Jo Michell is an assistant professor of economics at the University of West of England with whom I have often crossed swords. He thinks himself to be in the left, and a bit of a tax expert. And he hates modern monetary theory. I think such an emotive work appropriate on this occasion.
He has just written an article for Tribune magazine under the title ‘What should the left think about tax'. According to Torsten Bell of the Resolution Foundation in an email sent out yesterday this proves that ‘Now while there are micro elements of this Modern Monetary Theory argument that are right, its big picture conclusion is what you might politely call garbage.' That's some claim to make by the person who was Ed Miliband's chief of staff and who is still deeply influential in Labour, I suspect. So what did Michell say?
If I summarise his argument they are as follows (italics being used to highlight quotations):
1. The Tories are thinking about tax increases so Labour should be thinking about tax.
2. Labour is saying that it is absolutely the wrong time to be talking about tax rises.” This is correct from a Keynesian perspective, he says, but he thinks that some argue so from a different perspective.
3. These, he says, are those who argue that there is effectively no connection between taxation and the size of the public sector: government spending can be increased to any desired level, it is claimed, without needing to worry about raising tax revenues to “pay for” it. Michell argues that they say this because, as Michell agrees is the case, the Bank of England — a public sector institution — is the issuer of pounds sterling. He then claims that some say as long as the Bank of England is willing to issue pounds on behalf of the government, the government can spend without needing to tax.
4. As Michell notes, the argument is technically correct in terms of the mechanics — the UK government will never run out of pounds. But, he adds, the conclusion that “taxes don't pay for spending” is incorrect.
5. At this point Michell goes into an esoteric discussion of what ‘paid for' means, which includes the (stunning) revelation that in many cases that involves the reallocation of balances in bank accounts, and that absence of cash can then be a constraint on spending in normal circumstances, but given his previous conclusion, not for governments. From this he concludes Given that a shortage of cash can never constrain government spending in the narrow technical sense, it is claimed, taxes therefore don't pay for spending. Spending is instead “paid for” by the Bank of England electronically issuing new cash.
6. This, he notes is technically correct — but it is a narrow, mechanical, and ultimately misleading definition of how the government “pays for” things. This, he says is because What really matters are the goods and services that cash balances purchase.
7. He then goes on to say The government can purchase these by printing more money if two conditions hold. The first is that there is some “slack” in the economic system: in other words, there are unemployed or underemployed people who can increase their activity to produce the goods and services. The second is that the private sector (households and businesses) is willing to hold the extra money created by the government. As he then notes To the extent that these conditions hold, there is indeed a ‘free lunch' for the government, due to its ability to print new pounds.
Let be me be clear: to this point Jo Michell has not found anything to argue about with MMT. He has, in fact, said it's technically correct. He is right to do so. His only error to this point is with regard to his understanding of how bank payments work, which he thinks beyond the reach of MMT.
What he fails to note is that the reallocation of balance between bank accounts does not actually alter the overall sum of bank balances in existence. It's a telling omission on his part, indicating he has little understanding of central banking, which MMT requires. But having missed this point he then begins to turn on MMT. As a result my commentaries will now follow each of his arguments.
8. Michell then says But while most economies do operate with some slack — there are always unemployed people — this capacity is not limitless. Eventually, a point will be reached where the goods and services purchased by the government cannot be newly produced, so the government will have to compete with the private sector for economic resources.
MMT entirely agrees. This is not an argument against MMT. It is precisely what MMT says. There is slack. It's called unemployment, which MMT thinks should be eliminated, which it proposes to do by way of what might be called a Keynesian style stimulus until such time as that goal is achieved.
When that is achieved MMT says two things. Either the stimulus has to stop because the alternative is inflation because too much new government created money is chasing too few goods or, alternatively, taxes have to increase to reduce demand for private sector created goods so that the space is created for non-inflation inducing government spending. Tax, however, does not pay for that additional spend. Its role is to reduce demand to make space for that new government spend. It is, in other words, an instrument of fiscal policy that makes that relocation of resources possible. You would think the left would wish to embrace such an explanation, but apparently not.
9. Michell then notes that Likewise, the willingness to hold cash balances is not without limit: at some point, those holding newly-created pounds will use these balances to spend on goods and services, or to purchase assets such as houses or stocks and shares. Investors may sell pounds in exchange for other currencies, reducing the international value of the pound. At this juncture Michell is just wrong. Of course those newly created pounds might be used. That is, of course, the purpose for their creation. How else is demand stimulated? But Michell does not realise two things.
First, if a consumer spends they reallocate bank balances. They don't destroy them. The fall in the balance of the person who spends simply increases the balance in someone else's account. The overall cash held in central reserve accounts with the Bank of England does not change. If only Michell knew some accounting and basic double entry, on which secure foundation MMT is built, he would appreciate this.
If only he had the same understanding he would, secondly, also appreciate that if someone sells pounds to buy foreign currency someone else now owns the pounds they sold. Again, they do not disappear, as he assumes to be the case.
What is more, if he understood these things he would appreciate something much more powerful, and that is that there is only one thing that does change the amount of cash actually in issue, which as he notes is all ultimately government created, and that something is tax. Just as commercial bank loans are cancelled and the money that they create under government licence is destroyed as a result of bank loan repayment, so does tax cancel government money creation, which means that in MMT tax is the mechanism for controlling the money supply, and so inflation. But for the lack of understanding of the very basic issue of double entry book-keeping (a failing he has in common with many economists) he misses that quite essential point, which means MMT breaks economics from the shackles of neoliberal central bank, interest rate driven, inflation focussed control that does not only not work now (if it ever did without also destroying employment) but also destroys democratic accountability for economic management and passes it to the banking system.
It's a shame that Michell wholly misses the point that MMT restores economic power to the left. I am bemused as to why he wants to maintain neoliberal control instead.
10. Michell ploughs on. Having not noticed that MMT has already embraced his previous arguments and turned them to good effect, he then says There is, therefore, a limit to the extent to which the government can “pay for” its spending by printing new money. Beyond this limit, the government must either borrow, or tax. This is the sense in which tax “pays for” spending: it makes economic resources available to the government that would not otherwise be available.
Which is precisely what MMT says. MMT is obsessed by inflation risk and that the consequences that failure to understand this risk might create. And it assigns to tax, for the reasons I have already noted, the task of countering that risk by withdrawing demand from the economy if it were to arise. Instead Michell makes a more limited claim:
By levying taxes, the government can reduce the spending of some individuals, or reduce spending on particular goods and services. For example, by taxing those on higher incomes, consumption on highly-polluting luxury consumption may be reduced. This means more resources are available for other activities, such as building transport infrastructure or providing for the consumption needs of care workers.
Which is as MMT would also have it.
And he continues:
The climate emergency and the pandemic require a fundamental restructuring of the economy. The scale of investment needed means that bottlenecks are inevitable, requiring reductions in expenditure elsewhere. More home insulation may require fewer new kitchens to be installed, for example.
I couldn't agree more. But what MMT does, by assuming that full employment is the objective, and by making clear that it can be achieved without inflation arising (which Michell has tacitly agreed, whether he appreciates it or not) is to suggest that debate on these resource allocation decisions is necessary because MMT makes clear that the state can demand that the necessary relocations of resources can take place. In other words, it empowers the state. Michell fails to understand that: he does not see that MMT empowers the arguments that everyone on the left should wish to partake in.
11. Michell then begins to fall apart. To put it another way, his very obvious lack of understanding becomes clear. From his previous argument he concludes that It is misleading and unhelpful to claim, for example, that a Green New Deal can be implemented without taxing the wealthy. He adds monetary mechanics are largely irrelevant — what matters is that the wasteful consumption of the wealthy must be reduced to make resources available for socially-useful spending.
This is simply wrong for two really quite elementary reasons.
Firstly, Michell makes the mistake of thinking all pounds are equal. Given that no government wants to tax (a claim I presume he would agree with) then when a tax is imposed it has to be chosen for a reason. In the case he notes, where he assumes that there is full employment and that the aim of tax is to redirect demand, aiming his tax increases at the wealthy makes no sense: the wealthy save all or part of their income. This should not be hard for an economist to work out: that is, at least in part, why they are wealthy. So, extra taxes on the wealthy will reduce their wealth (which is an excellent reason to tax them, if that is an issue, and might also reduce their excess cash holdings created by government spending, which is, again, another excellent reason to tax them) but it will not have much, if any impact on changing demand. They will still have the means to consume even if you tax them more. Don't get me wrong: I am not saying don't tax the wealthy. I am saying tax them for the right reason, which is that they are wealthy and that has harmful consequences for society, but don't then think this will have much impact on consumer demand, because it will not.
And this is where MMT wins. Unlike Michell, who is a simple ‘book balancer' when it comes to tax and the public finance, MMT recognises (as I have stressed in my academic work and The Joy of Tax, as Stephanie Kelton has also done in The Deficit Myth) that what you tax really matters, and that this involves a vector of aims. Indeed, as I have long argued, including in peer reviewed journal papers, there are at least six reasons to tax, which are to:
- Raise revenue, either to fund government spending or, alternatively, to reclaim the money that the government has already spent into the economy;
- Ratify the value of the currency of the jurisdiction;
- Redistribute income and wealth;
- Reprice goods and services;
- Reorganise the economy through what is called fiscal policy.
- Raise democratic representation — people who pay tax vote;
The idea, that Michell puts forward, of book balancing, is not amongst these reasons because it is not necessary.
But this also puts other claims that Michell makes into context. For example, he argues that The changes mooted by the UK Treasury include aligning capital gains tax with income tax, removing additional pensions relief for the better off and increasing corporation tax. These are progressive changes and long overdue. The changes also attract widespread public support. Opposing them means siding with wealth over work and rich over poor.
His implication of ‘opposition' is that MMT would oppose such things. No I don't. Nor do I suspect anyone who really understands MMT would. I have promoted some of these ideas for a very long time, not least in The Joy of Tax. What he describes are wholly inappropriate tax reliefs and low rates because they reallocate wealth upwards, and that is an issue that needs to be addressed. But that's the reason to do them, and book balancing is not.
And since Michell has already conceded that tax does not finance government spending he should agree when MMT says that these changes should be made because they are the right thing to do, come what may. MMT is empowering the left to do what is right.
12. Michell then argues that At the same time, progressives must continue to argue for fiscal activism to maintain jobs and transform the economy. Claims that pandemic-induced increases in public debt need to be “paid back” are simply incorrect and should be refuted.
I wonder what else he thinks The Deficit Myth is about? I have to wonder if he has read it.
13. So next he says The public deficit will remain large until the crisis is over and the debt to GDP ratio will rise — that is exactly as it should be. The Bank of England can and should continue to use its money-issuing power ensure that the expansion of public debt can take place without generating financial or economic instability.
I think he will struggle to find anyone in MMT who would disagree.
14. At which point Michell comes to what I presume he thinks to be his killer argument. He says But tax revenues and the size of the state cannot permanently diverge. Those who want to see a larger and more effective state need to make the case for progressive changes to the tax system that will ensure that revenue grows at approximately the same rate as expenditures over the long run. This is not to say that the two should be equal: they should not. A public deficit has been the normal state of affairs for decades — but deficits cannot grow without limits.
And let me assure him, once more, that not a person in MMT would disagree.
But what he fails to understand is that what MMT says that it is entirely happy with a balanced budget if sustainable full employment - the goal of left of centre politics these days, I would hope he agrees - is achieved. At that point of course MMT says tax and spend should equate. Taking more than spend then would create unemployment by reducing demand. Taxing less than spend at that point would create inflation. MMT spends a lot of time explaining why neither is necessary. So, quite literally, to claim that MMT says that spend can continue without tax, or that at a particular point spend should not equate with tax, or that deficits can continue growing without limit, is simply to promote a falsehood. Or garbage, to useTorsten Bell's language. That's not what MMT says.
15. And so is Michell's conclusion garbage by implying MMT is a programme to cut spending, when he says We must not allow misguided arguments about “tax not paying for spending” to erode the tax base, increase inequality and open the door for free marketeers to argue for the need to cut back on essential social programmes. Literally nothing could be further than the truth about MMT.
Where MMT would agree with Michell is on his final sentence: If we want to see systemic change, it's time for the left to argue for progressive tax reform on it own terms.
Which is, of course, exactly what MMT does, only on a vastly more informed basis than Michell is suggesting because MMT places tax within its true macroeconomic framing, which Michell wholly fails to do, and because MMT correctly explains tax's relationship with fiat money, which Michell plainly fails to understand.
Michell and Bell rely on falsehoods to dismiss MMT. They plainly have not read it.
Their approach instead promotes the maintenance of the neoliberal system of central bank, interest driven, control of the economy that treats unemployment as a residual in the process of economic management, and considers those so unemployed ‘the price worth paying' for inflation control. If that's being left wing, I am flabbergasted.
And in the meantime, the fight for true left of centre policy continues, and Michell and Bell are not part of that process as a result of their commitment to policies antithetical to anyone of true left wing orientation, who must put people and not money at the centre of their politics, Which is precisely what MMT does, despite its name.
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Great article. I like this bit, particularly:
”MMT is empowering the left to do what is right”
Hopefully up and coming “new wave” economists will get it …..
Bit harsh on Jo Michell I thought. He dealt with a complicated point not too badly, and I speak as an MMT supporter. Having said that, I don’t care for Michell in that he tends to block people on social media. But he’s not stupid.
I used his arguments
And they show no sign that he has read MMT
I take my hat off. I would never have the patience to politely and fully put Jo Michell right.
My great uncle was Methodist minister in the 30s and 40s in Tonypandy, South Wales. He knew a thing or two about unemployment and what it does to people.
I only ever saw him really angry once; it was as he denounced the use of unemployment as a policy tool as EVIL (a very strong word for him to use).
It makes me very angry that anyone that has influence in the Labour Party should hold those views.
Thanks
There is still a lot to think about regarding MMT.
It is not the creation of money that produces inflation, it is what people do with that money that may/may not produce inflation. What makes different people do different things with money? Yes, young/poor people spend it and rich people hoard it….. but why and what changes peoples propensity to spend/save? MMT focuses on tax as a way to drain cash and curb demand but as an individual I want tax policy to be reasonably stable and predictable as I approach old age. I worry that we could see sudden changes in spending/saving behaviour that might need a swift and large response to control inflation. I still think there is a very important role for borrowing and interest rate policy that should be more clearly emphasised.
Yes, I know it IS there in MMT and the literature on MMT – but to my eye it seems a mere footnote. I would rather compare MMT to being a conductor of an orchestra able to use all the different instruments to get the right sound. The level or rates and the amount of borrowing should rank fully alongside tax policy.
But why do you want positive interest rates?
I can’t see a justification for them
I am not arguing for rate rises now. Merely that we should be in the tool kit for the future….. and I mean the distant future.
However, there IS an argument that we need higher rates – although I am not sure I agree with it. It says that we DO have inflation, ASSET price inflation. Higher rates, looser fiscal policy might be a better balance to generate real economic activity and restrain speculation. Business are not failing because of high rates, they are failing from lack of demand. Asset prices are rising not due to a booming economy, they are rising as borrowing is cheap.
In the “old” world the ONLY tool was interest rates. The “new” world offers additional policy tools…. which might allow us to use interest rates for particular purposes. (Credit controls etc. might be useful, too)
As I say, not sure about this but I don’t reject it out of hand.
There may be an argument for differential interest rates….
To counter the effect of inflation on savings?
Sorry, your concern is?
You asked for justification for positive interest rates, so I suggested for countering the erosion of savings through retail price inflation. That’s certainly a concern of mine, on low income. Judging by shopping at Tesco’s, over the past few years, there’s been significant food price inflation & shrinkflation. (They half the size of the tins, but they don’t half the price).
But why are savings more important than the interests of those paying interest?
People save because they are seeking both protection from the risk of adverse events (security, especially into the higher risks that come with old age), and independence of action in what they do. Borrowing other people’s money (individuals, not governments) not unreasonably comes with strings attached. I think Mr Parry has a point. I accept there is a problem here; how to distinguish saving from rentierism.
Very hard
I do know why people save. I do
But I am not sure why that gives me a priority
I guess that was my real question
Allow me to rehearse this argument:
Saving is a choice. Borrowing is a choice. The difference to me is that saving is a form of liberty. Borrowing less so, because ultimately it delivers you into the hands of the lender. If there is a level playing field between saver and borrower, both are delivered into the hands of the lender; and that definitely is rentierism.
MMT also points out that taxes are not the only way to control inflation. Spending priorities can also be changed of course, and can be done rapidly if need be.
This is from a US perspective, but can be read across –
“First, when we suggest that a budget constraint be replaced by an inflation constraint, we are not suggesting that all inflation is caused by excess demand. Indeed, from our view, excess demand is rarely the cause of inflation. Whether it’s businesses raising profit margins or passing on costs, or it’s Wall Street speculating on commodities or houses, there are a range of sources of inflation that aren’t caused by the general state of demand and aren’t best regulated by aggregate demand policies.”
“Second, we do not believe that any and all inflation that does result from excessive demand can and should be addressed by higher taxes. This is a distortion of our view, as years of publications can attest. When MMT says that a major role of taxes is to help offset demand rather than generate revenue, we are recognising that taxes are a critical part of a whole suite of potential demand offsets, which also includes things like tightening financial and credit regulations to reduce bank lending, market finance, speculation and fraud.”
That’s from https://ftalphaville.ft.com/2019/03/01/1551434402000/An-MMT-response-on-what-causes-inflation/, which is worth reading in its entirety.
On an entirely separate note……
I conducted a discussion with a class of newly hired graduates in the banking sector, most with degrees in Finance, Economics etc..
First, it fascinating to chat with a bunch of 22/25 year olds from around the world starting out in their new careers. I feel old and too set in my ways.
Second, very few understand the plumbing of the money system.
Third, quite a lot believe in MMT although they never used that label – and nor did I (I still want to invited back!!)
Fourth, in answer to the question, “Will any major CB reverse QE (by selling from their bond portfolio or not rolling over existing holdings) in the next 10 years?” – the room was evenly split. Not sure what I make of that.
Fifth, what would you like to ask them?? I will be with them all next week, too.
My question is easy
In whose interests should the public finances be managed, and with what goal?
Or, to put it another way, what should the Bank of England mandate be?
I will ask!!
Clive,
Are you aware that MMT economist Steven Hail used to teach banking and finance to City bankers whilst at the LSE 25 years ago? He said he feels a bit guilty about that as he only learned about MMT afterwards. Steven’s talks are excellent (e.g. those to Christian Reilly & Patricia Pino at the “The MMT Podcast”).
I will take a look. Thanks.
“very few understand the plumbing of the money system”.
Who is teaching it? May I suggest the title for a simple book: ‘The Plumbing of the Money System’. Or even an article – perhaps Richard and Mr Parry could write it.
Time…..
The plumbing of the US monetary system seems to be well understood by MMT folk like Éric Tymoigne, and I’m often told that it’s the same here except the names of the accounts are different. I guess it may not be a 1:1 read across but, unless there are mysteries/secrets in the UK system, it shouldn’t be too difficult.
We could just ask ONS. #LOL
The ONS do not know…
I found this helpful.
https://www.amazon.co.uk/DIAGRAMS-DOLLARS-Modern-Money-Illustrated-ebook/dp/B00HUF6POI
It uses a plumbing anaolgy to explain things very clearly
I might add that “borrowing” is just swapping non-interest-bearing IOU’s (money) for interest-bearing IOU’s (gilts). And the swap can be reversed if the gilt holders wish – 100% guaranteed by HM Treasury, just like the approximately £200bn held by Joe Public at NS&I is guaranteed –
“We’re 100% secure
We’re backed by HM Treasury. So all the money you invest with us is 100% secure. Always.”
https://www.nsandi.com/why-save-with-us?WT.z_search=treasury
That £200bn in NS&I is counted as part of the government debt, and has targets set by the government. Hence the significant reductions in interest recently announced by NS&I were really being announced by the government.
It’s hard work with characters like Jo Michell and Torsten Bell getting them to understand MMT simply because they won’t do the necessary homework to properly understand it. As soon as they start shouting MMT is garbage you know that’s the case.
Perhaps it’s possible to simplify what the chief issues are of living in a monetary based society in order to provide some clarity. Firstly, just attempting to survive means there are all always low grade and major crises for human beings to contend with. The low grade ones are simply gaining access to resources which means getting and maintaining an income. The major grade crises are such things as wars, weather disasters, agriculture failures, large scale pollution, pandemics, financial crashes and now climate change.
It helps, given we mostly all now live in monetary based societies, to deal with these crises to see money as flows that are required as either influxes or refluxes in lesser or greater amounts. History reveals this and the UK is a good example. The creation of the Bank of England was largely a consequence of high inflation caused by the incessant wars the country was fighting. The government under a commodity based money system was either eroding the precious metal coinage content or crying the value of coinage and banknotes down. The wealthy were especially incensed at losing the value of their accumulations and essentially through the establishment of the Bank of England lent money to the government by attaching government tax revenue streams (refluxes) for repayment of their loans. This spread the cost of wars over a longer time base and it’s believed allowed the British to build up a much more formidable military machine than their enemies. It also, of course, had the advantage of tamping down inflation not only by refluxing money but constrained government in its money creation because power to issue banknotes now resided with the privately run Bank of England.
This didn’t stop other crises, however, there were still other non-war based ones particularly financial crises. If you read Walter Bagehot’s 19th century book “Lombard Street” then the book’s central argument about the need to have a reserves creation facility (influxes) in the system to stop financial panics ultimately became accepted as necessary commonsense.
So it really is nonsense for Bell and Michell to claim that MMT is garbage when all it’s doing is clarifying that monetary based societies need both types of flows – influx and reflux to handle what life and planet throws at these type of societies and the best means of going about utilising these flows!
Bell and Michell could do better by with more studying of of the need for both types of monetary flow!
Agreed
This seems like a timely post Richard as I have been engaged in a debate within the Scottish Currency Group about MMT and tax. I have been arguing that a function of tax is as you describe as Reason (1) in your article (and in your book). I have been trying to persuade the group that a modified narrative about tax is required. Today I posted another OP on the subject and I will just reproduce it here. If you think I am wrong no doubt you will tell me and I would be quite happy to discover if and why I am wrong
MMT and Tax — a new narrative
I have been arguing within the Scottish Currency Group recently, through a number of OPs and comments, that the MMT narrative about taxation is incomplete and presents a serious weakness in the MMT proposition. I want to explain why this weakness needs to be addressed.
MMT is a description of what actually happens in the monetary system with a fiat currency. However it is an ECONOMIC description based on an economic definition of currency and money. This is only one dimension of the matter.
Money also needs to be understood and described in the dimensions of psychology, sociology and politics — taken together this amounts to an ANTHROPOLOGICAL dimension. This is where MMT’s weakness is located.
Let’s start from the MMT proposition that all fiat money is created by a Central Bank at the instruction of a sovereign government and that this is the source of all government spending. Public spending is not dependent upon revenues derived from taxation. This proposition is correct from the perspective of macroeconomics.
However, this immediately prompts the question “In that case why do I have to pay any taxes?” The standard MMT answer is that taxation is required to manage inflation risk by removing money from circulation in the economy.
The problem with this proposition, which is correct from the perspective of economics, is that it undermines whatever motivation citizens have for paying taxes. That motivation is required to overcome the natural instinct to “keep one’s own money” as much a possible. The motivation to pay tax voluntarily springs from the basic human characteristic that we are social beings and have both an individual and a collective identity. We care not just about ourselves but also about our community. We pay our taxes (with varying degrees of reluctance) because this is our individual commitment to and contribution to the general well being of us all.
Telling citizens that taxes do not pay for public spending is a direct threat to the “social contract” that binds communities.
The second problem is that MMT also argues, again correctly from the economics perspective, that tax is what gives a currency its value. If citizens are persuaded that their taxes don’t fund public spending and resist payment of tax then taxation can no longer give value to the currency.
Of course the state could resort to various degrees of force in order to compel citizens to pay taxes. It is inevitable that this would eventually undermine the legitimacy of the state, lead to a break down in law and order, disintegration of the society into tribal groups, growth in the unregulated economy and the emergence of gangsterism. We usually call such a scenario “a failed state”.
If we look at these issues from the ANTHROPOLOGICAL perspective it is immediately apparent that both the legitimacy of the state and the legitimacy of the currency are based on TRUST and the formation of a web of mutual rights and obligations amongst citizens. MMT starts from the premise that all money is a “promise to pay” — that means money is a matter of trust.
The economics of MMT cannot function unless there is a well developed web of mutual rights and obligations which bind the society and within this web resides the authority to require payment of taxes and the acceptance that tax is due and is paid voluntarily. The “promise to pay” (money) also resides within this trust based social web and cannot exist outside of it.
Which brings me to the issue of democracy. Trust in the state, and the government, is based on an understanding that the state and government acts in the interest of all citizens individually and collectively and does not serve the vested interests of a minority. The promotion and maintenance of trust, therefore, depends critically upon the Constitution, which must be designed to uphold fundamental individual and collective rights.
A democratic Constitution and a legitimate sovereign currency cannot exist separately and, within the resulting “social contract”, taxation has an important function in maintaining the web of mutual rights and obligations.
It is entirely possible for the MMT narrative to integrate this anthropological perspective into its propositions. MMT simply has to describe tax in a modified manner as follows:
“A sovereign government with its own currency does not require that taxation funds all public spending and in most circumstances the revenues from taxation cannot be sufficient to fund all the public spending that a society needs. Any shortfall can ALWAYS be covered by the ability of a sovereign government to create new money, subject only to the limitation imposed by the real capacity of the economy, which is limited by the physical resources available to it.”
It is also the case that the proponents of MMT must also be proponents of a democratic Constitution. Currency campaigners ignore the importance of the Constitutional debate at their peril.
There are, I have to admit, those within MMT who still do not get the importance of tax. I clearly regret that.
I have written some academic work on this subject
https://www.cambridge.org/core/journals/social-policy-and-society/article/modern-monetary-theory-and-the-changing-role-of-tax-in-society/B7A8B0C7C80C8F7E38D20BE4F5099C83
http://www.paecon.net/PAEReview/issue89/Murphy89.pdf
https://scholar.google.co.uk/scholar?oi=bibs&cluster=2978528249610729569&btnI=1&hl=en
MMT scholars have long acknowledged that MMT aligns with the findings of historians and anthropologists (e.g. Randy Wray talking here about how the recording of debits and credits is very probably how writing itself began). So anthropology is already “part of the narrative”.I think its a mistake to imply, as your definition does, the government spends ‘tax’ money and ‘printed’ money. From there its a short step to the right-wing (incorrect) framing of ‘sound’ money & ‘funny’ money and accusation of being ‘MMT loons’.
Anthropology is also a study of the present….it’s not just about how ancient societies functioned. What I am trying to say is that paying tax is part of the web of mutual rights and obligations that bind a modern democratic society together and MMT does not seem to reflect this in its narrative about tax.
I think it assumes it exists
Given how fundamental tax is to MMT it cannot be said it ignores it
“money is a matter of trust” is surely the essence of the matter. The history of money is the history of trust.
I very much your blog and feel more informed than I’ve ever been but I feel like I’ve so much still to learn.
Is Stephanie Kelton’s Deficit Myth a good book to begin learning about MMT? Or are there any others you’d recommend?
That’s easily the best right now
Great article.
The Left in this country is a busted flush. They’re not going anywhere fast and I’m tired of waiting.
If I had the time I ‘d start a blog slagging off the Guardian and inviting progressive to boycott it. I don’t know about you but I want Viner gone. Now.
I am utterly sick of people on the Left who think that ‘caring’ is all that you need to do to differentiate yourself from the Right. There are too many followers in the Left and not enough leaders. Cowards too.
As I promised I have continued to buy editions of Kelton’s book for my family and friends – as many as I can afford – for Christmas. On the title page of each one I have quoted from Henry David Thoreau (1817-1862):
“I went to the woods because I wished to live deliberately, to front only the essential facts of life, and see if I could not learn what it had to teach, and not, when I came to die, discover that I had not lived”.
Henry David Thoreau, “Where I Lived, and What I Lived For”, in Walden.
Michell needs to go for a walk in the woods in my opinion.
“MMT places tax within its true macroeconomic framing.”
One of MMTs golden nuggets that should be embraced by the Left. Great line; great article.
Thanks
One of the greatest reservoirs against taxation in that context can be found in the professional middle classes.
I have found none who are in favour of it and I mix widely with them to know.
One of the reasons I suppose they are so hostile to tax is that so many are up to their ears in debt- property debt mostly as well as car debt (those nice Audi’s and Range Rovers are very expensive after all). What I see is debt doing is what we’ve said it does here – destroying the value of money.
To put it plainly, too many would rather see tax go as an expenditure so that they’d have more money after dealing with their debts. It’s debts (personal consumption) versus tax (which they think is for other people’s consumption and which they think is unfair). MMT scotches that untruth.
It would not occur to many that it is their buying choices that are creating their debts. Not taxation.
But it also makes you ask what sort of ‘financial society’ we want? We all want/need houses and at the moment will still need cars (although they are not good for us).
There must be better ways to financially organise these matters. These fundamentals must be dealt with somehow.
Thanks for this. Since discovering your blog a few months ago I have become more interested in economics. This particular discussion (of an individual I had never heard of) is actually quite illuminating. It does seem to me though that as long as you don’t use the initials MMT there is not a lot between you.
From what I get here, it seems to me there are only two major points of difference.
First the need to “balance the books”. However I am not sure you (I haven’t much read other protagonists of MMT) have shown that this is unnecessary, only that it is quite loosely coupled so that any balancing can only be seen over timescales of multiple years or decades. And over that timescale a lot will depend on whether there has been any “real” expansion of the economy to take into account.
Second, but most importantly, the role of taxation. It seems to me this is the most liberating revelation which some don’t see: if the role of taxation is not to balance the books but to remove money from the economy at a rate and timepoint which stops the supply of money leading to inflation (or, I suppose, currency depreciation with respect to trading partners) then the way taxes are applied matters more than whether they generate “government revenue” within any particular accounting period. So it is entirely appropriate to design them for social or environmental good rather than simply for their money-raising capacity.
I suspect my understanding remains naïve, but hope you can take my comment as it is intended — as a prompt from someone curious for further blogs to correct my misunderstandings which may well be common to others.
I think it a little more complex
But I like the summary, especially on tax
Actually, it depends what you mean by ‘balancing the books’. Since this depends on double-entry book-keeping (and Economists are ill-educated on this critical subject – the “plumbing” of the money system), the books must ‘balance’.
Neoliberalism is what I would term a post-Heisenberg Delphic oracle. It is trying to persuade the world that MMT is both true and false, at the same time. What it means by ‘balancing the books’ thus depends entirely on how close neoliberalism is to being ‘found out’ by the public.
NB. Neoliberalism isn’t capitalism. It is rentierism for the uncompetitive, who rely on Government for special privileges to operate faux-capitalism, assisted by tax havens, Government contracts and weak financial regulation to obfuscate the endemic uncompetitiveness.
There might be an obvious answer to these questions:
1. Why didn’t communist countries adopt MMT ?
2. If all countries used MMT, what’s to stop the British government getting the bank of England to issue a few billion pounds and then using it to buy Amazon off Jeff Bezos, for example?
Have you actually the slightest idea what MMT is?
“what’s to stop the British government getting the bank of England to issue a few billion pounds and then using it to buy Amazon off Jeff Bezos, for example?“
Why is that not a good idea? Or at least bid for the U.K. part of the business. A central premise of MMT is to create full employment but also control the tax requirement in the UK. Well you have continuous cited you can’t do this with big global multinationals. Well buying them out and making them entirely domestic businesses is one way isn’t it?
No
And the question is too absurd to spend time on
A government can create as much money as it wants. What’s to stop it from using it, or exchanging it into another currency, to buy up another country’s assets? Sorry if it’s a stupid question. I get how it would work in a national system but I don’t understand how it works in a global system.
Exchanging money does not destroy the original currency. Someone buys that original currency
If you make it without purpose (and MMT is clearly opposed to that) you simply change the exchange rate I.e. you get no more foreign currency
MMT suggests money creation for a purpose on useful public spending
No one with sense says make money for its own sake. Positive Money did for a while but I think they have seen sense now
I haven’t read , or understood enough about MMT.
Readily accept that money is created by government not ‘borrowed’, but concerned about asset price inflation resulting from QE – a massive increase in wealth inequality.
Michael Hudson says :
By failing to distinguish the use of bank credit to buy assets (hence, adding to asset-price inflation) as compared to government deficit spending, both the old monetary formulae and the frequent MMT contrast between public and private sectors neglect the need to distinguish the FIRE sector’s “wealth and debt” transactions from how wages and profits are spent in the production-and-consumption economy.”
Should we not distinguish between public spending which increases demand and supply in the real economy, from that which merely pumps up asset prices?
Of course
I could not agree more
Hence why we need green QE and not QE
They are fundamentally different, as I have said for a decade
I have listened to a new podcast with Ian McFarlane the former governor of the RBA (Australian Reserve Bank) entitled the “failure of monetary policy”. Link to podcast #101 at
josephnoelwalker.com/episodes/
In it he discusses MMT amongst other things. Basically he confirms that the MMT description of how government spending works is entirely correct (i.e spend before tax) and that a government with a fiat currency cannot default.
He makes a distinction between funded and unfunded deficits. Funded paid for by issuing bonds, unfunded by not issuing bonds. He claims that banks would not survive in the unfunded model i.e. they would not make sufficient income from reserves without bond income and there would be a subsequent growth in unregulated shadow banking to replace their function.
Perhaps someone with economics expertise could listen and offer more insight and analysis of what he is saying regarding unfunded deficits as this seems to be his reason for dismissing the usefulness of MMT.
He also states that monetary policy doesn’t work and reserve banks have known it for years! Quite a revelation from a former governor.
The suggestion doe# not make @ lot of sense
Central reserve balances in the U.K. carry interest at 0.1%
They do help solvency
I am not sure they contribute that much income
Thank you very much for this forensic demolition of Michell, Bell, and the wrong-headed Left, and appreciate the comments. Including George S Gordon’s quote from NS&I.
[…] Read here […]
On Mr Michell’s views, which I acknowledge I have not independently examined; but it seems he is following the standard neoliberal response to MMT; take all its clothes, claim them for neoliberalism, go on as before; and insist, in the phrase of the age: “nothing has changed”.
That’s it
“15. And so is Michell’s conclusion garbage by implying MMT is a programme to cut spending, when he says We must not allow misguided arguments about “tax not paying for spending” to erode the tax base, increase inequality and open the door for free marketeers to argue for the need to cut back on essential social programmes. Literally nothing could be further than the truth about MMT.”
This is the crux if the issue for me. There is a danger that MMT’s correct view of money can be used for purposes other than intended. Stephanie Kelton says herself that this could well happen. Namely that regressive forces will argue that tax cuts (for the rich) are the solution, not increased spending.
I don’t see a major problem with Michell pointing that out. What we have to do is get solid arguments why this is not a good idea, to counter this happening…or that is exactly what will happen.
But that is done by rooting this in the power of the spending
What’s sad about individuals like Torsten Bell who fling the insult that MMT is garbage is they can’t back up their insult with an alternative coherent macroeconomic explanation how the UK’s reserves based monetary system works including why it got to be a reserves based system in the first place.
The two central reasons why Bell can’t do this are he can’t think in terms of money flows as influx and reflux and secondly views everything through a microeconomic lens.
This latter lens derives from Libertarian/Neoliberal thinking where money is not regarded as an instrument of social obligation simply because from this mental perspective nothing in life is really seen as connected to anything else.
Now I’ve made some notes , let’s bring the garbage in
Where’s my Tribune ?
The problem with academia is that it is not really about being ‘right’ in the true sense of the word. It is about getting as many people to subscribe to your point of view as possible, and seeking validation and self worth through this, often at the expense of other more important things in life. This is why change is such a slow process. Because successful academics/advisors have dined out on their ideas for many years, and are not about to see that ruined for the sake of ‘progress’ and ‘positive societal change’.
This is all about the battle for Anneliese Dodds ear.
Previous advisers need to continue to discredit MMT ; otherwise they expose themselves as being wrong in the past for preaching various brands of conventional economic responsibility.
The real arguments should be about the best ways to remodel the economy ,that is not going to go back to normal , but requires more investment in health and care, in responding best to climate change, to the consequences of brexit, and so that the country can cope with ongoing risks of pandemics, the threat of mass unemployment as companies in unsustainable sectors perish , as new technology and communications makes decentering more feasible and safer, and when winners will be outnumbered by angry losers.
MMT provides the left with credible arguments for not boxing themselves in an economic corner, but there a lot of people who want to place them there anyway.
Somewhat off-topic but here’s a novel way of taxing the NHS out of existence by our “world-beating” government so it and Covid-19 don’t cause any problems anymore:-
https://www.theguardian.com/society/2020/oct/11/hospital-bosses-urge-nhs-england-to-drop-unfair-fines-as-covid-admissions-rise
This is staggering…surreal even
The surreal aspect is that if you do not fine NHS trusts for not treating patients you supply the Trusts with an incentive to not treat patients (because they are being paid anyway).
Their clinical staff are more than willing to supply market needs…
https://www.theguardian.com/money/2020/oct/10/covid-uk-fund-own-operations-private-for-knee-hip-cataract-operations-pay
Again surreally these operations in the private sector are being facilitated by NHS anaesthetists who may have to go back to treating COV patients because there is a national shortage.
An ability to see the whole picture is not only valuable in economics but also in looking at the NHS.
The battle there is between those that identify that the crucial problem is in shortage of capacity and those that would centralise and consolidate capacity further. Johnson is dressing up new hospitals as extra capacity whereas they are really further consolidation ie making the problem worse in return for a new building.
Little did I realize when I first encountered double-entry book keeping as a graduate trainee 30 years ago that I was acquiring essential knowledge for some understanding of macro-economics and so much more. Without getting too philosophical, there’s something fundamental in knowing there’s a need to figure out where the other entry goes in any transaction. A modest proposal: basic double-entry booking should be part of any economics course at school or beyond.
I agree
Workling out where the ‘dangling debit’ is can be difficult
But it’s always necessary
It can also be the ‘cunning credit’ that refuses to disclose its location, of course
‘I want my,
I want my,
I want my MMT’
(Sung to the well know Dire Straits ‘Money for nothing’.
🙂