I have just noticed (hat tip to Simon Wren-Lewis) that New York magazine has an article on modern monetary theory and Alexandria Ocasio-Cortez in the current edition. Written by Josh Barro, the key sentence in it in my opinion is this:
MMT does not relieve policy-makers of “pay-for” questions – it just describes differently how policy-makers should evaluate whether they're collecting enough taxes for a given level of government spending.
This is the angle from which I reached MMT (from first principles, pretty much: I had got to many of its answwers before I realised it existed).
What MMT does is say that government will need to raise tax, always. And the amount of tax it will require is, inevitably, related to the amount that the government spends. There is absolutely no point pretending otherwise, even if it is absolutely true that tax does not fund government spending. And that is because MMT is a better way of looking at two things.
One is the importance of fiscal policy, and the extent to which deficits are required (I stress the word required) to achieve three goals. One is to create money supply. The second is to stimulate the economy and the third is to control inflation (remember, we wanted it for ages and could not deliver it).
The other is to understand that there is an alternative to the absolute poverty of the austerity narrative that makes no sense at all when MMT is understood because money is not a constraint on government activity: it is instead a tool to be used to deliver the well-being of the society for which a government is responsibkle, and which austerity always and without exception seeks to destroy.
But what I think so important is that this one sentence puts tax at the core of MMT - which is where it both belongs and without which MMT makes no sense at all.
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When discussing tax and MMT with people (yes I have tried and it is very difficult) I compare the value of the money destroying quality of TAX (a value that can be apparently used to curb inflation in an MMT scenario) with the value of the money destroying quality of DEBT (and the attendant problems of the credit cycle) and ask which is preferable or more socially useful? Or what about so-called money management fees even?
I was reminded of this when I was recently given some investment documents of family member to shred. Looking through them, they were obviously for investments being managed offshore. But the fees that were being charged by the investment fund firm…….I mean that could just have easily have been tax!!!!!?
That’s the offshore rent…..
The big advantage of human beings’ invention of money was it enabled the regular occurrence of markets but along with this came the threat of inflation and deflation which obviously requires some form of agency with the appropriate tools to do Goldilocks regulation to keep the markets operating healthily. It’s no different in principle than the way immune systems operate in organisms!
Human beings, however, are still at a primitive level in fully understanding how to do this. They may recognise the importance of price signals in markets but not all the private and public influences (good and bad) that set them.
Exactly!
But what’s the difference – really? It’s still ‘money out’ for the fee payer?
I suppose it s the fee amount versus the tax amount in real pounds where the beneficial margins for the individual are.
The relative used to say to me ‘I’m good with money’. Well, not really. You PAID other people to be good with money on your behalf and over the years – and boy! – did you pay.
One of my thoughts is the seemingly unmentioned – but (as I think it) fairly crucial – concept in considering the economic/MMT money-go-round is that of as tax as fiat debt, i.e. debt that the state (alone) just decrees into existence. And that it can be settled with the fiat money that the state also decrees into existence.
Well spotted – I am using that in my first chapter now! A number of green economy specialists are convinced such an economy must be post-capitalist on the grounds of diminishing tax returns from the brown economy (SPERI 37 has a bit of a review). The ‘tax paying for’ myth and ‘wealth being sweated necessarily from the brown economy’ myth keep on going, along with doing things green being an imposed cost (ignoring what such as burning brown coal imposes). If we can get these myths out of the way and have green investment QE running with tax as control, we still have to decide on some transparent accounting in the money issue and project accounting. I don’t see this as theoretically tough, but it does seem very different and potentially much more efficient than the current bond and bank involved system. Endogenous money? Preventing white elephants? Internationalisation of a fair system?
Oddly this theme was discussed at the Progressive Economy Forum today
But maybe I brought it up…..
When income tax was introduced in the USA during the early 1900’s, only the richest 10% paid. The reasoning was that basic living expenses (food, and transportation etc.) those necessary for sustaining livelihood should not be taxed. Therefore, only the top earners paid tax. Even as late as the late 1940’s in the UK the major tax burden was borne by the corporations and the rich. Then we were very close to tax justice. Ever since the demonization of the parties of the left and the trade unions (accelerated under Margret thatcher and New Labour) the tax burden has been shifted off corporations and onto individuals; and off rich individuals onto the general including population including the poor.
Of course, we need to tax, but let us learn from history. We only need to tax the corporations and the rich.
Businesses can deduct essential business expenses before tax is levied. The people should be allowed to do the same.
We cannot fund a modern welfare state on that basis
Sorry – that is not possible
Yes we can if we run the economy in real time. You wouldn’t cross a busy street in non- real time why would you want navigate the economy in an equally unsafe manner?>
The Josh Barro article is weak in argument. For example, he doesn’t mention Keynes’s very important 1936 argument that the private sector rarely optimises the use of resources:-
https://rucforsk.ruc.dk/ws/portalfiles/portal/32845977/Jespersen_General_Theory_becoming_75_years.pdf
He also fails to mention the role played by tax credits for reflating an economy and government savings schemes such as treasury bonds for withdrawing money from active circulation. Of course limits on the quantity of individual ownership of treasury bonds can be imposed which enables higher rates of interest to be offered on such ownership capped bonds. There could be lower tier interest rate bonds for business use.
Josh Barro needs to rework his arguments!
I was trying to be polite
I picked my bit…..
“…. it just describes differently how policy-makers should evaluate whether they’re collecting enough taxes for a given level of government spending”
This seems to me a perceptive and philosophically interesting perspective. I think it is more valuable (and useful) than pedantry about what was not discussed or missed; or whether he passed an examination he didn’t know he was sitting, set by the MMT priesthood. I genuinely do not intend that remark to be offensive; but if we wish MMT to illuminate public understanding; might we not be better engaged if we all ‘loosen up’ a little?
Yes
As I have said before….https://www.taxresearch.org.uk/Blog/2018/11/09/modern-monetary-theorists-need-to-take-a-long-and-hard-look-at-how-they-are-campaigning-if-their-case-is-to-be-won/
There’s quite a lot of food for thought and discussion in that New York magazine article and most of it involves the ongoing revelations about that insane rort that is the US Health System.
The doesn’t article discuss that directly, it simply assumes that the reader is aware that Bernie Sanders’ “single-payer” universal health care proposal is estimated to be hugely expensive. As to why it would be more expensive per-capita than the NHS or any of the other universal health systems in most Western nations, it turns out that I have some of the missing background info at hand:
To begin with US reformers have an uphill battle as 16% or more of their GDP is dedicated to health care and they have almost no public system In most Western countries the total health care spend (public and private) varies between about 9-12% of GDP. In the UK the NHS is worth about 7% of GDP.
But here’s the rub for Ocasio-Cortez, Sanders, Kelton et al. There have been numerous estimates made of the cost the ‘single payer’ Medicare for All proposal and they all seem to come in at around $32 Trillion over 10 years – which, by rough calculation, turns out to be more than twice as expensive per person as the NHS.
My rough, GDP-based calculation is simple enough: US GDP currently stands at around $20 trillion.
If the US followed the NHS’ lead and spent 7% of that on Medicare for All it would cost $1.4 trillion per year which is $14 trillion over 10 years (GDP growth notwithstanding)
$14 Trillion is less than half the estimated $32 trillion figure that’s being touted around.
So are the estimators lying? Not necessarily. The source that I have provided below is from Urban.org, a progressive publication and the estimate there is academically respectable. There are also “free market think tank” versions available but i’m not going to bother you with that shite. In any case there’s not that much difference between them.
More to the point, the key question is why would Americans pay twice as much as the British (or anyone else) for a public health system. I raised this with someone I know who has advanced knowledge of US politics and they said this:
“There are a LOT of reasons why US healthcare would cost twice as much as any other country. But they all spring from the same basic issue – their healthcare system has been left to develop in EXTREMELY inefficient directions for decades, and now it is very difficult to put the genie back in the bottle. Procedures cost too much. Equipment costs too much. Doctors charge too much. Hospitals charge too much. Universities charge too much to train doctors. Every step of the process is too expensive because it’s been allowed to develop that way over decades. The original sin of US healthcare is the employer-provided insurance system. In the past there have been no incentives to constrain costs because the cost of insurance is hidden in employee benefits and written off as tax deductions. And so gouging has flourished, and it has long since become priced into the system. Every player in the system now NEEDS to charge a lot because THEY’RE being charged a lot. And the person charging THEM a lot is THEMSELF being charged a lot, etc.
So the question is how you can politically get every single party in the process to take considerably less money; and how you can do it in a politically practical way; and in a way with no unforeseen side effects. That for me is the real challenge of making healthcare affordable in America.”
So, given that is the case is there a better way of approaching US health reform? There are alternative approaches but I’ve got to go now due to another commitment so I’ll get back to that a bit later.
BTW here are my references:
https://www.urban.org/research/publication/sanders-single-payer-health-care-plan-effect-national-health-expenditures-and-federal-and-private-spending
https://data.worldbank.org/indicator/SH.XPD.CHEX.GD.ZS
https://data.worldbank.org/indicator/NY.GDP.MKTP.CD
https://en.wikipedia.org/wiki/List_of_countries_by_total_health_expenditure_per_capita
https://www.nuffieldtrust.org.uk/chart/nhs-spending-as-a-percentage-of-gdp-1950-2020
And, having taken all that into account this is an example of the sort of annoying shite that health reformers in the US have to put up with:
https://edition.cnn.com/2018/09/16/politics/alexandria-ocasio-cortez-40-trillion-cnntv/index.html
Thanks
And apologies for delay – sometimes a lack of time gets in the way and I read comments before posting them
No apologies required.
I just thought that having learnt a bit on this topic recently it might be useful to provide some background info to the New York magazine article.
Maybe I could adapt the two comments into a blog post format for Progressive Pulse. Would that be the something that they might be interested in perhaps?
I am entirely sure it will be….
Further to my previous (as yet unmoderated) comment re. the US health system:
There should be no expectation that a US ‘Medicare for All’ system would cost more than twice as much per capita as the NHS. But the researchers that have recently estimated its cost seem to be assuming that public health in the US would be just as bloated and inefficient as its private counterpart currently is.
That assumption fails to adequately recognise that existing universal health systems (like the NHS) are more cost efficient because they use the monopsony buying power of the state to keep costs and payments under control. Sanders’ plan proposes to do likewise but (unfortunately) not to the same extent.
https://www.vox.com/policy-and-politics/2017/9/13/16296656/bernie-sanders-single-payer
Sanders would also be tasked with taking on one of the world’s most powerful, corrupt and proudly inefficient set of vested interests (big Pharma included) all in one go in the new president’s first term while he has other major challenges to deal with. Loathe as I am to admit this it may be more expedient to begin by offering a less ambitious public option that allows the opportunity of grinding the vested interests down slowly until full universal healthcare is achieved over time.
Of the alternative approaches for US Democrats the most widely discussed would involve a parallel, opt-in system that competes with the private industry and makes itself available to all and any US citizen that doesn’t currently have coverage. The “Medicare X” proposal from Democrat senator Tim Kaine offers a fairly mild example of that approach but it appears to be something that is easy to implement and it also has some bipartisan support.
https://www.vox.com/health-care/2017/10/20/16504800/medicare-x-single-payer
With a public option like ‘Medicare X’ established and available, salary packages that include healthcare will, over time, become less attractive than those offer more pay (without the health insurance). As the public option grows in size and popularity it could be strengthened and transformed into a more complete universal health care system.
Getting good sense into policy and practice runs a minefield. If one has to venture into such I’m not for throwing the map away or letting some Rupert read it upside down, or following the idiot 50 yards in front of him. The US health system is very expensive and yet was touted as excellent by such as McKinsey over many years in glossy reports. At the heart of the problem is insurance that really isn’t insurance. You fall of a bike doing your bit for green thinking you are insured until you are stuck with a 27K bill for having your arm fixed until “insurance” pays out only 3K. This insurance not being insurance and huge fees imposed for largely undifferentiated products requiring about O level “expertise” in recommendation is a wide problem. The so-called disciplines of the private sector rarely stand up well against mutual comparisons. The entrepreneurial sector is rarely what it claims.
Financing anything seems to subsidise a waiting network of financial vultures claiming their managerial skills are essential and somehow cheaper than government-local-government systems. Hard to follow any of the money-return system in bent accounting obfuscation. Most of out structures need investigation beyond our bemusement in received language, cut as it is with false civility and ideology. There is almost no answer at expiration levels leaving only the force of Reason present, and no possible answer in democracy as epistemology. Occasionally paranoid in anything is up for deconstruction, I can relate green QE to Schacht’s Mefo Bonds and waiting Junkers to exploit them. Only in wonder about getting government money spent as we hope for decently democratic function.
Green QE could be a mechanism for a lot of developing world self-generated funding, making the Tory plan to continue brain-drain stealing from them much more difficult. The US and others are in this game too. I see this realisation as a problem for Western competitive advantage and the deep secrets of this maintained by dominant economics and other false history. In short, I don’t think we are in open deliberation on health services or green issues. My own green radical peace position clearly has religious thinking in it. And I’m happy with this as an atheist. I’m shifting authority from god and the Est
…. cat sent the last post! My last point would have been we are up against something like religious denial mechanisms that entail very little public deliberation on the root metaphors of decision and evidence.
“….the third is to control inflation (remember, we wanted it for ages and could not deliver it)…..”
But we did have inflation, it’s just that it isn’t in the ‘shopping basket’ metric it’s in the assets sector. Which is hardly surprising since that is where the money is circulating.
The inflation metric is about as useful as an unemployment metric that bears no relation to real levels
of unemployment and under employment in the economy.
You make a superb crystal clear observation on the article Richard! :”What MMT does is say that government will need to raise tax, always. And the amount of tax it will require is, inevitably, related to the amount that the government spends. There is absolutely no point pretending otherwise, even if it is absolutely true that tax does not fund government spending. And that is because MMT is a better way of looking at two things.”
But there is still a challenge for newbies like me. This insightful paradigm shift for taxes is true for National governments with a national currency. But the old paradigm is still true for small political entities – cities, counties, provinces, states … . That experience makes your point harder to accept for ordinary readers.
You are right: that is the paradox
It is why Scotland must have its own currency