I decided to publish our MMT Source Book this morning, and overnight, a query came in from Australia that would have made the cut if it had arrived on time. This was it, from a correspondent there:
Your message appears to be reaching far and wide.
What if we used taxes or superannuation to control inflation, not just interest rates? - ABC News
The one point against MMT that is inferred in the above article:
"The central problem is that fiscal expansion is generally more politically popular than contraction, which generates a bias towards expansion."
- This is especially true when an election is looming.
- Politicians can't be trusted to put the national interest above their political interests (snouts in the trough).
- Another argument is that it takes too long to change tax rates because such changes have to be passed by parliament.
Is there a MMT way of controlling political self interest, something constantly on display here in Australia in exchange for political donations and campaign funding.
The Reserve Bank's 'independent' control of interest rates does prevent political self-interest, but as I think you make clear the current 'business' model economics leaves the will of the people in the back seat and taken for a ride to who knows where.
What I do really like about MMT using taxes to control inflation is that tax rates can vary according to income. I believe top tax rates in the late 70's - early 80's in Australia, UK and the USA were all >= 70% and a single wage earner could still buy a family home.
I added the highlight in italics because that is the core question I am being asked, and it really did not take long to deal with this one, as the argument that politicians cannot be trusted with fiscal policy is, in my opinion, one of the strangest claims in modern economics.
We already trust politicians with:
-
Creating laws
-
Managing budgets of hundreds of billions of pounds or dollars, and maybe more
- Managing;
- education
- health
- setting taxes
- broader fiscal policy
- providing a social safety net, and more
-
Declaring war
But we are told they cannot be trusted to manage interest rates to supposedly manage demand within the economy to deliver agreed inflation targets, assuming such a thing is possible in most situations, which evidence suggests it is not.
Instead, that power is handed to unelected central bankers whose primary tool is the setting of a single interest rate to penalise borrowers and reward those with wealth.
That is presented as “neutral”, but it is, in fact, a deeply political policy choice.
The theory behind interest rate control in thi wya is profoundly flawed. It assumes always, and forever, that inflation is a purely monetary phenomenon, which it is not.
It assumes that all inflation arises from excess demand due to an overheating domestic economy, which is rarely the case. External supply shocks and the resulting market price manipulation by commodity trading are now the usual explanations for the inflation we have.
And the idea that this must be done independently of government is evidence of the success of the far-right, anti-democratic trope called public choice theory.
The reality of economic management is that it is about exercising judgment in the face of considerable uncertainty. The outsourcing of interest rate management to a central bank instead suggests that it is simply a mechanical exercise of lever-pulling in the face of probability, when it is nothing of the sort.
As a result, what we can see as a result of recent failures is that economic management by supposedly independent central banks has not worked, and yet this myth that doing this is necessary because politicians cannot manage the economic policy of a country in a way that would mean that just one organisation has its foot on both the accelerator and brake, rather than the two we have at present, persists.
In that case, it is right to suggest, as my correspondent did, that taxes can be a much more targeted and equitable way to control inflation than interest rates. Rates punish borrowers indiscriminately. Tax can be directed at excess consumption, speculation, windfall gains or high incomes.
And, as for political self-interest, no system removes it entirely. The question is how accountability is created. Central bank “independence” does not remove politics; it simply relocates political power into institutions that are less democratically accountable.
Meanwhile, it is worth noting that historically, much higher top tax rates have coexisted with rising living standards, strong public services, and greater housing affordability. That alone should make people question many current economic assumptions.
MMT asks us to rethink most of what we think we know about economics. That is why it is important. That is why it is worth having a look at this morning's download.
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The thing that puzzles me is why it is supposedly so politically difficult for politicians to embrace raising taxes on wealth accumulation, when there are so many more low income voters than high income ones.
Of course it has little to do with votes and everything to do with the corrupting effect of money in politics. Donations to parties (advance payment on policy implementation) and bungs/job promises for the retiring/defeated politicians. Only the wealthy can offer those.
Get private money out of politics. Ban the patronage, ban the bungs, ban the sinecures. It’s got to obscene levels.
Then perhaps in-office and aspiring politicians might listen to the voters more than to the donors.
We must stop seeing capitalism = democracy = voting and begin seeing capitalism as power (controlling the many through propaganda narratives). In that regard I direct you to the works of Jonathan Nitzan and his CasP thesis Capital as Power in the Polycrisis | Michael Hudson and other such discussions which are out there on the net.
I hope this goes some way to solving your puzzle.
I know that formula is correct. John Christensen and I often discuss it.n
According to MMT’s analysis, the US federal government creates new money every time it spends. Whenever it collects taxes, it completely destroys the money from the record. MMTer Stephanie Kelton says, “Clearly, government spending cannot be financed by money that is destroyed when received in payment to the State!”
MMT’s analysis is incorrect—it suffers from numerous technical and logical problems. For example, MMT says that when the US treasury moves money into its account at the central bank, that money is “destroyed.” In reality, the balance in that account goes up and is properly recorded, as in any bank transfer. MMTers seem to be thrown off by how statisticians calculate common money aggregates, such as M0 and M1, which don’t include the balance in the treasury’s bank account.
The error has been pointed out to MMTers to no avail. In Stephanie Kelton’s 2020 book, The Deficit Myth, she insists the US federal government creates new money every time it spends and destroys money when it collects taxes.
If an MMTer tells you the government doesn’t need taxes before it can spend, ask them, “If the balance of the treasury’s bank account is zero, how can it continue spending without taxes or bonds?”
Graham Real (if that really is your name),
I have just wasted my time reading Emmanuel Maggiori’s book.
Like you, he denies that the US government, or the British government, creates money when it spends, and then contradicts himself by admitting that he can, but it should not which is an entirely different proposition together based wholly upon hatred of the state and the power has to deliver well-being for people
Without that comprehension, neuither he, or you, are able to understand what MMT says. Your arguments only survive in a state of denial, and political obstinance.
If, as is the case, money is created by a government as debt (which it is, just read a British bank note), the debt is cancelled when a wholly artificial liability imposed upon a population by way of taxation solely for this purpose is settled using that currency, at which point the money that was created as debt is destroyed, quite simply because the liability it represents no longer exist exists. The bank account of the government is not replenished as a result by tax payment: its liability is instead cancelled.
I suggest you read my new MMT Source Book and this https://www.taxresearch.org.uk/Blog/2022/06/21/the-double-entry-behind-the-money-creation-in-the-central-bank-reserve-accounts/. You might stop making such a fool of yourself if you were to do so.
Lightbulb moment:
If money is created and issued as a debt (BoE promises to pay the bearer £*) then giving the promissory note back (paying taxes with the promissory note) ) cancels the debt and the “money” is destroyed – balance = zero)
Why has it taken me so long to grasp that? And all because Mr Real decided to attack MMT!
🙂
@ Graham Real,
“If the balance of the treasury’s bank account is zero, how can it continue spending without taxes or bonds?”
The Bank of England is legally obliged to pay any payments the government mandates. Then what the Bank can do, if no other funds are available, is increase the government’s overdraft. So far just like a normal bank account. The difference is that, since the government owns the Bank of England, it has an unlimited overdraft. And, unlike you or me, it pays no net interest on that overdraft (any interest it might pay is returned to the owner of the bank, i.e. the government). So the government can, in principle, spend without limit. Simples.
Grahame here’s the easy answer: the government can run an overdraft. It just promises to pay the Bank of England when it gets around to it.
Now here’s the complicated reality: what effectively boils down to running an overdraft where the quickness of the hand deceives the eye. With one hand the government issues bonds (a government promise to repay) into the bond market, gets money for that and spends it. Just as you might have expected, Graham, move along nothing to see here. Meanwhile with the other hand the Bank of England creates money (a bank’s promise to repay) and buys the government bonds back from the markets. The second process is Quantitative Easing (QE). If you add the two processes up, the markets no longer figure. The selling and buying cancel out. The Government has exchanged its bonds for the Bank’s money and spent it. Just like an overdraft. And the fun thing is: the government owns the Bank of England, so any profit from the coupon payments paid by the Treasury to the Bank goes straight back to the Treasury! It has exchanged a promise to repay itself for money, and spent the money into the economy.
Between 2009 and 2021 the Bank of England issued nearly a trillion pounds in QE. Of course the government could have just run a trillion pound overdraft, but where would be the mystique in that?
You are right to pull out Public Choice Theory (PCT) as the culprit. Talk about the the teapot calling the kettle black. I worked 20 years in the private sector (catering and retailing) and I can tell you that in that sector you have people working for themselves – against company policy, directors, shareholders, customers – twisting and gaming systems and rules for their benefit/bonuses.
To hear James Buchanan talk this only happens in the public sector but I can tell you that it is a complete lie. The private sector is made out to be rational and controlled – and as we know it ain’t. But the public sector is more accountable when it gets things wrong, you are right.
But what is really cunning and deliberate about PCT is that it breaks the relationship between the common people (the ruled) and the ruler.
PCT basically says that the ruler can ignore the masses they rule over but at the same time seek their consent to be ruled by them. Yet, that consent comprises of delivering what the masses want – promise made at election time etc. PCT therefore denies that there is any benefit to that shared self interest and leaves the door open for the powerful few to influence the ruler instead and ignore the masses.
This is why privatisation has gone wrong; why industrial policy is a mess; why AI is creeping in; why incomes are falling; why we left the EU and why we are in the grips – right now – of Fascism, and much else that is wrong.
PCT is the denial of politics – and politics should be the art of balancing competing claims about reality.
Thank you
Although the BoE seems a special case – there is an issue with ‘arms length bodies’ in general . The executive has permeated the NHS UKHSA BBC etc – while pretending they are ‘independent ‘ public bodies.<p>
Maybe BoE could still operate at arms length – if it helped transparency – and if its remit was changed- and got rid of the ridiculous ‘interest rates are the way to control imported inflation’. It could maybe have targets for unemployment , inequality of asset s and incomes etc etc.<p>
But our public sphere seems to have lost the ability to even discuss these things – cant question BoE independence, monetarism, caps on asset prices, rents etc etc.<p>
Decades ago when I was in the civil service – there was public talk about how to bring expertise into government – maybe to separate longer term economic strategy from short term fiscal management etc etc. Now only Richard and other political economists raise these issues – but very much censored by BBC and billionaire media.<p>
Fed up<p>
Much to agree with
Love this answer ,a brilliant rebuff.
Only thing I would add. The typical member of a central bank is not only male,pale and stale but comes from a background linked the to financial sector.
This has to change too.
Just In Time!
It’s already Thursday evening here in Tasmania and tomorrow morning I’m off to a U3A discussion on working towards a sustainable future. I’m not sure how many of my fellow group members appreciate how critical economic reform is to making that happen and I’m not going to stay up all night reading up on coherent explanations I can use to indicate how MMT might enable that, but at least I have somewhere to point the members for further information. Many thanks.
Perhaps that might be a focus for the next or subsequent compendium? The economic reforms specifically required to achieve your own Funding The Future aims.
Good luck
Oooops! Obviously my previous comment was meant to be on the “Out today… ” page.
Ok…
Absolutely agree.
We should not be trusting politicians with any of those things.
Politely, stop being stupid, or a fascist
There are many countries without functioning governments and such things are handled by local mafioso or armed militias. They are not places to live. Perhaps you could go there and experience the blessings of their system first hand?
We trust our leaders with nuclear weapons but interest rates is a step too far. I call this maddness.
This, I think, is correct, Richard.
Beyond the Muddle: Why Britain is about to be Pushed Towards Localism | Chatting about Localism
I suspect you are right
I’ve been harping on this for years. The solution to unemployment and inflation is the Job Gty and an Automatic Tax Modulating Tool (ATMT) which would include AUTOMATIC across-the-board tax increases that kick in when certain monthly wage inflation target are hit-say for 6 months in a row. These can include:
a) Income Taxes,
b) Sales/VAT Taxes
c) Asset Value (or Wealth) Taxes
That’ll cool things of Pronto!
Once inflation cools, then the taxes automatically go back to their base line. The key is they are AUTOMATIC, incorporated at the same time as the Job Gty. Taxes would be collected monthly to the extent practical to have an immediate impact. No legislation needs to be passed at the time needed.
Why haven’t MMT folks adopted this?
Because it does not work – would be impossible to manage on a day to day basis (payrolls just could not handle this, nor could retailers) and so you are proposing something that any wise person would reject.