Wednesday, March 13, 2019

Lizzy Francis - What Is Modern Monetary Theory? An MMT Theorist Explains

A resurgence in a popular economic theory might make it possible for Universal Child Care and other programs to actually see the light of day


MMT makes a distinction between the issuer of the currency, which is the federal government, and the users of the currency, which is everybody else. States, municipalities, us, individuals, families, households, and companies, and the rest of the world. Once we look at that distinction, it becomes illogical to say the government needs to borrow money in order to spend it. In order for the U.S. dollar to exist in circulation in the economy, it must come from the only source: the federal government.
What do you mean?
The federal government spends money into existence. That’s what allows for the circulation of currency in the system, so that the rest of us can use, spend, borrow, and lend it to each other and use it to pay taxes back to the government. So, in MMT, first, the government spends, then taxes some of it back. Then the question becomes: if taxation doesn’t fund government programs, what’s the purpose of taxation?
MMT’s explanation: Because taxation is required for everyone, it creates demand for an otherwise useless piece of paper. The US dollar is not backed by gold or silver. So that in and of itself gives it value. It’s required via the coercive authority of the government. It’s required for the payment of taxes.
Okay, so taxation gives money value, but it isn’t required for enacting new programs that would require a lot of federal spending. So, why are taxes still important in the MMT framework?
Taxation also withdraws money from the system. So, yes, the government can spend anything it wants, but that would put too much money in the system, which would allow consumers to go on a shopping spree and could cause inflation. So taxation takes some of that money out of circulation. It can tame inflation.
What’s stopping us from adopting an MMT mindset and just going right into funding a huge social program right now, tomorrow?
Inflation is the limit. Let’s say, tomorrow, we decide as a nation that dental care is a human right, and we are going to provide it to every person in this country. Anyone can call up their dentist and schedule an appointment without insurance. The government is going to pay for it. I call my dentist and say, ‘I’d like to schedule an appointment.’ They say, ‘Sure. We’ll put you on the list and we’ll see you in 2035.’ And I say, ‘Why?’ They’ll say: ‘Because everyone is calling and everyone is scheduling because they were excluded before that.’
What good does it do for us, having the government pay for dental care, if we don’t actually have the physical resources and productive capacity to provide those things? The dentist will say, ‘By the way, we have this premium platinum service where you pay $7,000 and we put you in an elite club and you can schedule your appointment next week.’
If you have a shortage of productive capacity, and a huge amount of demand, regardless of whether we have the money or not, that will cause inflation. MMT says let’s increase the productive capacity of all the things that we care about: renewable energy, medical services, whatever the national priorities are. The good thing is those resources are producible. Dentists can be trained.

29 comments:

Andrew Anderson said...

MMT makes a distinction between the issuer of the currency, which is the federal government, and the users of the currency, which is everybody else. States, municipalities, us, individuals, families, households, and companies, and the rest of the world. Lizzy Francis

Actually, except for mere physical fiat, paper bills and coins, ONLY depository institutions, aka "the banks" may USE fiat. The rest of us must use bank deposits or be limited to mere physical fiat, paper bills and coins.

Andrew Anderson said...

So taxation takes some of that money out of circulation. It can tame inflation. Lizzy Francis

Note that taxing the rich would require a very high rate to curb their consumption. In any case, the non-rich MUST be taxed to have a significant impact on price inflation.

Andrew Anderson said...

Otoh, de-privileging the banks would be deflationary by itself and allow massive amounts of deficit spending for the general welfare.

But MMT advocates won't hear of de-privileging the banks.

Konrad said...

“In order for the U.S. dollar to exist in circulation in the economy, it must come from the only source: the federal government.”

Dollars are also created by banks when they make loans.

“The federal government spends money into existence.”

And banks lend money into existence.

“If taxation doesn’t fund government programs, what’s the purpose of taxation? Because taxation is required for everyone, it creates demand for an otherwise useless piece of paper.”

That’s the “taxes drive money” mantra, which I have never agreed with. If all taxes fell to zero, then people would still want and use dollars, just as people did before there was federal withholding tax.

“Taxation can tame inflation.”

Inflation means there is an excess of money relative to the availability of goods and services. To control inflation we must remove money from the economy. One way to do this is via taxation. Another way is to offer people incentives to buy CDs, Treasury securities, or other vehicles that lock up money until some maturity date. Another way is to boost general interest rates so that excess money is sucked up by the banks. Another way is to impose austerity, i.e. simply create less money out of thin air.

“What’s stopping us from adopting an MMT mindset and just going right into funding a huge social program right now, tomorrow?”

Cowardice, selfishness, inertia, habit, greed, and convention. Humans live in a consensus reality, which means that “reality” is whatever humans agree that it is. If humans are habituated to think the U.S. government is “broke,” then they will treat it as “broke.” He who controls the myths, labels, symbols, hoaxes, and taboos controls the narrative. He who controls the narrative controls the masses.

Kaivey said...

'That’s the “taxes drive money” mantra, which I have never agreed with. If all taxes fell to zero, then people would still want and use dollars, just as people did before there was federal withholding tax.'

I agree with you on that, people just see government money as legal tender and don't question it. I think the MMT professors feel they won't be able to convince sceptics of MMT that people will just accept government fiat money without question, so they come up with the theory about tax driving the currency as it sounds more scientific. Most people have their taxes deducted by their employee and so don't ever think about the currency.

Ralph Musgrave said...

Andrew, I agree that commercial banks are privileged. Indeed, it is widely accepted they are in receipt of various subsidies, but there remains a lot of disagreement on exactly HOW they are subsidised and how much each subsidy is worth and why those subsidies are in place.

Strikes me the basic privilege banks have relative to similar financial institutions is that banks are essentially entities via which one person or firm lends to another person or firm. The former lot are depositors / bond holders and the latter lot borrow from banks. But governments, via deposit insurance, guarantee that those lenders will not lose money. That’s in contrast to where someone for example lends to a corporation buy buying its bonds: in that case there is no government guarantee you won’t lose your money. So in a sense, if you cut out the middle man (your bank) and lend direct, government punishes you! Bizarre!

That is an anomaly for which there is no justification. I.e. anyone who deposits money at a bank, and who wants to the bank to lend on their money so as to earn interest should carry any losses involved. In contrast, if they want total safety and no interest, they should be able to place their money with the central bank.

Konrad said...

@KAIVEY: “I agree with you on that, people just see government money as legal tender and don't question it.”

Exactly. And yet, I have met many people (including here on this blog) who insist that money would instantly become worthless without taxes. They believe this because Randy Wray told them so. According to this gospel, you think about taxes every time buy a loaf of bread, or a liter of petrol, or a pint in a pub. When you see a pound note, you think of a pound worth of taxes.

Nonsense.

If taxes are what give value to money, then we should all be eager to pay more taxes, since our money would have more value. Tax cuts would reduce money’s value.

Again this is nonsense.

Also: Whereas a national government with monetary sovereignty has no need or use for tax revenue, and in fact destroys revenue upon receipt, local governments do need tax revenue, and they only accept dollars or pounds or whatever. If “taxes drive money,” then we have local taxes. Why have national taxes? To control inflation? Okay, but that’s a different topic.

“I think the MMT professors feel they won't be able to convince sceptics of MMT that people will just accept government fiat money without question, so they come up with the theory about tax driving the currency as it sounds more scientific.”

Yes, the “taxes drive money” mantra is for people who, because of lifelong conditioning, refuse to believe that national governments with monetary sovereignty have no need or use for tax revenue. Over time, however, “taxes drive money” became a standalone assertion, accepted on blind faith. New converts to MMT cling to it, and they become angry when you question it, and when you question the unnecessary and unworkable “job guarantee.”

Randy Wray himself has a bizarre neurosis about his “job guarantee.” If you question it while communicating with him, he will denounce you with profanity. (I know this from personal experience.)

MMT describes how money works, like the theory of aerodynamics explains how an aircraft flies.

The “taxes drive money” mantra and the “job guarantee” are like weird sub-cults whose members worship sky gods and cloud spirits.

Ralph Musgrave said...

I agree with Konrad: Randy Wray has a very short fuse.

Greg said...

@Kaivey- 'That’s the “taxes drive money” mantra, which I have never agreed with. If all taxes fell to zero, then people would still want and use dollars, just as people did before there was federal withholding tax.'



Thats not actually the argument though Kaivey. Its about recognizing that there are many things with moneyness and requiring a tax only payable with X lifts X to the top of the pyramid. Providing the entity requiring the tax has the ability to enforce it.

No MMTer argues that zero taxes means no one would use the dollar, but to make a worthless token valuable at the inception of a state, levying a tax gives it an immediate level of demand. Thats the argument. Eventually over long enough time the tax is no longer necessary to promote exchange of the token.

S400 said...

“so they come up with the theory about tax driving the currency as it sounds more scientific.“

No it’s nothing like that. It’s well grounded logic behind it. That goes for the JG too.

S400 said...

“If you question it while communicating with him, he will denounce you with profanity. (I know this from personal experience”

I haven’t seen any legitimate questions about it from you based on what MMT says, only rant. So it’s definitely understandable if Wray has no patience for you or Ralph.

Kaivey said...

@'That’s the “taxes drive money” mantra, which I have never agreed with. If all taxes fell to zero, then people would still want and use dollars, just as people did before there was federal withholding tax.'

That's in inverted commas, it's what Konrad said, not me.

All I'm saying is I don't anyone thinks about their country's currency or that taxes can only be paid in in that currency. It's possible, in olden times, people may have used anything as currency, so stipulating that tax has to be paid in the governments currency will drive demand for it. But that would have been a long time ago.

Marian Ruccius said...

Taxes drive money, because without them currency just becomes a commodity, and a paper or digital one at that. So vastly less valuable and less stable necessarily than even a bitcoin. Where there are no taxes to drive its value, currency is essentially voided of its value as a numéraire. It is true that this is more of an origins story for MMT, as, as Marc Lavoie has pointed out, taxation and spending always happen simultaneously. But as a pure point of logic, the MMT position is irrefutable, since it is founded in the many historical examples where the taxes drive money effect has been observed -- under colonialism in Africa, for example. So Wray is entirely correct, and Kaivey mistaken

Konrad said...

“I haven’t seen any legitimate questions about it from you based on what MMT says, only rant. So it’s definitely understandable if Wray has no patience for you or Ralph.” ~ S400

Spoken like a loyal Wray cult groupie. Wray does indeed have anger management issues, as many people have noticed. After one of his lectures, I had two brief questions about his job guarantee. I was very polite and respectful while communicating with Dear Leader Wray, but he told me to “fu*k off.” Everyone in the room was shocked for a moment, and then they laughed nervously, treating it as a joke. I let the matter go.

But yes, the idea that money would be worthless without taxes is idiotic. Several countries have no income tax or sales tax, yet their currencies work just fine.

I also noted above that even if the “taxes drive money” mantra was valid, we do not need federal taxes to give value to money, since there are local taxes.

Moreover, if taxes are what give value to money then logically the value of money should increase with our rate of taxation.

When the Wray cultists are questioned about their “taxes drive money” mantra, they simply repeat the mantra, imagining that the more they chant it, the more it is “true.”

Therefore Kaivey is correct, and Wray, S400 and Marian Ruccius are mistaken.

Calgacus said...

It is unfortunate if Wray responded to very polite and respectful questions that way. What were they?

But no, Konrad, I would say that you (and Kaivey) half or 3/4 understand MMT but have paused in learning more; something that people with more than half a brain but a bit too much enthusiasm for their own (often interesting) approach are prone to do. The Wray Cult = MMT has logical argument and enormous evidence on their sides that people who insist that "taxation drives money (with all the necessary but minor qualifications)" is false - simply ignore. For instance the US Civil War provided decisive, controlled experiments - can't remember if I posted something about it recently here.

To be more specific. Suppose the USA abolished all taxation, federal, state and local but did not decrease spending. Do you think that the dollar would maintain its value because of common belief and legal tender laws?

Konrad said...

My two questions concerned the job guarantee. I asked about the "fine print," so to speak (i.e. certain details) and Wray's response led to more questions that I listed off. He interrupted me saying, "There's one like you in every lecture. My simplest response is fu*k off." This made me feel like Rodney Dangerfield attending his son's economic class in the movie "Back to School" (1986). Fortunately I was sitting near a door, and I got up and left. After that I never communicated with Wray again in person of via email. I wasn't mad. I just felt it would be a waste of time. I have one of Wray's books, which I purchased through Amazon before the incident in the lecture gall. I still have it.

"Suppose the USA abolished all taxation, federal, state and local but did not decrease spending. Do you think that the dollar would maintain its value because of common belief and legal tender laws?" ~ Calgacus

No I do not. We would have an inflation problem.

Is THAT what is meant by "taxes drive money"?

If so, then I agree with it.

However I do not agree with any claim that money would instantly lose value without taxes. Nor do I agree that social convention and legal tender laws are irrelevant in bestowing value on money.

I commend you for being willing to reason this out. Most people simply repeat the mantra.

S400 said...

“Several countries have no income tax or sales tax, yet their currencies work just fine. “

You are aware that that statement is NOT the same as having any taxes at all?

S400 said...

“Moreover, if taxes are what give value to money then logically the value of money should increase with our rate of taxation. “

It’s part of what gives the state money value. The statement that taxation in its own currency creates demand for the currency is true. That taxation is part of what creates its value but another is that the government is in part in price setting through its buying of gods and serves in its own currency.

S400 said...

Should be; the government has a large part in price setting through its buying of gods and serves in its own currency.

Konrad said...

"The statement that taxation in its own currency creates demand for the currency is true."

S400 you simply repeat the mantra, like everyone else does. It's like being asked to define "banana," and you respond by saying, "banana, banana, banana."

You also throw in this: "Another is that the government is in part in price setting through its buying of gods and serves in its own currency."

Okay so the government is involved in its own currency. Granted. Agreed. The government buys things and pays for things and has legal tender laws, and so on. This helps to maintain the integrity of the monetary system, with out or without taxation.

You cling to Dear Leader Wray's mantra for reasons that are emotional, not logical. If you wish to discuss this topic using real world examples, great, but if you're just going to repeat the mantra, then neither of us can learn, and neither can persuade the other.

S400 said...

Nope it’s not a mantra, it’s logic. If a government tax in its own currency it per definition creates a demand for the currency. That is, in order to be able to pay the tax in that currency one will have to
obtain it in some way. That is Real demand for it created through the taxing.

Once again you’ve not come up with any criticism that holds only the same rant as you always do due to your inability to get over that Wray thought you where not to bright figure. Get over it.

Heck, You don’t even know that countries that do not have income tax or sales tax happens to tax in other ways.

But I’ll give a chance anyway, show me any country that do not tax in any way in it’s own currency and where that currency doesn’t continuously loses it value.

Real world example and not your home made examples only containing income tax and sales tax. Name of the country please.

Greg said...

It shouldn't be forgotten that the whole "taxes drive money" argument needs to be placed in the context of a discussion about origins of monetary systems, especially modern systems involving nation states. Its not about how the national currencies continue to have/hold value although as S400 pointed out elimination of all taxes would significantly lower our currencies value.

Ancient marketplaces had many things which acted as money for various transactions but in all successful nation states the state money achieved the widest circulation of all others largely due to the ability to impose and enforce fines, fees, taxes etc which could only be paid in the state determined currency. That gave it immediate demand.

Noah Way said...

"MMT advocates won't hear of de-privileging the banks."

Keep making shit up. You sound just like RODDIS.

Andrew Anderson said...

Regulation is not the same as de-privileging.

Privileges banks enjoy:
1) Exclusive access in the private sector to inherently risk-free accounts at the Central Bank.
2) Government provided deposit insurance.
3) Lender of last resort
4) Asset buyer of last resort
5) Non-negative interest on reserves.
6) Non-negative yields on other debt of the monetary sovereign.

It's true Overt Monetary Finance would eliminate 6) so what I should have said, and I appreciate the correction, is :

"MMT advocates won't hear of COMPLETELY de-privileging the banks."

Not that I am aware of anyone else, besides myself, in favor of "COMPLETELY de-privileging the banks" but if we are to have maximum fiat creation for the general welfare, then privileges for private bank deposits must be abolished since those are created by the banks for private interests and compete for the same resources as fiat creation for the general welfare.

Greg said...

Andrew

That "Govt provided deposit insurance" is not a privilege for the banks its protection for the depositor. Banks get charged for it. Its essentially the citizen having access to the Fed/Treasury because all funds under the limit (which I think is $250,000) are guaranteed, per account, per person.

As I stated in another thread, if its such a benefit for the banks why don't they back a larger limit? Why do they even put a limit? Just guarantee every dollar in specified accounts. Banks never liked the idea of insuring a depositors money, they were made to do it in the 30s by FDR.

Today banks would be negatively affected if the insurance were removed, they know that, but that doesn't mean that its truly a privilege for them.

Calgacus said...

Konrad:
Is THAT what is meant by "taxes drive money"?
If so, then I agree with it.


Great!

Andrew Anderson said...

That "Govt provided deposit insurance" is not a privilege for the banks its protection for the depositor. Greg

Banks don't need deposit insurance protection for their accounts at the FED since accounts at a true Central Bank are inherently risk-free. Why then may not US citizens use their Nation's fiat, the US Dollar, in account form as the banks do? For those funds citizens wish to be 100% risk-free and liquid at all times? And FOR FREE up to reasonable limits just as the use of physical US Dollars is FOR FREE*? And receiving no interest since none is deserved for ZERO risk and always liquid?

Where then is any legitimate need for monetarily sovereign governments like the US to insure the deposits at private banks, including the deposits the banks themselves create when they "lend"?

Banks get charged for it. Greg

Irrelevant since the provision of such insurance is improper to begin with. And the premiums would have to be so high as to be prohibitive to truly cover the risk of a financial crisis with hundreds or thousands of banks failing at once, So whatever the banks are paying, it's a mere token compared to what they are receiving - that their depositors may be 100% certain that their accounts are safe up to the insurance limit, come what may.

Its essentially the citizen having access to the Fed/Treasury because all funds under the limit (which I think is $250,000) are guaranteed, per account, per person. Greg

It's not the same at all because allowing citizens to use fiat in account form with all other privileges for the banks having been revoked too would make it much more dangerous for the banks to create new deposits since the corresponding liabilities for fiat would be as genuine toward the non-bank private sector as they are to other banks and to other account holders at the Central Bank, i.e. bank runs, even on EVERY bank at once would be much more of a threat.

And the genuine threat of bank runs, even on every bank at once (making it difficult or impossible for one bank to help another) would greatly reduce the power of the banks to drive the population into debt, cheat those who need to save, and to finance automation to dis-employ workers without a just share in the new profits to be obtained thereby.

*The use of physical US Dollars should also only be FOR FREE up to a reasonable limit; beyond that negative interest should apply too.

Greg said...

AA

My primary point is that the origins of deposit insurance were not for the banks but for the depositor. Do banks profit from a more stable banking system..... yes. Do the depositors....yes.

Yes Id like to see less coddling of private banks. Id like to see a true public bank option. I dont put deposit insurance high on the list of travesty's of our banking/financial system.

Andrew Anderson said...

I dont put deposit insurance high on the list of travesty's of our banking/financial system. Greg

Then imagine what would happen without deposit insurance (and no lender of last resort, etc.) and checking/debit accounts for all at the Central Bank and a bank created a deposit to automate some jobs away at a factory ("Bank loans create bank deposits")? Let's call the bank, "Smith Bank."

Then the "loan" would be distributed to the various people responsible for accomplishing the automation via checks drawn on Smith Bank either directly or indirectly. These people would have various levels of risk tolerance. Those with a high risk tolerance would deposit their checks into the now 100% private banks for the interest offered.

From the viewpoint of Smith Bank, the ideal situation would be for people to deposits their checks from Smith Bank with Smith Bank itself since no corresponding reserves would be lost. The next best thing would be to deposit their checks into other private banks where some, but not necessarily all, of the corresponding reserves would be lost because Smith Bank might be owed reserves from some of the other banks. Follow?

But some of those receiving their checks from Smith Bank, especially the poorest, would have no tolerance for risk at all since they could not afford to lose any of their checks. These would immediately deposit their checks into their Central Bank accounts and now 100% of the corresponding reserves of Smith Bank would be lost into those inherently risk-free accounts at the Central Bank. This is the worst scenario for Smith Bank because in the case of those people, Smith Bank was not able to create deposits at all but essentially just made an honest loan 100% out of its capital with no leverage of profit at all!

So government provided deposit insurance allows banks to create more deposits for evil purposes - such as automating jobs away without having to fairly share the resulting profits with the workers who lost their jobs - which is why eliminating that bank privilege is number 2 on my list above.