A commentator on this blog called Grahame asked about the role of tax in modern monetary theory yesterday. I pointed him to the Taxing Wealth Report and, in particular, page 383 onwards in the full report.
PSR, who is a regular commentator here, offered this explanation instead, and I really like it, so I thought I would share it.
OK, Grahame, I will take you at your word and try to help you on your journey of understanding tax in the context of MMT.
You know how a steam engine works, right? It essentially just boils water and builds up enough steam pressure to not only move the engine but also pull a train.
But what if it has built up so much steam either standing or when working, and the pressure builds up, threatening to blow the boiler?
Well, then you need the safety valve that simply opens and allows the excess steam to safely blow off and take away the threat of destruction, cooling down the loco, and reducing pressure.
That is what tax can be in an MMT system: a safety valve for inflation, as money is printed into the economy. No fireman would light up a steam engine without a working safety valve on the loco Grahame. No chancellor should let money into the economy without balancing that with taxes. Credit or base money.
Currently, you could say that taxes are too high and there is not enough money in the economy, which is rather like releasing the safety valve on a steam engine before it has enough pressure to actually get working. What we need is both: money like steam in a steam engine being injected and ejected at the same time, creating a flow of money which is the real economy, you, me and everyone else, in motion.
Mull that over for a while and see how you get on. And then think about tax, why, even though it is thought of so negatively, it has such a potentially key and useful role.
And if you do not use tax as the safety valve, then you might have to use austerity or low wages, or meagre benefits, or poor public services instead. What would you rather have?
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That’s an excellent analogy. More of this sort of description is very welcome. Similar to your other commentator who compared the weirdness of a King running out of knighthoods as a way of understanding Fiat Money from a Central Bank. It really helps us all understand what is essentially a very dry and technical, but admittedly, hugely important subject.
I don’t know if you heard the latest Rest is Politics Questions edition, but if Rory Stewart is struggling to understand*…and ultimately missing the point…a man who has embedded himself in politics, it’s not going to be easy for the rest of us.
*There may be an element of ‘ It’s hard to get an individual to understand an issue if his livelyhood depends on not understanding it…’ here.
PS You should try getting yourself on the rest is politics. It would make for a very entertaining listen if nothing else!
Thanks
And I have taken action on your last point.
This is the result of reading LTC Rolt’s ‘Red for Danger (1955, 3rd Ed, 1976), Chapter 3 ‘Blow Ups and Breakdowns’ – a book I first read as a boy and have read again and again.
I’m flattered and blinking a lot in the spotlight for which I am unsuited.
I have read a lot of Rolt’s stuff over the year. I am not sure I like all his politics – although he was in effect a very early Green – touched with an unattractive arrogance. But he was a very good user of the English language.
I was never interested in his politics, I’ve only ever read one book of his.
But his depiction of key accidents in the development of safety on the railways is what caught my imagination the most – the writing is quite frankly, exceptional.
Try Railway Adventure or Narrow Boat. He started canal restoration and railway preservation. His biography is interesting, in three parts and High Horse Riderless is a very early wake up call on climate.
So we tax when there is too much “steam pressure” (money) in the economy.
But I’ve never heard a government talk about when there is not enough steam pressure (money) to provision the economy and make it work.
Our train has not moved for at least 45 years (since Thatcher started selling off the train, the station, and the railways).
The key to being on the footplate Ian is observation – watching the signals, the permanent way and the gauges in the cab (steam pressure and water levels) and keeping the fire going.
The steam engine is a finely tuned capitalist machine operating on the verge of destruction but kept in check by valves and combustion operated by skilled people who know what they are doing. It’s about the balance of inputs – water, coal, steam and outputs (smoke, ejected steam, movement, speed). Mastering capitalism is like mastering a steam engine; you are controlling that which if left to get out of control, simply destroys.
Government no longer it seems think that it is their job to build up the steam. They think markets should do that and that they should not be looking at the gauges, signals or route either, and this is where it goes wrong.
And please…….no fat controller jokes.
Again, very good
Take a look at ‘Who’s buying Britain next’ on YouTube by Will Gale at British Home Group.
If you suffer from depression, please don’t watch.
A safety valve is a regulator. If you accept that life including that of human beings is modelled on the dual drives of being both Communitarian and Libertarian then clearly regulatory devices are needed to balance the two drives.
There are, however, false safety valves. One is the unthinking pretence money doesn’t grow on trees but on the rich who very much like to balance their books. You therefore need to decide in advance what the private sector is going to spend or save and then tax in advance (see Fully-Funded Rule). The usual consequence of this being the private sector reduces demand to pay increased taxes!
Another false one is the pretence a society doesn’t need democracy as a communal safety valve to provide feedback on your decisions simply because you’ve read a lot of Marx and Lenin!
Thanks
PFR’s steam train analogy is quite serviceable and, as a boyhood trainspotter from Longsight, Manchester, I like it.
But as often the case with analogies, it is less than perfect.
The problem with this one is that, unlike the steam released by the valve, which is wasted, tax receipts are purposeful, in that they do far more than remove purchasing power (effective demand) from the economy, thereby preventing excessive inflation.
A progressive tax system, rather than the antiquated and creaking one the UK has, serves several purposes, as noted on this blog and in The Joy of Tax (2015), and necessarily alters the distribution of income and therefore the nature of effective demand in the economy.
As a complement to the adoption of a progressive version of MMT, with judicious ongoing budget deficits, not necessarily fully covered by bond sales, a progressive tax system would shape both the demand and supply of the economy to more collective and less individualistic purposes.
Accepted.
But lets notlet the perfect be the enemy of the good.
Ian
You are adding wider context, when the steam engine analogy was provided within Grahame’s stated narrow context of how MMT tackled inflation. My answer was confined to that and it does not mean that what you have to say is untrue. The steam engine analogy is a very specific analogy.
My understanding is that money is created but needs to be destroyed (released) by tax, otherwise, money backs up, over spills, pops etc. Money left swimming around with nothing to do, un-destroyed if you like, is the problem. Of course we could take that tax money or just the money and do something else with it other than speculate and cause havoc and enrich the already enriched.
Grahame Morris is Labour MP for Easington (and I am using Labour and not LINO purposely). Whilst skeptical I also query if an astroturfer would pretend to be a somewhat obscure (sorry Grahame if you are reading) Northern MP.
Make of this what you will
Very obviously suitable for the omnibus, especially a steam powered one.
I’ll report back when I’ve tried it out.
I had 2 good MMT conversations last week.
The credibility collapse in gov’t is definitely making people curious about alternatives.
I like this analogy, and it points to something further I’ve been trying to get my head around. I am a staunch believer in the evolutionary/complexity economics model of the economy, however most of the books I have read only use this model to look at the ‘real’ economy. What would be interesting for me is whether MMT can be combined with evolutionary/complexity economics, to realise a fuller picture of the economic landscape. I believe this is important because what the e/c economic model tells us is how we can set up better economic market conditions or rules for entrepreneurs/businesses/innovation etc. to flourish. I guess in this analogy this is the train and the track? So to summarise, what I think is MMT is what we need to adopt, but I don’t think its adoption will be successful alone as it focuses (solely?) on the monetary system. For true change, we need to combine it with a better model of the ‘real’ economy or the market system, which will give us further tools to reshape our economy into one for hope.
MMT just explains how money works.
Evolutionary / complexity economics has to use it, unless it’s giving up money. They will / can’t have any better explanation.
You need to realise there is no conflict.
And yoy can’t adopt MMT. It’s what is. You are missing a great deal about it, I think, looking for something that is not there because it is not meant to be.