Modern Monetary Theory and the economic crisis

Also, here is part of a post I did elsewhere a good while ago, which I should have cross-posted here, which I think is a pretty nice way of introducing MMT with a few easy incremental steps:
1: Unlinks government spending from taxes, and limits it based on the inflation target instead; nice way of avoiding hyperinflation scaremongering, and forces people to talk in terms of inflation.
2: Gives a pretty watertight way of showing how taxes are directly a method of managing inflation, and also implicitly shows how 'deficit' spending adds money to the economy, and government 'surplus' would remove money
3: Gives a rather big perspective change on what taxes are actually for, and totally disarms a lot of conservative economic narrative in doing so.


Lets say that this is a representation of how government finances currently work: (don't click the table headers, as it messes them up)
||Gov Current Account||Revenue Account||Private sector
Operation||Assets||Assets||Assets
Taxation||||+Tax||-Tax
Revenue to current account||+Tax||-Tax||
Government spending||-Spending||||+Spending

Now lets change this, and allow government to spend through money creation (we need to add the central bank for this); this is shown by 'Current account top-up', which would only happen when the current account hits 0 (when all tax funds have been used up):
||Central Bank||Gov Current Account||Revenue Account||Private sector
Operation||Money supply||Assets||Assets||Assets
Taxation||||||+Tax||-Tax
Revenue to current account||||+Tax||-Tax||
Current account top-up||+Money creation||+Money creation||||
Government spending||||-Spending||||+Spending


Here is where the whole perspective change happens: If a government can spend through money creation (limited only by an inflation target of 2-4%) then this is equivalent to taking taxes out of the money supply itself.

This is effectively exactly the same as the previous table, you just change the operation above, 'Revenue to current account', to 'Destroy taxes' below (taking the taxed money directly out of the money supply itself):
||Central Bank||Gov Current Account||Revenue Account||Private sector
Operation||Money supply||Assets||Assets||Assets
Taxation||||||+Tax||-Tax
Destroy taxes||-Tax||||-Tax||
Current account top-up||+Money creation||+Money creation||||
Government spending||||-Spending||||+Spending


So, what is the purpose of taxation, for a government with control over its own currency?
Such a government does not need taxes in order to fund spending, do they? (they can always source it from money creation)

There are economic limits to this though, because you don't want to cause excessive inflation beyond 2-4%, so government can spend up to the inflation target limit; this means, that for a government with control over its own currency, taxes are used to manage inflation.


The first response to this I expect, is (rightfully enough) pointing out that currently, government can not fund itself through money creation, but this is a political restriction only, because there is no fundamental economic restriction to doing this, only political.

So if that was the case, that tax is used to manage inflation, and is not used for government funding, then it doesn't make sense anymore to say that we are funding social welfare, health services etc. with our taxes; the entire "my taxdollars pay for x, y, z; pay for wasteful public service a, b, c" line of argument becomes false, because government can always fund that regardless of taxes, you are instead paying taxes in order to prevent/reduce inflation.


If you can't frame taxes then, as supporting services x, y, z and such, then how should they be divided up? What is 'fair' and what defines the most equitable way to spread out the tax burden?

The primary purposes tax could then undertake would be:
Disincentivizing socially harmful activity, such as pollution, fraud (something we see enormous amounts of in finance and business), destructive business activity (such as CEO pay linked to short-term rather than long-term profits, causing incentives for fraud), destructive financial speculation (causing inflation in economies, through inflating essential asset prices), among much else.

Wealth redistribution; no matter how good laws/regulations are, there are always going to be some loopholes that enrich a few before they are closed, and the dangers of the influence of wealthy individuals upon politics are well known, so taxes can also play a role in wealth redistribution, and in capping off the amount of wealth (i.e. power over society) any one person can wield (outside of elected office, in the case of power).

Controlling resources; when some resources become a scarce or endangered supply, such as trees/fish-populations, taxation can be used as a tool to disincentivize the depletion of that supply, and for other resources (such as oil), can be used as a means of moving an entire economy away from relying upon a particular resource, which may cause economic trouble through shortgages in the future, or which is harming the environment in the long-term (though taxation is a somewhat blunt tool here).

These are just a few of the primary roles taxes would then undertake, after the transition to a government that utilizes money creation; there can be yet more besides this (which don't come to mind offhand).

You can find a lot more writing on this, at sites like New Economic Perspectives.

No, MMT would generally support a standard level of inflation (between 2-4%) in currency, which will erode its value over time, meaning you'd still have to invest it and get a return, in order to beat inflation.

One other small difference there, is that you wouldn't be able to invest in government bonds (national debt) anymore, to gain earnings on the interest, because government would not need bonds to fund itself anymore; you'd invest in the private sector instead.

moneymad wrote: »

Well I think that's not a very good system at all. More of the same.

Well, it's a choice between inflation or deflation (the latter being a situation where the value of money increases over time), and deflation has a number of regressive negative effects:
1: Creditors (lenders) get an unfair advantage over debtors, because the principal of the loan the debtor took out will increase in value over time, meaning the debtor has to pay back an increasing principle over time, and the compounded interest on top of that, which is very regressive.

2: The increase in value of money has to come from somewhere in a deflationary economy as well, and it is economic growth which spurs the increase in value of the currency; this increase in value will disproportionately go to the rich, to people who hoard money, which is effectively like a tax on economic growth itself, and distributed highly regressively.

So, due to this and other reasons, a small level of inflation is preferable (which is also why a gold standard is bad, because it is deflationary; Bitcoin eventually will be deflationary as well), and it also incentivizes people to put their money to productive use, in order to keep ahead of inflation.

moneymad wrote: »

How would governments fund themselves?

Governments would fund themselves directly through money creation (limited by an inflation target), and (as described in this post) would use taxes to keep within inflation targets.

ezra_pound wrote: »

I have tried rational debate on the issue but, like so many others in this forum, I found that that is a pointless exercise so I have decided to try satire as a last resort when logic has failed.

Yes because you pretty much don't have any rational arguments against it (and aren't interested in trying to present any), hence your resorting to what is supposed to be 'satire'; you make clear here and elsewhere on the forum, you come into discussion over it with zero interest in actually discussing it, only in dumping on threads to derail discussion of it.

I'm happy to engage in debate on this topic, with people who are critical of it (even with people who either clearly have some personal issue, or who only hold the most specious respect for logical argument, with no actual interest in the topic other than to disparage it), but it is indeed a pointless exercise, trying to debate with someone who does not even have an argument at this stage, and is just taking a dump on a thread, for the sake of it (months after they stopped bothering posting any real arguments).

ezra_pound wrote: »

Fair enough. Obviously we won't reach a compromise on this. Id just like to make two comments in response to this post:
1 I'm not the only one who claims to have this experience with you. There are many of us who find any debate with you pointless and tedious.
2 you have a habit of hijacking other debate with the same argument and degenerating lots of threads to discussions on the same topic i.e. MMT.

Anyway. Hope the satire didn't offend you
Too much!

If people have a problem with the manner in which I debate, they are free to state what problems they have, and if the criticisms makes sense, I would take that on board; the posters who have the most visibly biggest problems with my posts describing MMT policies, tend to be the ones that drop into wholly specious levels of argument, and give up any effort at honest discourse (preferring to nitpick, pour scorn, and try to disparage discussion); usually it is so persistent, that it is not possible to just ignore it, and thus it leads to heavily circular arguments; that is certainly pointless and tedious.

The topic of public (government) use of money creation, is applicable to every single political/economic thread, that relates even remotely to the national debt, government spending, austerity, the economic crisis in general, and just about every discussion involving any of that.

People had a problem with me specifically mentioning MMT in support of my arguments before, but there have been no similar problems with discussing its policies instead; people are free to challenge my arguments on that topic whenever they are brought up, and nobody has presented a criticism of it that I have not provided an explanation/solution for.

My experience, is that most people are willing and interested in learning about it (and most stay understandably skeptical, which is grand), and there are a core number of posters (typically a handful of Austrian/Libertarian and comparably economically-right-wing posters) who love to disparage it and try to prevent discussion of it altogether.