Thursday, March 15, 2018

Bill Mitchell — Where do we get the funds from to pay our taxes and buy government debt?


Bill addresses a major objection to MMT.

Note: I am reading the post from the RSS feed. I am getting a database error message in trying to connect with Bill's site.
I have been (involuntarily) copied into a rather lengthy Twitter exchange in the last week or so where a person who says he is ‘all over MMT’ (meaning I presume, that he understands its basic principles and levels of abstraction and subtlety) has been arguing ad nauseum that Modern Monetary Theory (MMT) proponents are a laughing stock when they claim that taxes and debt-issuance do not fund the spending of a currency-issuing government. He points to the existing institutional structures in the US whereby tax receipts apparently go into a specific account at the central bank and governments are prevented from spending unless the account balance is positive. Also implicated, apparently, is the on-going sham about the ‘debt ceiling’, which according to the argument presented on Twitter is testament to the ‘fact’ that government deficits are funded by borrowings obtained from debt issuance. I received many E-mails about this issue in the last week from readers of my blog wondering what the veracity of these claims were – given they thought (in general) they sounded ‘convincing’. Were the original MMT proponents really overstating the matter and were these accounting arrangements evidence that in reality the government has to raise both tax revenue and funds from borrowing in order to deficit spend? Confusion reigns supreme it seems. Once one understands the underlying nature of the financial flows associated with government spending and taxation, it will become obvious that the argument presented above is superficial at best and fails to come to terms with the basic questions: where do the funds come from that we use to pay our taxes and buy government debt? Once we dig down to that level, the matter resolves quickly.
Bill Mitchell – billy blog
Where do we get the funds from to pay our taxes and buy government debt?
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

8 comments:

Calgacus said...

Getting error too. But you can search the URL or title in google and get a google cache version, with the post & 3 comments right now.

Matt Franko said...

“where do the funds come from that we use to pay our taxes and buy government debt? ”

This from Bill here is STILL somewhat an objectification of what are ideally approached as FULLY an abstraction of Accounting....

How is Larry Kudlow, a HISTORY MAJOR, ever going to understand these abstractions that can ONLY be learned via rigorous training in abstract exercises that he Kudlow, or any other person not understanding any of this, never was put through?

NEVER going to happen ....

AXEC / E.K-H said...

Bill Mitchell, MMT’s fake scientist
Comment on Bill Mitchell on ‘Where do we get the funds from to pay our taxes and buy government debt?’

Bill Mitchell recounts a recent Twitter exchange: “… where a person who says he is ‘all over MMT’… has been arguing ad nauseam that Modern Monetary Theory (MMT) proponents are a laughing stock when they claim that taxes and debt-issuance do not fund the spending of a currency-issuing government. He points to the existing institutional structures in the US whereby tax receipts apparently go into a specific account at the central bank and governments are prevented from spending unless the account balance is positive.”

This, of course, is a straw man and Bill Mitchell easily knocks him down. What people do not understand is that monetary theory is NOT about the operational details of the Treasury/FED interactions. Monetary theory is an integral part of what Keynes called the ‘monetary theory of production’. By sticking to operational details, the average common sense person commits the Fallacy of Insufficient Abstraction.

Bill Mitchell is right: “The problem with this ‘obvious’ argument is that it fails to consider what is actually going on in a fiat monetary system at the level beyond the accounting arrangements.” Monetary theory is macroeconomics and who does not understand macro better takes the remote control and never stops again watching sitcoms.

MMT proponents are NOT a laughing stock because they get the operational details/accounting conventions of deficit spending/money creation wrong but because they get the essentials of macro wrong.

The error/fraud of MMT consists in misplaced consolidation. Here you have it in a nutshell: “The notion of a consolidated government sector is a basic MMT starting point and allows us to demonstrate the essential relationship between the government and non-government sectors whereby net financial assets enter and exit the economy without complicating the analysis unduly.” And: “At this simple level ― that the currency-issuing ‘government’ comprises the consolidation of the central bank and the treasury functions ― makes it obvious that taxes and borrowing do not fund ‘government’ spending.”

Exactly at this point, Bill Mitchell runs into the Fallacy of Insufficient Abstraction. Independently of all operational/organizational specifics in different countries, proper economic analysis requires the functional distinction between business sector, household sector, government sector, and banking sector which consists initially alone of the money creating central bank. Upfront consolidation of any two sectors is methodologically inadmissible.

In order to go back to the ultimate foundations of economics, the elementary production-consumption economy is for a start defined by three macroeconomic axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and two definitions (monetary profit/loss Qm≡C−Yw, monetary saving/dissaving Sm≡Yw−C).#1

It always holds Qm+Sm=0 or Qm=−Sm, in other words, the business sector’s surplus = profit equals the household sector’s deficit = dissaving and, vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. This is the most elementary form of the macroeconomic Profit Law. This Law refutes the MMT profit theory. So, the whole of MMT is scientifically dead already at this point.

See part 2

AXEC / E.K-H said...

Part 2

Money is needed by the business sector to pay the workers who receive the wage income Yw per period (econ-speak for wages + salaries). The workers/employees spend C per period. Given the two conditions, the market clearing price is derived for a start as P = W/R. So, the price P is determined by the wage rate W, which has to be fixed as a numéraire, and the productivity R. This is the macroeconomic Law of Supply and Demand.

As a corollary, this macroeconomic Law kills the commonplace Quantity Theory because the “Quantity of Money” is NOT among the price determinants. The average stock of transaction money follows as M=kYw, with k determined by the payment pattern. In other words, the “Quantity of Money” M is determined by the autonomous transactions of the household and business sector and created out of thin air by the central bank. The economy never runs out of money. The government is NOT needed to supply the economy with money.

Starting from the elementary production-consumption economy, complexity is then successively increased.To make matters short, the axiomatically correct relationships are given here without further explanation. It holds, with Qm monetary profit/loss, Sm monetary saving/dissaving, I investment expenditures, G government spending, T taxes, X export, M import, Yd distributed profit:

(i) Qm=−Sm in the elementary production-consumption economy,
(ii) Qm=I−Sm in the elementary investment economy,
(iii) Qm=(G−T)+(I−Sm) in the investment economy with government deficit/surplus,
(iv) Qm=Yd+(X−M)+(G−T)+(I−Sm) in the open economy with distributed profit.

From (i)/(ii) follows that saving and investment are NEVER equal and that ALL I=S/IS-LM models are false since Keynes/Hicks and that ALL After-Keynesians are stupid.

From (iii) follows that ― given business sector investment I and household sector monetary saving Sm ― Public Deficit = Private Profit. The government deficit (co-)determines the cumulative stock of financial assets in the business sector.

Exactly at this point, Bill Mitchell’s error/fraud happens. He states: “The government deficit [of $20] is exactly the non-government savings [of $20].” No. The mirror image of government deficit is the business sector’s profit.

The MMT error/fraud lies in the word non-government sector. There is NO such thing as the “non-government sector”, there are TWO sectors, the business- and the household sector. And the business sector does NOT save. Saving/dissaving is the balance of the household sector, profit/loss is the balance of the business sector. The word profit, though, does not appear once in Bill Mitchell’s analysis.

The Iron Rule of Methodology says: Every economic theory/model that does not explicitly contain the foundational economic magnitude profit is scientifically worthless.#2, #3, #4 MMT falls squarely into this category.

Egmont Kakarot-Handtke

#1 Macro for retarded economists
https://axecorg.blogspot.de/2018/01/macro-for-retarded-economists.html

#2 MMT is idiocy and fraud
http://axecorg.blogspot.de/2018/03/mmt-is-idiocy-and-fraud.html

#3 DSGE and profit―forget it! MMT and profit―forget it!
http://axecorg.blogspot.de/2018/03/dsge-and-profit-forget-it-mmt-and.html

#4 Deficits matter for distribution
http://axecorg.blogspot.de/2018/02/deficits-matter-for-distribution.html

André said...

Matt,

You should read a paper entitled "The Origin of Electrum Coinage" by Robert W. Wallace, a HISTORIAN (archeologist actually):

https://www.jstor.org/stable/505360?seq=1#page_scan_tab_contents

Even being a HISTORIAN, he concludes, without employing a single accounting concept, that early electrum coins were not valued at commodity value, but at face valued guaranteed by the issuer (probably states or rulers).

He doesn't actually go further and examine how exactly such value is redeemed or guaranteed by the issuer. Hence, he doesn't get to the "taxes drive money", yet he gets really close. You know, evidence is not so easy to get after some thousand years.

My point is that you don't need to get "rigorous training in abstract" accounting exercises to realize what money is and that it is fiat and driven by taxes.

ANC Driver said...

Exactly at this point, Bill Mitchell’s error/fraud happens. He states: “The government deficit [of $20] is exactly the non-government savings [of $20].” No. The mirror image of government deficit is the business sector’s profit.

also, seeing as I - G + Yd > Sm, then it is when households net save it creates a need for govt to run deficits if business want to keep the net investment growing?

AXEC / E.K-H said...

André

From history you can possibly learn who invented fire. This, though, does not help you much. You still do not understand what fire ‘is’. To figure this out is the task of science, in this case of physics. And, low and behold, these folks have figured out the Law of Thermodynamics which tell you not only how a match works but also how a jet engine works.

The fact that in the course of history the ‘state’ has issued ‘money’ does not prove that the state is indispensable for money creation in the actual monetary economy or that taxes drive money.

For the theory of money it is irrelevant who invented money. Science is NOT about historical accidents.

It is pretty obvious that Bill Mitchell is not a scientist who tries to figure out how the economic system works and what the underlying economic laws are but an agenda pusher who tries to enlist the state for a policy of permanent deficit spending. For this political purpose he ― unintentionally or intentionally does not matter ― ignores the fact that the Profit Law states Public Deficit = Private Profit and that, by consequence, MMT policy has grave distributional consequences.#1

Bill Mitchell does not understand the macroeconomic Profit Law. He is not a scientist, neither is Stephanie Kelton ― the Mother Theresa of MMT ― neither are you nor the rest of the deplorable MMT marketing/PR/sales squad.

Egmont Kakarot-Handtke

#1 Keynes, Lerner, MMT, Trump and exploding profit
https://axecorg.blogspot.de/2017/12/keynes-lerner-mmt-trump-and-exploding.html

ANC Driver said...

Egmont,
just need some clarification

(i) Qm=−Sm in the elementary production-consumption economy,
(ii) Qm=I−Sm in the elementary investment economy,
(iii) Qm=(G−T)+(I−Sm) in the investment economy with government deficit/surplus,
(iv) Qm=Yd+(X−M)+(G−T)+(I−Sm) in the open economy with distributed profit.

in a couple of other blogs you've said

(X-M)+(G-T)+(I-S)-(Q-Yd)=0

should S & Q always read Sm & Qm?

thanks