Saturday, October 16, 2010

Dishonest in Dallas


I'm gonna go back to Warren Mosler's Dallas address, because that way I don't have to transcribe Mosler's words. He opens the Dallas address with these words:

Honesty in government is a core value of the Tea Party movement and the most basic value in any representative democracy. Accordingly, my first proposal is that all candidates for public office be sworn in: ‘I solemnly swear to tell the truth, the whole truth, and nothing but the truth, so help me God.’ As a consequence, any subsequent lies are perjury, and punishable by law.

And this is relevant because...


Suppose you have $5,000 in your bank account and you write a check to the government for $1,000 to pay your taxes. What happens? You can see it on your computer screen. The number 5,000 changes into the number 4,000. The number 5 changes to the number 4. All the government did is change the number in your bank account. They didn’t ‘get’ anything. No gold coins dropped into a box at the Fed. Yes, they account for it, which means they keep track of what they do, but they don’t actually get anything that they give to anyone. The man at the IRS simply changes numbers down in our bank accounts when he collects taxes. And, if you pay your taxes with actual cash, they give you a receipt, and then shred it. How does taking your cash and shredding it pay for anything? It doesn’t. Taxes don’t give the government anything to use to make payments.

So the absolute fact of the matter is, the government never has nor doesn’t have dollars. It taxes by changing numbers down, but doesn’t get anything. It spends by changing numbers up and doesn’t use up anything. Government can’t ‘run out of money’...

Warren Mosler's words take the value out of money. He speaks of "changing numbers up" and "changing numbers down" as though no transfer of value was involved. That is completely false.

The government "didn’t ‘get’ anything," Mosler says. But of course they got something. They got paid. The numbers "went up" in the government bank account, and the number "went down" in your bank account. An obligation was met. A bill was paid. A transaction was completed. Mosler can say again and again that they "didn’t ‘get’ anything," but it just ain't so.

"Taxes don’t give the government anything to use to make payments," Mosler says. So, let's turn that around: If Mosler is right, then paying taxes doesn't really take anything away from you. It's just a matter of changing numbers.

It's just nonsense, that's what it is.


If you pay your taxes in cash, Mosler says, they give you a receipt and then shred the cash. Well, okay. But they also record your tax payment in their account. By recording your tax payment, they transfer the purchasing power into their account so they can spend it. After that, if they spent the cash too, it would be like counterfeiting.

They shred that cash because the money-value has been transferred out of your cash and into their account. Mosler has to know this. He just doesn't tell that part of the story, that's all. Mosler doesn't tell the whole truth.

5 comments:

Tschäff said...

"Warren Mosler's words take the value out of money. He speaks of "changing numbers up" and "changing numbers down" as though no transfer of value was involved. That is completely false."

All of us MMTers try to simplify a mind boggling complex system so people can grasp the principles. Of course in doing so they can't throughly address everyone's objections. For that you have to dive into the literature. This classic goes to the heart of your objections: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=115128

The conclusion I took from it was that government spends by crediting bank accounts and taxes by doing the reverse. Government doesn't need to tax or issue bonds to finance spending. It only needs to tax to prevent YOU from spending. It's a tool for managing aggregate demand by preventing the inflationary situation more being demanded from the economy than what can be produced or the opposite in times of insufficient demand. I would add there are other reasons to tax besides this such has to redistribute wealth, punish socially undesirable behaviors and create a demand for the currency.

"Taxes don’t give the government anything to use to make payments," Mosler says. So, let's turn that around: If Mosler is right, then paying taxes doesn't really take anything away from you. It's just a matter of changing numbers.

It's just nonsense, that's what it is.


Taxes lower your financial assets. If that's the point you're trying to make then there is no disagreement. I believe Mosler was trying to make the point that after leaving the gold standard that taxes for revenue became obsolete. The same point the old head of the New York Federal Reserve made back in 1946: http://hiwaay.net/~becraft/RUMLTAXES.html

Tschäff said...

Question: Why would a government that has the printing press need to tax? Answer: to prevent you from spending.

If you pay your taxes in cash, Mosler says, they give you a receipt and then shred the cash. Well, okay. But they also record your tax payment in their account. By recording your tax payment, they transfer the purchasing power into their account so they can spend it. After that, if they spent the cash too, it would be like counterfeiting.

They shred that cash because the money-value has been transferred out of your cash and into their account. Mosler has to know this. He just doesn't tell that part of the story, that's all. Mosler doesn't tell the whole truth.


Mosler is describing the "vertical relationship" in the economy. Since you've read the casino analogy this should make a lot of sense to you now. The vertical relationship is between the government and the non-government sectors. When government taxes it is like the casino taking chips away from the players and putting them in their vault. Those chips are gone from circulation on the gaming floor. There are no measures of money (M0,M1..M3) that count the taxed away currency as part of the "money supply" In effect it is shredded.

I love that you are interested in learning about alternative economic perspectives. You can comment on his blogs, and very often he and other knowledgeable MMTers will be able to answer. We're a friendly and intelligent group, not hostile like some of the other economic perspectives.

The Arthurian said...

Two good links. Thank you.

Tschäff, this "vertical relationship" is just one more analogy. One is forced to wonder: Who is higher? Who is lower?? Is the one directly over the other??? None of that is relevant. For me, analogies always add complexity.

I like your technique of bolding the quoted remarks.

There are no measures of money (M0,M1..M3) that count the taxed away currency as part of the "money supply"...

This is very useful info for me. It spurs further study. Thanks.

...In effect it is shredded.

But in the Seven Deadly PDF -- offering evidence that if you pay your taxes with cash, the government shreds it -- Mosler says, "In fact, you can actually buy shredded money in Washington, D.C." (page 14). And I know that's true, because, well, we bought some. So now I have to ask: Is Mosler telling the truth when he says they shred our currency payments? Or is that just another metaphor? Is the cash really shredded, or is it only "in effect" shredded, as you put it?

But this all gets away from the point of my post, which is that Mosler's money-transfer arguments fail to consider money's role as a mechanism for the transfer of value. I think if transfer-of-value is brought into the discussion, the store-of-value function must come in as well, and then Mosler's over-simplified argument must die a painful death.

All of us MMTers try to simplify a mind boggling complex system so people can grasp the principles. Of course in doing so they can't throughly address everyone's objections.

Bad argument is bad, and defending bad argument weakens it.

Please be aware that my objections focus more on the quality than the content of the MMT argument. I think I would agree with much of the argument, if I was sure what it is. And those links help with that.

Art

Tschäff said...

I'm delighted that you took my suggestion to read Soft Currency Economics. I even shared the link with Warren Mosler, he'd be delighted I'm sure.

The "vertical" relationship isn't another analogy. MMTers use it to describe the financial transactions between the government sector and the non-government sectors. Learning how vertical transactions differ from horizontal is the key to understanding MMT.

When government "spends" the treasury issues a check to the recipient. The recipient's bank deposit increases. Settlement involves transferring reserves from the treasury's account at the central bank to the recipient's bank's account at the central bank. The result is the recipient's deposit account increased with no corresponding liability in the banking system. This is "vertical" or exogenous money because it leads to a net increase in financial assets to the non-government sector.

Compare that to when banks expand their credit. Loans create deposits, so this also leads to an increase in deposits, however the bank deposit is a liability for the bank that has a corresponding asset, the loan. The borrower has a new asset, the deposit, and a new liability, the loan so in accounting lingo, it "nets to zero." Therefore vertical money created increases net financial assets of the non-government sector, and horizontal money does not.

There is a lot of confusion about what happens between the treasury and central bank. Since the balance sheet interactions between only the two have no impact on banking system reserves they can be ignored from the point of view of the non-government sector. That's also the reason MMTers most often combine the treasury and central bank and call it "government."

Is Mosler telling the truth when he says they shred our currency payments? Or is that just another metaphor?

Tschäff said...

He's not giving another metaphor. I'm not sure if the paper money gets shredded to be honest, everyone I've known has always paid electronically or by cheque. My understanding is they only destroy the bills that are unfit for circulation, but this is only trivia and irrelevant to the main story. The government is the only entity which creates high powered money or "base money." It is created only when government spends on goods, services and assets held or produced by the non-government sector. Base money is destroyed only when government collects taxes, retires loans, sells goods and services or other assets. This is just balance sheet fundamentals, nothing theoretical. When you try to verify all of this, as I have, it gets a little more complicated because most tax payments are kept inside specially designated private banks (TT&L program) for the purpose of coordinating government spending and taxing so as not to create instability in the banking system.

Here is a graphic that illustrates the horizontal and vertical relationships:
[PIC]

That's the economist version of what Mosler was talking about. Understanding balance sheet entries and their impact on various money aggregates is not appropriate for a general audience. Even good economists find it difficult to comprehend at first because it is ignored in most classrooms. I struggle with keeping things simple enough for non-economists to understand without oversimplifying. Unfortunately, whenever MMT is discussed on the internet in simple terms "i.e. government spends by crediting bank accounts, and taxes by debiting them, government spending isn't revenue constrained." It inevitably gets a barrage of endless (usually hostile) objections. Here you can see what happened on Naked Capitalism's blog when my friend Scott tried to introduce MMT to a wider audience [link]. The good news was that the MMTers were out answering objections, and none of the critics were able to come up with a single instance where MMT was incorrect. The bad news is we still struggle to craft a beautiful "elevator speech."