Wednesday, April 27, 2011

Point of Interest

It is a big deal among MMT people, that the purpose of taxes is not to fund government spending, but rather to induce growth or to inhibit inflation.

MMT to Obama- Taxes Function to Regulate Aggregate Demand, Not to Raise Revenue per se (The Center of the Universe, 4-15-2011):
Federal spending is NOT inherently dependent on revenues from taxing or borrowing... Nor is there any inherent financial risk posed by foreigners or anyone else buying or not buying US Treasury securities... Additionally, the risk of federal overspending relative to taxation, as available labor and materials become fully employed, is higher prices, and not insolvency or any kind of funding crisis.

Taxes In The MMT Perspective (Yglesias, 4-21-2011):
The government funds purchases by creating financial assets and it manipulates aggregate demand by threatening to throw people in jail unless they turn financial assets over to the government.

What are taxes for? (Rogue Economist Rants, 4-22-2011):
The fox hunt is important because this is how the nation procures the population's meat supply... Tax is important because this is how a sovereign, fiat-issuing nation pays for its spending.

Krugman says MMT again (, 4-22-2011):
Taxes, first and foremost, are a manifestation of sovereign power and thus lay the groundwork for fiat money. By draining the private sector of the funds it needs to purchase it's own output, they create room for the Government to take that output without generating inflation.

UPDATE 6:48 AM 4/28/2011:

Who Really Pays Taxes (Another Amateur Economist, 23 April 2011):
A point of MMT, however, if I have it correct, is that the purpose of taxes is not to raise revenue. The government can spend its currency as it wishes. (Nominal) taxes are to maintain a demand for that currency, and to destroy excess demand in that currency, that is, to maintain the value of that currency, ie fight inflation. According to MMT, then, the real cause of inflation is a lack of political will.

Once again, I don't claim to have the greatest understanding of MMT. I'm neither an economist nor an accountant. I just try to fit things people say in with things I already know, like putting a puzzle together.

But it seems to me that MMT sees "government" as separate from the economy, ready and willing to do what needs to be done to improve the economic environment. (That's how I see it, anyway.)

And it seems that MMT understands government demand as a tool, or the main tool, to be used to make those improvements. For example, when things are slow the government should spend more and tax less; when there is inflation the government should spend less and tax more. That seems rather Keynesian to me, so maybe I don't have it right.

But anyway, one of the things they say is they would raise taxes to fight inflation.
There are lots of potential arguments here that lots of people might want to start, about why MMT is wrong or something. I don't care to get involved in any of those arguments.
I just want to point out that in my earlier post today, I said:

We have to keep interest rates low, as Keynes said. And we have to fight inflation by having everybody pay off debt faster. Mostly the private sector.

If you take the MMT view and express it in mainstream words, it comes out like this: MMT would fight inflation by raising taxes and reducing the public debt. (MMT people don't care much about the public debt and they don't think of taxes as money the government actually receives, so they wouldn't say it this way. But that's how you have to say it in not-MMT.)

So then again: MMT would fight inflation by raising taxes and reducing the public debt. Now it is in a form that I can compare to my idea, to show how I differ.

My idea to fight inflation is to use tax policy to help and to encourage people to reduce their own debt. In other words, I want to reduce private-sector debt.

To fight inflation MMT would reduce government debt; I would reduce private debt.


Greg said...

One of the fairly consistent arguments of the MMT economists is that debt is not necessary in the first place so "reducing debt" to them simply means to stop issuing debt after you spend.

SO I think its safe to say MMT never advocates reducing debt as a prescription for inflation it advocates never issuing debt in the first place so it never needs to be reduced. If its never issued you cant complain about the level of it.

Debt issuance is a "monetary" operation, necessary to reach the target interest rate set by the fed. Thats all it is, it provides no money for the govt to spend. MMT says set the interest at zero and quit the kabuki theater about the debt. Let the private market come up with savings instruments that meet the desires of the population.

MMTs prescription for inflation is targeted tax increases at the area that is driving inflation AND meaningful, sensible private credit market regulation. Youve shown us pretty well that it is privated credit which fuels the inflation and private debt which causes the deflation, which in modern times has been fought by an attempt to increase private debt accumulation again. Back and forth back and forth......... insanity.

Functional finance ......... Abba Lerner

Jazzbumpa said...

I'm not an economist either, so (not having some beautiful model to lean on) I base my opinions on looking the the data. From what I have been able to determine is that since WW II, and then during and most of the years after, there is no correlation between deficits and inflation. None. Zero. Nada. Zilch.

The only exception is the period from approx late 50's to early 70's - maybe 15 years of secular inflation.

I think this statement is technically true: "Federal spending is NOT inherently dependent on revenues from taxing or borrowing," but not especially meaningful.

Sure, we have fiat money. But taxation is still the basis for sending, and profoundly effects the flows of the economy in several other ways.


Greg said...


I think there is a way in which that statement is meaningful. Its meaningful in the sense that if we can ever get past the notion of paying for some govt program with taxes and simply learn that our political process should determine what WE as a country want to purchase for the citizens (and not "the bond market") then the issue of affordability will be turned on its head.

Jazzbumpa said...

Greg -

if we can ever get past the notion of paying for some govt program with taxes and simply learn that our political process should determine what WE as a country want to purchase for the citizens

I really don't know what you're getting at. Why "get past" the notion of paying for programs with taxes, and once we are past that, where are we? What does that mean?

And what bearing does knowing what we want to purchase have on the costs and methods of payment?


Greg said...

Its about getting the direction of money movement correct. Taxes dont "pay" for govt spending. The govt must spend first for there to be money for us to pay our taxes.

The longer we persist with these backwards understandings, the longer we are going to keep having discussions of whether we can "afford" social security or medicare. What is social security costing us? Are people over 65 taking too much of something that the rest of us need? Is there not enough titanium to make the artificial hips or not enough people willing to rehab folks post surgery?
Whats the problem with medicare and SS?

The cost of something you decide you need is irrelevant, right?

I want the arguments to be made in real terms, not money terms.