I am not sure what others have made of the discussions on modern monetary theory (MMT) that have dominated this blog during the last week or so, but I have found them useful because it has considerably helped the development of my own thinking around MMT<\/p>\n
I had already summarised some of that thinking in my publication of an explanation of what I think MMT says. There are, however, those who follow MMT who dispute that my interpretation is correct. That I acknowledge. I would say in response that an idea that cannot change and develop is not one worth having. What I am suggesting that MMT does need to change and develop.<\/p>\n
To summarise the differences between what might be called Founder\u2019s MMT, as explained by Warren Mosler, and what I would call Reformed MMT (or RMMT, as a commentator described it), these are, again in my opinion, as follows, with headings to help identify the issues.<\/p>\n
This summary will be added to my explanation of MMT in due course.<\/p>\n
To make this post easier to read for some for whom the following table will be hard to follow on a web browser a PDF version is available here<\/a>.\u00a0<\/em><\/p>\n a)\u00a0\u00a0\u00a0\u00a0 The government of the jurisdiction in question has a central bank.<\/p>\n b)\u00a0\u00a0\u00a0 That central bank issues the fiat currency that is in use as the only legal tender within that jurisdiction.<\/p>\n c)\u00a0\u00a0\u00a0\u00a0 The jurisdiction in question can borrow in its own currency and need not do so in any other currency.<\/p>\n MMT does not, and is not intended to, provide a history of money or an explanation of its role in any circumstance other than those noted above.<\/p>\n MMT is modern in the sense that the above conditions reflect relatively recent economic history<\/td>\n<\/tr>\n A tax need not be imposed before a government spends in the currency it declares to be legal tender because it is that declaration and the requirement that all enforceable debts be denominated in it that provides money with its value.<\/td>\n<\/tr>\n It is not tax in that case, but commercial contract law, that puts a currency into circulation and which provides money with its value, having said which if the value of tax payments owing to a government is a significant part of national income those in the jurisdiction have little choice but to transact in that currency to avoid exchange rate risks and costs when making tax payment.<\/p>\n In the view of Reformed MMT, tax is imposed by a legal government to uphold the rule of law, which rule of law is used with public consent as the basis for the reprimand of those refusing to comply with the communal requirement that they do so. There is a social contract in which tax plays a key role.<\/td>\n<\/tr>\n The commercial banks have the task of translating that commercial bank-created money used by their customers to pay tax into sums due for settlement via their central bank reserve accounts, which accounts have been pre-loaded with government-created money as a result of government spending preceding the payment of tax.<\/td>\n<\/tr>\n <\/td>\n The guarantee of work to anyone who wants it is financed centrally and administered locally.<\/p>\n The work is paid at a basic rate which is, however, intended to set a floor on the acceptable pay rate within markets below which employers cannot drop and still secure the services of employees.<\/p>\n Since government action in taxing before spending necessarily created unemployment increasing spending by making payment to cover the cost of the Job Guarantee necessarily restores the full employment which it was assumed existed before any tax was imposed.<\/p>\n <\/td>\n If there are unemployed resources and people in that economy then full employment can be delivered without risk of inflation arising meaning that no additional taxation to match the spending made is required.<\/p>\n If there are labour but not physical resources underemployed in the economy for which a government is responsible a government has to decide if the cost in terms of a declining exchange rate can be justified to deliver full employment.<\/p>\n Central management and forecasting of the economy is essential to reduce the timing issues within economic cycles that can result in periodic unemployment because of failed market signals on supply and demand.<\/p>\n A job guarantee might address the consequences of failed market signals.<\/td>\n<\/tr>\n <\/p>\n As a consequence, the price level is necessarily a function of prices paid by the government\u2019s agents when it spends, or collateral demanded when it lends.<\/em><\/strong><\/p>\n The government is, therefore, solely responsible for the rate of inflation within the economy.<\/p>\n <\/td>\n The government as a major employer and purchaser of resources can exaggerate these inflationary tendencies.<\/p>\n The government can also fuel inflation by taxing insufficiently.<\/p>\n Because the government is not a monopoly creator of credit, the majority of which is the result of commercial banking and trade transactions, it cannot be suggested that the government has sole control of a currency. As such it cannot be solely responsible for inflation.<\/p>\n A government can tackle inflation. Taxation is the only effective tool available to it to do so.<\/td>\n<\/tr>\n The government need never borrow since it can always create the funding it requires to fulfil its mandate. However, as a consequence of the historical legacy structure of the world\u2019s major financial markets governments need to:<\/p>\n a)\u00a0\u00a0\u00a0\u00a0 Issue bonds that can be used as security for lending within financial markets.<\/p>\n b)\u00a0\u00a0\u00a0 Provide a long-term savings facility to pension funds and others who need it and wish for the implicit guarantee that saving with the government provides.<\/p>\n c)\u00a0\u00a0\u00a0\u00a0 Provide a savings facility to the public who also wish to avail themselves of a facility that has no risk regarding repayment.<\/p>\n The provision of such a facility is a banking arrangement. It is not borrowing, although those who have deposited funds are creditors of the government.<\/p>\n There is no need for a government to balance sums held on these deposit accounts with the cumulative difference between sums it has expended and tax charged (the inappropriately called \u2018national debt\u2019). The sum ion deposit may be less, equal to or more than that supposed debt. The difference will be reflected in balances with the central bank.<\/p>\n The government can use this desire on the part of savers to deposit sums with the government to advantage. In the absence of markets providing any useful social purpose for savings by turning them into a source of capital for investment the government might do that instead. As such these savings could be used to deliver full employment within an economy though their use as financial capital that could stimulate full employment in times when that does not happen.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n <\/p>\n","protected":false},"excerpt":{"rendered":"\n\n
\n Founder\u2019s MMT<\/strong><\/td>\n Reformed MMT<\/strong><\/td>\n<\/tr>\n \n What MMT does<\/strong><\/td>\n<\/tr>\n \n MMT describes the role of money in the macroeconomy. It does so without recognising that there was any significant change in that role between the era of asset-backed currencies and the fiat currency era.<\/td>\n MMT describes the role of money in a macroeconomy where a fiat currency is in use, subject to the condition that:<\/p>\n \n Purpose of MMT<\/strong><\/td>\n<\/tr>\n \n To provide a theoretical explanation of the role of money in the economy over time as a largely academic pursuit.<\/td>\n Tp provide an explanation of how money actually works in the economy now, largely as a guide to policy making.<\/td>\n<\/tr>\n \n Summary of MMT<\/strong><\/td>\n<\/tr>\n \n Founder\u2019s MMT says a government can fund its spending using the currency of its choice using money created for it by its central bank without needing the prior settlement of taxes or the taking of loans.<\/td>\n Reformed MMT says that a government can fund its spending using the currency of its choice using money created for it by its central bank without having to necessarily impose taxes take loans in advance of doing so<\/td>\n<\/tr>\n \n Ordering of spend and tax and the creation of a valuable currency <\/strong><\/td>\n<\/tr>\n \n Taxes are imposed but not paid before the government can spend because that imposition provides money with its value in exchange. Without having imposed a tax first a government could not spend in its own currency because that currency would not be accepted within the economy.<\/td>\n Taxes need not be imposed or paid before the government can spend. A government can always spend without raising a tax first by creating the money required to do.<\/p>\n \n Founder\u2019s MMT says that a government will, to secure the use of its currency:<\/td>\n Reformed MMT says that a government will, to secure the use of its currency in an economy:<\/td>\n<\/tr>\n \n a.\u00a0\u00a0\u00a0\u00a0 Impose a tax on its population that must be paid using the currency that it creates. \u00a0This will be a poll tax of some form, payable irrespective of the availability of income to make settlement.<\/td>\n a)\u00a0\u00a0\u00a0\u00a0 Declare the money that it creates the sole legal tender of the jurisdiction in question.<\/td>\n<\/tr>\n \n b.\u00a0\u00a0\u00a0 The government imposing the tax will offer employment to its population, forcing them out of their existing employment and into the employment of the government.<\/td>\n b)\u00a0\u00a0\u00a0 Refuse to uphold contracts in other currencies for domestic purposes, including (but far from exclusively) for the settlement of taxes.<\/td>\n<\/tr>\n \n c.\u00a0\u00a0\u00a0\u00a0 The government will make settlement of the liability due to those it has forced into its employment that they will then in turn use for transactions within the economy for which that government is responsible, meaning that the currency in question is widely available for settlement of the tax previously imposed.<\/td>\n c)\u00a0\u00a0\u00a0\u00a0 Require that bankers use the currency in question for their domestic transactions, including their inter-bank settlements.<\/td>\n<\/tr>\n \n d.\u00a0\u00a0\u00a0 Payment of the tax due can then take place.<\/td>\n d)\u00a0\u00a0\u00a0 Actually use this currency in the course of its own market interventions, and refuse any other, meaning it will only accept payment of tax in this currency.<\/td>\n<\/tr>\n \n Following this logic, money secures its value by being imposed, violently if necessarily, on society. Money secures its value from the enforced payment of tax.<\/td>\n Following this logic, tax is imposed voluntarily on a society that has secured the benefit of government spending and is settled in the legal tender of the jurisdiction, which is used for all commercial transactions, from which it secures its value.<\/td>\n<\/tr>\n \n To achieve this outcome, Founder\u2019s MMT says that taxes are imposed before government spending can take place within an economy.<\/td>\n As a result, Reformed MMT says that a government wishing to spend without having either imposed taxes or taken loans in advance of doing so is able to do so because it can secure loans in the currency it has created from its central bank because that currency is the only legally enforceable currency in which contracts might be concluded in the jurisdiction in question, meaning that those wishing to transact must use it if they are desirous of being paid.<\/p>\n \n Purpose of tax<\/strong><\/td>\n<\/tr>\n \n a)\u00a0\u00a0\u00a0\u00a0 The primary purpose of tax is to create unemployment so that people are forced to work for the government and so accept its currency which they need to settle the taxes it has imposed before providing any other means to make settlement.<\/td>\n a.\u00a0\u00a0\u00a0\u00a0 Tax is primarily used to reclaim the money created by government spending from the economy to control inflation.<\/td>\n<\/tr>\n \n b)\u00a0\u00a0\u00a0 By forcing people into employment with the government so that they can earn the money require to pay their tax liabilities it is suggested that tax provides the government created currency with its value.<\/td>\n b.\u00a0\u00a0\u00a0 By requiring payment of tax in the currency the government creates and, assuming such liabilities are sufficient in proportion to total income, the economy pragmatically adopts the government created currency for general use to avoid currency exchange risks that would otherwise arise when making tax payments.<\/td>\n<\/tr>\n \n c)\u00a0\u00a0\u00a0\u00a0 The payment of tax destroys the money created by government spending, but never funds that spending.<\/td>\n c.\u00a0\u00a0\u00a0\u00a0 Tax is used to redistribute income and wealth, reprice market failure, to act as an instrument for the delivery of economic, fiscal and social policy and to promote democracy by representing the consideration in the social contract.<\/td>\n<\/tr>\n \n <\/td>\n d.\u00a0\u00a0\u00a0 The payment of tax destroys the money created by government spending, but never funds that spending.<\/td>\n<\/tr>\n \n The role of the central bank<\/strong><\/td>\n<\/tr>\n \n a)\u00a0\u00a0\u00a0\u00a0 To create the currency used by the government by lending it into existence for that government to spend.<\/td>\n a.\u00a0\u00a0\u00a0\u00a0 To create the currency used by the government by lending it into existence for that government to spend.<\/td>\n<\/tr>\n \n b)\u00a0\u00a0\u00a0 To administer the central bank reserve accounts through which the money created by the central bank for the government is injected into the economy via the commercial banks that have such accounts.<\/td>\n b.\u00a0\u00a0\u00a0 To administer the central bank reserve accounts through which the money created by the central bank for the government is injected into the economy via the commercial banks that have such accounts.<\/td>\n<\/tr>\n \n c)\u00a0\u00a0\u00a0\u00a0 To receive payment of tax from commercial banks via the central bank reserve accounts, using such funds to cancel the sums owed by the government to the central bank when money was created to facilitate its spending.<\/td>\n c.\u00a0\u00a0\u00a0\u00a0 To receive payment of tax from commercial banks via the central bank reserve accounts, using such funds to cancel the sums owed by the government to the central bank when money was created to facilitate its spending.<\/td>\n<\/tr>\n \n The money in which tax is paid<\/strong><\/td>\n<\/tr>\n \n Tax is paid using government-created money.<\/td>\n Tax is paid using commercial bank-created money because government-created money does not circulate within the tax-paying economy that only has access to commercial banking facilities.<\/p>\n \n The cause of unemployment <\/strong><\/td>\n<\/tr>\n \n Unemployment is created by the government spending insufficiently to put to use the resources (people) it has made unemployed as a result of having imposed taxes on the economy.<\/p>\n Governments do not deliberately create unemployment, although they can tolerate a level of unemployment created as a consequence of the inefficiencies found within any economy because of failures to communicate and consequent timing differences in required actions arising between the state and private sectors, both of which sectors can as a consequence contribute to the creation of that unemployment as a result of the inevitably imperfect actions of each of them.<\/td>\n<\/tr>\n \n The remedies for unemployment <\/strong><\/td>\n<\/tr>\n \n The Job Guarantee prevents unemployment.<\/p>\n A government that can spend without necessarily having to tax can pursue a policy of full employment in the economy for which it is responsible.<\/p>\n \n The cause of inflation <\/strong><\/td>\n<\/tr>\n \n A currency itself is a public monopoly and monopolists are necessarily \u201cprice setters.\u201d<\/p>\n Inflation has multiple causes within a market-based economy without any necessary involvement of government, whether that is due to price speculation, excessive profit taking, the exploitation of monopoly power, deliberate disruption of supply chains, or imbalances of power within the marketplace, e.g. between monopsonist employers and employees denied union representation.<\/p>\n \n The role of government \u2018borrowing\u2019 and government \u2018debt\u2019<\/strong><\/td>\n<\/tr>\n \n Governments need not borrow. They are the sole creator of currency and as such cannot ever need to borrow it back from the economy into which they have injected it by taxing less than they have spent.<\/td>\n The government is not the sole creator of money since it can be created by commercial sector banks. This will always mean that the total money supply of a jurisdiction will be in excess of the net difference between cumulative government spending and taxation levied.<\/p>\n