I was asked to make this video to explain whether, or not, people on low incomes would be punished more heavily than those with higher incomes and wealth if, and when, MMT succeeds in delivering full employment and the risk of inflation is created.
In the video I explain that it is wrong to believe that the only mechanism to control inflation through taxation might be consumption taxes like VAT. Instead I show that there can be other taxes which are on consumption, but which are biased towards those with high incomes, and that at the moment when tax to control inflation is required it is also entirely possible to increase taxes on those with income and wealth disproportionately to ensure redistribution to those on low income as a policy objective in its own right and contained within the MMT framework. The video explains this in more depth.
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Another good video where I think you make two important points.
First, the benchmark against which any policy must me measured is the current system rather than “perfection”.
Second, you can get a greater variety of tunes out of a full orchestra than out of a brass band. MMT add the strings and woodwind of tax policy to the brass that is interest rates.
However, I think we need to take care in three respects.
First, in our desire to show off the new orchestral sections and what they can do we should not ignore the brass players – there IS still a role for interest rate policy in draining money from the economy.
Second, impacts of particular policy changes are complex. For example, you assert that higher rates hit the poor more than the rich. Is this really true? I would divide people into three categories here; (a) borrowing to get by, (b) borrowing to buy assets (houses) and (c) non-borrowers. People in (a) are poor and (c) are rich but I would suggest that (b)s are rich, too. And, if you hike official rates by 1% it would have little impact on the usurious rates paid on credit cards by (a)s. (b)s and (c)s would be hit by falling asset prices that came as a result of rising rates. My point is that we should emphasise that we can now play more tunes rather than specify too far in advance what the correct tune will be. (My solution to this would be to add percussion (credit/interest rate controls) to the orchestra that would allow differential rates depending on the purpose of the loan…. but that is another story).
Third, if you want to slow an economy by taxing then you can’t do it just by taxing rich people – ordinary and (relatively) poor people need to be taxed to alter their consumption, too. You (rightly) say that the circumstances where taxes rise is one where poor people all have jobs and are better off than today. But just as tax cuts for the rich do not trickle down neither will tax hikes and we must be honest about this.
Accepted and noted
I watched this video and have a few points and questions.
Firstly, you seem to think that only in MMT are taxes are used for redistribution. This isn’t true – most tax systems around the world have some element of redistribution in them, so this isn’t something innate to MMT.
Secondly, you say that at full employment you would likely start to see inflation rise. Fair enough. But wouldn’t you see inflation start to rise well before full employment, and by how much would it rise? How much MMT funded government spending would cause a given increase in inflation?
Lastly, you say taxes would have to rise to manage this inflation. Again, fine. But by how much would taxation in general have to rise to control a given amount of inflation? Or which specific taxes would have to rise and by how much to contain a 1% rise in inflation above target?
Of course I am not saying only MMT has a concern about redistribution – but I am saying that it makes it easier to focus on that concern
The real issue is the one re inflation. Why will that rise well before full employment? There is now no evidence for that. And please don’t quote the Phillips curve: we know that is broken.
We know from both current inflation models and the real world that inflation isn’t evenly distributed in an economy, so the different sectors within an economy can experience inflation at different rates and times.
This means you can’t treat inflation as a homogeneous blob as you seem to do.
For example, if there is a huge amount of new construction spending, that sector will see higher cost inflation first, well before other parts of the economy do, and it will feed through to the rest of the economy.
In practice, this means that as unemployment goes down, you are likely to see inflation rise well before you hit full employment. Capacity across the economy and the labour market isn’t evenly distributed, so inflation won’t be either.
We also know just from current and past experience that you more often than not can see inflation rise (which it currently is in the US for example) without full employment, and that you can have relatively high inflation co-existing with high unemployment.
Are you and MMT claiming that it is impossible for inflation to be elevated at the same time as having high unemployment?
You didn’t answer the main thrust of my question.
1. How does MMT model inflation expectations for a given increase in spending? Or does it simply ignore it until full employment – which as mentioned above is a gross over simplification.
2. Given an increase in inflation, how does MMT model which taxes and how much general taxation levels have to increase to remove that excess inflation?
I am assuming that the confidence you have in the theory means that MMT must have described exactly how these two centrally important topics for managing an economy would work. There must be a mathematical treatment of how MMT would achieve monitor these targets and the policy reactions that must be applied?
If you could point me towards them, either on this site or elsewhere that would be appreciated.
Of course we know there are variations in inflation
We also know that this is not the basis of current policy setting
We also know that the links between inflation and interest rate changes have been as much guess work as anything else
And I will be candid, best judgement will also be required by those using MMT explanations
But at least we know it ios a model that works rather than one that does not
You are offering false arguments here – that because MMT is not perfect it must be used
I am using valid arguments – that it is better than what we have
If you cannot propose something better than it then I win
You are talking a lot without actually saying anything in your last response to me and haven’t answered any of my questions.
For clarity, and to remove any obfuscation, could you simply answer the following points:
1. Are you and MMT claiming that it is impossible for inflation to be elevated at the same time as having high unemployment?
2. How does MMT model inflation expectations for a given increase in spending?
3. Given an increase in inflation, how does MMT model which taxes and how much general taxation levels have to increase to remove that excess inflation?
For 2 and 3 it would be helpful if you could post a link to the underlying mathematical or statistical models MMT uses to determine the linkages between MMT spending, inflation and unemployment/spare capacity and the relationship between tax and inflation.
I assume, given MMT is calling itself a theory, that these models must exist somewhere in a text book or publication. Given you are an expert on the subject, would it be too much to provide a link to these models?
1) No: there are reasons for inflation e.g external price of political shock that make this possible. It is not possible because of reasons within the control of usual domestic economic policy
2) Using the same tools as any other current system
3) The aim is to reduce demand. Models for the demand impact of tax increases plus multiplier effects are widely known
MMT is not offering new explanation on this – it is offering a better solution based on existing diagnosis
And theory does in no way imply maths. Theory is simply a rational way of constructing ideas or thinking. Nothing says it must be mathematical. Only an adherent of bankrupt econo mic thinking would presume that.
Thank you for your answers. To respond:
I read your answer to 1. as amounting to saying that you will indeed have no inflation if there is unemployment unless the economy is subjected to an external, exogenous shock. Am I correct in this?
This is deeply problematic, as current models of inflation (which you say MMT uses in point 2.) show that it is easy and common for inflation to occur in an economy despite high unemployment. We also see this historically and by current observation.
The main flaw in MMTs view is that it treats all labour as one homogeneous pool of resources. In practice, this isn’t the case. The are a lot of unemployed people who are low skilled, but unemployment among high skilled professionals is very low. Government spending on whatever capital project it might be won’t affect all those people equally, and the spending might have much more of an effect on inflation that it will on unemployment given the demand for skilled or specialised workers is already much higher than for low skilled workers.
So one of the main claims MMT makes – that you won’t see inflation until full employment is false, given you say it uses current inflation models in its assumptions.
I also note your answer to point 3. It is worth pointing out that by MMT’s logic, tax cuts would also stimulate demand and raise inflation just as well as extra government spending – but I haven’t seen any discussion of this in the papers I have read on MMT. It seems peculiar that MMT always ascribes increasing demand to more government spending, and reducing it by more taxation.
There is a much bigger issue though. Whilst it is well understood that tax increases can reduce demand, the many studies done on the subject have shown that the nature of this control is very hard to describe and mange and the effects are not linear, well defined and have a distinct lag in their effect.
All of which make using taxes to control inflation a near impossible task in practical terms. Some demand is inelastic and raising taxes has very little effect, and some is very elastic and raising taxes would have a large effect – and often that demand will change over very short periods of time so it is simply not possible to try and use them as a substitute for monetary policy.
How many studies show interest rates don’t work?
Did you forget to mention them?
I think it’s time you stopped wasting my time
Sorry – to add:
Theories do imply maths, in economics and science in general at least. You have to be able to describe a theory in mathematical terms, so you can test against that theory. Maths is objective.
Otherwise it is just prose – which is subjective and people can interpret it as they see fit, and the interpretation can change on a whim. Which doesn’t make for a good theory, which by definition is should be true until a counterexample is found.
MMT fails at this point in my view. We know inflation and unemployment can both be high at the same time, which is the counterexample to show that MMT isn’t a correct theory.
Then you know remarkably little about economics
Go and read Keyne’s general theory
There are fewer formulas than in my last academic paper on MMT
It was prose
And that’s amazing stuff
And if you think that the absence of a ∆ or a ƒ or a ß proves otherwise, I am sorry, but you really have a great deal of learning to do
Unemployment does not mean only people not working. It includes the non use of any factor of production, eg land and capital. MMT indicates that bringing unused land, labour or capital into production will not, by itself, cause inflation. Ryan asserts that without some econometric calculation, these observations are incorrect. Yet the classical Phillip’s Curve trade off between unemployment and inflation is valid. So Ryan, you provide an econometric calculation which proves your point. Remember that the basic assumptions underpinning the classic neoliberal position have never, and never will be, fulfilled. ie perfect market knowledge, free entry to the market etc.
Unusually I didn’t find the video convincing on this occasion. My own thoughts are that part of the answer to this might be to drain money from the economy by encouraging more savings rather than by relying solely on tax, offering a higher rate on bonds (maybe even a hypothecated bond issue such as a “green bond”) and then apply tax to the unearned income. Would this avoid imposing a disproportionate tax burden on the less well off?