Monday, October 4, 2021

The Politics of Pay-Fors Revisited — JW Mason

Without addressing the points in JW Mason's post, these are my views based on MMT as I understand it.

First off, taxes and borrowing don't "pay for" spending by a government that is a currency sovereign in the sense of issuing its own non-convertible floating rate currency without undertaking obligations in other currencies. It's logically impossible. Such a government does "fund" its spending in some manner on its accounting statements but this sense of "fund" is different from "pay for." Presently, the US "funds" its spending by revenue and borrowing but revenue and borrowing don't pay for it. The government simply issues the funds through the central bank. The accounting is just scorekeeping that has nothing to do with funds available through the central bank.

Secondly, spending and taxation are not intrinsically linked for a currency sovereign. Taxation is a necessary condition for driving the currency by creating demand artificially. Taxation also serves to withdraw funds injected by spending and thereby it acts as instrument of price stability. 

Other uses of taxation are discouraging economic behavior that is undesirable or destabilizing, like using externalities to capitalize the gains while socializing the losses, and "sin" taxes. Another use is also smoothing distribution by with targeted spending and clawing back economic rents to prevent excessive inequality and the eventual social polarization that comes from skewed distribution.

The end in view of fiscal policy of both spending and taxation is public purpose, which in a democracy should be treated politically. This presupposes a fair system in which privilege is absent and all are equally represented. Under such conditions, spending and taxation are complementary processes.

This has to be addressed on the level of the design of the system in terms of structure and function to produce an agile, flexible, efficient and resilient distributed socio-economic system that deals with public purpose effectively. This is an institutional approach.

Without taking a systems approach, this issue — as most other issues — cannot be addressed adequately. But that takes a smart leadership and a smart electorate, and it also presumes a sufficiently advanced level of collective consciousness evidenced culturally and institutionally. Absent these conditions, measures will not be holistic and unintended consequences will occur. 

Given present conditions, outcomes are not promising. Moreover, in the US the electorate is too polarized to take an adequate systems approach.  So the trend is decline.

J. W. Mason's Blog
The Politics of Pay-Fors Revisited
JW Mason | Assistant Professor of Economics, John Jay College, City University of New York


peterc said...

Tom, I haven't had a chance to read JW Mason's post yet, but your summary statement of MMT here is characteristically excellent. I've filed it away for future reference. Cheers.

Tom Hickey said...

Thanks, Peter.

NeilW said...

There are only two economic functions of taxation:

(i) Releasing the Resources - reducing demand such that the real resources the government wishes to hire are released by the private sector. If the resources are already released then you don't need to tax!

(ii) Driving the Denomination - ensuring that there is a broad based demand for the otherwise worthless currency which means that government will receive bids when it makes offers in that currency.

These two are in tension with each other. (i) requires a targeted tax that preferably hits only the users of, say, doctors so they will be released. (ii) requires a broad based tax that impacts widely across the economy, and certainly all geographic areas.

Since the tension cannot be resolved cleanly, MMT suggests dealing with stabilisation on the spend side and leaving tax in the middle ground somewhere where it does neither job particularly well, but sufficiently well to ensure the currency circulates properly.

NeilW said...

That's not to say that there aren't other uses for taxation, but those uses are political. In the UK we tend to have different names for political taxes - Levies, Fees, Licences, Duty, even Tithes.