thinking it would help me in my job (or at the very least postpone my repayments on student loans). I studied public finance very early on in that endeavor, with Wilma Krebbs, using the great Musgrave&Musgrave–with which I am sure you are familiar. I have always been concerned with public finance and taxes. As I studied more, I realized that M&M did not understand the break that is made with sovereign currency; I much later came to Beardsley Ruml–but without losing any respect for M&M who I consider to be otherwise on the right track, good public-interest spirited Keynesians. Can you be more specific with your displeasure at my views on taxes?
As I have said, taxes serve many purposes, in addition to driving the currency. None of the core who developed MMT believe that taxes are unimportant. Can you name names? As I am sure you realize, the core developers of MMT cannot supervise who gets to claim to represent MMT, no more than the followers of Keynes can supervise who gets to claim to be Keynesian. I do take the point that the core has not always been good at selling MMT. Stephanie and I took that up about a half dozen years ago when we discovered George Lakoff and we’ve been trying to do a better job; Bill Mitchell independently also began to work on framing. We are open to suggestions. What you seem to be suggesting, however, is not very helpful. In spite of what you might believe, MMT does stand on strong theoretical grounds and the JG is indeed an essential component. That does not mean that you need to endorse it and I agree that in some contexts it is best to stick to description and to leave theory and policy to the side. But I think you will agree that it is actually impossible to do description without theory; there is no such thing as atheoretical description. MMT is based on a view as to how the world works and certainly any policy–including policy favoring redistribution–must be theoretically grounded. What you call a “tool” can indeed lead to different solutions but the theory behind that tool can help to choose the best solution. Based on different theoretical approaches, one might indeed choose an unemployed bufferstock over an employed one, or a gold standard over a flexible exchange rate. The framework I adopt, based on Keynes-Kalecki-Minsky-Godley does lead rather inexorably to flex and JG for developed nations.
I agree that one might want to hide one’s support for a JG (or any other policy) in some circumstances and I would not vilify anyone for so doing. There’s nothing necessarily wrong with strategizing and taking into account one’s audience. In some public talks I advocate raising taxes on the rich with a view to reaching confiscatory rates–taxes set at a level to ensure they will no longer be rich. That is not always the best way to sell MMT so one does need to know the audience.
However, I do note the progress that MMT has made–beyond my wildest dreams, actually–in spite of your well-placed warnings. This is a “school of thought” (I know you will disagree with that) that was developed by about a half dozen people–working in relative isolation with very little institutional support. It is now embraced by thousands.
Thanks for this comment
Naturally, I do not agree with your suggestion that my comment is not helpful
I also think you misread me. I am not saying MMT is not based on theory. I am saying that theory and the JG, for example, are not linked. I cannot see reason why they are. I think MMT strongly suggests a case for intervention. It does not say what intervention. That is a difference.
And re tax, the problem is the lack of emphasis: just look at the table of contents of your book. It gets mentioned once, and then only as a driver of value in money.
And this is wrong: tax is vastly more important to MMT than the JG.
Ans if MMT is to have a consequence it will be in tax policy.
But then Bill Mitchell gets it wrong on offshore, for example, missing all the key issues on the issue because of a blindness driven by MMT theory http://bilbo.economicoutlook.net/blog/?p=20337 . Offhsore matters. As does policy detail. As do social functions. Tax is not T, a fiscal aggregate, alone.
And the MMT attitude to corporation tax, driven largely by Waren, is not just fundamentally right wing, it shows a total lack of awareness of how tax works and is a gifty to the tax haven lobby and to the increase in inequality.
I could add more but I have massive commitments today. But let me assure you, however valid some of the perspectives may look in the US they fail in Europe, and that matters to those of us here, and it is from that perspective and farming that I am looking at this.
Hi Richard, I have immense respect for your intellectual rigour and your effectiveness as a teacher and activist. I’m not an important person so my commendation may not mean much. But I would like to emphasise my high regard for your work and the way that you conduct yourself in public debates.
I suspect that the issue here is that different movements place emphasis on different aspects of an issue. This is inevitable and not a bad thing. Nobody can give equal emphasis to every aspect of every problem.
I’ve read a lot of MMT books, articles, reports, and blogs by the core scholars of this field of macroeconomics. In my lay person’s judgement they devote considerable attention to the importance of taxation as an instrument doe influencing distribution of income and wealth and influencing household and business behaviours in socially and environmentally desirable ways. I accept that you disagree with my view.
I think I can understand why from your perspective you consider that they don’t emphasize those issues enough. The Tax Justice Network focuses more on the distributional and behaviour change functions of taxation than MMT scholars generally do. The emphasis of MMT scholars is to demonstrate that currency-issuing governments should be spending within the productive limits of the economy with a focus on enhancing productive capacity and socially and environmentally healthy outcomes. Currency-issuing governments should not be targeting a particular fiscal balance because the final fiscal outcome is largely the result of discretionary variables that the currency-issuer does not control (i.e. the aggregated spending and saving decisions of millions of domestic households and domestic firms and foreign entities). Currency-issuing governments should not be targeting arbitrary and irrelevant deficit to GDP and debt to GDP ratios.
But surely there is space for different movements to place emphasis on different issues?
The main thing is for progressive movements to aim to be accurate in all that they do and say.
I think that the Tax Justice Network falls short when it makes statements such as this:
https://www.taxjustice.net/topics/inequality-democracy/aid-tax-state-building/
Aid, Tax & State Building – Tax Justice Network
Pay your taxes, and set your country free Kenya Revenue Authority It is a contradiction to support increased development assistance, yet turn a blind eye to actions by multinationals and others that undermine the tax base of a developing country.
http://www.taxjustice.net
No, I’m sorry, but that is objectively incorrect. Raising revenue to pay for public services is not a purpose of tax obligations enforced by a currency-issuer.
Reinforcing that mythical belief strengthens the hand of neoliberals who want governments to neglect the unemployed and underfund public services and infrastructure.
It is important for the Tax Justice Network to develop and disseminate an accurate description of the functions that taxation serves for a currency-issuer. Raising revenue for the government to spend is not one of those purposes.
I understand that changing people’s ingrained beliefs on this point is a very difficult political task, but it becomes even harder when progressives choose to reinforce their opponents’ false frameworks instead of advancing a truthful framework.
If MMT scholars emphasized the distributional function of taxation more heavily in their literature, would the Tax Justice Network stop saying that a purpose of taxation is to raise revenue for supposedly revenue-constrained currency-issuing governments?
I think it would be wonderful if the MMT scholars and the Tax Justice Network had the time and willingness to make that kind of deal. MMT scholars could dedicate more of their literature to the distributional functions of taxation. The Tax Justice Networks could stop perpetuating the objectively incorrect view that taxes raise revenue for a currency-issuing government to spend.
Effective social and political advocacy from progressives requires authenticity. In my view the MMT scholars have that quality that in spades. The Tax Justice Network should articulate an authentic statement about the functions of taxation by a currency issuer (which do not include raising revenue to finance the government).
Best wishes
Nicholas
I made clear I am discussing this with TJN
Your comment is criticism
I am suggesting in my piece that this does not help
Don’t tell people they are wrong in this issue
Encourage reform
Hence, I am talking to them
Excellent post, and excellent guidance as to how we conduct exploring it …or any other issue.
One of Warren Mosler’s great insights is that there is very much, almost by definition, a profound link between a monetary system and unemployment.
There are 4 steps to establishing a monetary system:
1. Announce a tax on the population denominated in a unit of account that only the government has the authority to create
2. The upshot of step 1 is that 100% of the population instantly becomes unemployed – unemployment being defined as looking for paid for work in the currency (which has not yet been created). Note that the day before step 1 nobody was unemployed (in fact neither was anybody employed!)
3. The government begins to issue the new currency to the, now ready and willing, populace who gladly accept in exchange for goods and services
4. Unemployment drops to some level commensurate with the level of deficit spending in step 3
Therefore, unemployment is the ‘original sin’ of any monetary system. The two are inextricably intertwined and hence do have a “necessary relationship”, albeit not an obvious one.
Note that this is completely in line with the findings of anthropologists, such as David Graeber, whenever they study the role of state currency in human societies throughout history and across cultures.
And tou wonder why I think MMT has tax wrong?
Thanks for making my case
Tax creates jobs