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Governments do not need the savings of the rich, nor their taxes!

In Chapter 24 of The General Theory of Employment, Interest and Money, Concluding Notes on the Social Philosophy towards which the General Theory might Lead, John Maynard Keynes confronted the issue of the “arbitrary and inequitable distribution of wealth and incomes” in capitalist economies. The argument he advances in that Chapter of his 1936 book contains guidelines for the progressive left that some just cannot seem to grasp. In short, governments (as our agents) do not need the savings of the rich to ensure that society prospers. There was another interesting contribution in 1946 from the American statistician and economist – Beardsley Ruml – who wrote that “Taxes for Revenue are Obsolete”. The progressive left would be advised to study his work and stop building political policy platforms on the claim that governments needs to make the rich pay their fair share of taxes so that adequate public services and infrastructure can be provided. The incomes and taxes paid by the rich are largely irrelevant to the capacity of a national, currency-issuing government to provide first-class public services and infrastructure. It is time to re-frame the debate and the way in which progressive political forces state their policy aspirations. This bears on the current interesting struggle in Britain for the leadership of their Labour Party.

In Chapter 24 of the General Theory, Keynes considers that the:

… outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.

He said his work (the General Theory) had obvious relevance for the first fault – “failure to provide for full employment” – because it demonstrated categorically that mass unemployment was the result of a deficiency of total spending in the economy and that governments could easily use their fiscal capacities (spending and taxation) to redress that ill.

This observation destroyed the existing ‘macroeconomics’ of the day which had maintained that unemployment was due to excessive real wages and that wage cuts would restore full employment.

In the early years of the Great Depression, the ‘Treasury View’ (wage cutting) was tried and failed dramatically. Keynes’ insights, which built on what Marx had already understood and explained in detail many decades earlier, were demonstrated to be valid as governments introduced major fiscal stimulus and job creation programs to combat the growing mass unemployment in the 1930s.

The onset of the Second World War and the rise in fiscal deficits as governments sought to prosecute their respective War efforts ended the Great Depression and set the scene in the subsequent peace time for several decades of full employment managed by appropriate fiscal policy use.

That era ended when the neo-liberals stormed back into the policy dominance.

Chapter 24 also noted that their were “two important respects in which … [the General Theory] … is relevant to the second” fault – the “arbitrary and inequitable distribution of wealth and incomes”.

Keynes wrote:

Since the end of the nineteenth century significant progress towards the removal of very great disparities of wealth and income has been achieved through the instrument of direct taxation – income tax and surtax and death duties – especially in Great Britain. Many people would wish to see this process carried much further, but they are deterred by two considerations; partly by the fear of making skilful evasions too much worth while and also of diminishing unduly the motive towards risk-taking, but mainly, I think, by the belief that the growth of capital depends upon the strength of the motive towards individual saving and that for a large proportion of this growth we are dependent on the savings of the rich out of their superfluity. Our argument does not affect the first of these considerations. But it may considerably modify our attitude towards the second. For we have seen that, up to the point where full employment prevails, the growth of capital depends not at all on a low propensity to consume but is, on the contrary, held back by it; and only in conditions of full employment is a low propensity to consume conducive to the growth of capital. Moreover, experience suggests that in existing conditions saving by institutions and through sinking funds is more than adequate, and that measures for the redistribution of incomes in a way likely to raise the propensity to consume may prove positively favourable to the growth of capital.

In other words, the high saving of the rich actually undermine the capacity of the economy to achieve full employment and if they spent more then the government would not have to spend as much to achieve that aim.

But the idea that these savings were essential to fund government spending and could be accessed by taxing the rich was clearly understood by Keynes to be flawed reasoning.

In 1946, Beardsley Ruml published his 4-page article – Taxes for Revenue Are Obsolete – in the journal American Affairs (January 1946, Vol VIII, No 1), which carried the sub-title “A Quarterly Journal of Free Opinion”.

This journal was published by the – National Industrial Conference Board, Inc – which is now known as the Conference Board.

The article is one of those gems that make you wonder why economists and politicians have been able to obscure the truth for so long and generate millions of unemployed and poverty in the process.

Once again, it is consistent with today’s theme – that the viability of the spending programs of a currency-issuing government is not dependent on high-income earners or the wealthy for tax revenue or their savings.

At the tine Beardsley Ruml was the Chairman of the Federal Reserve Bank of New York and the bio in the “Notes on Contributors” in the Journal described him as “an audacious thinker in the new world of social fiscal policy”.

Ruml’s argument was straightforward:

… given (1) control of a central banking system and (2) an inconvertible currency, a sovereign national government is finally free of money worries and need no longer levy taxes for the purpose of providing itself with revenue. All taxation, therefore should be regarded from the point of view of social and economic consequences.

Regular readers will no doubt identify this sentiment with Abba Lerner’s Functional Finance theories, which provide essential underpinnings to Modern Monetary Theory (MMT).

Please read my blog – Functional finance and modern monetary theory – for more discussion on this point.

I will come back to that.

Ruml began by noting that:

Taxation is one of the limitations placed by government on the power of business to do what it pleases … issues in the taxation of business are not moral issues, but are questions of practical effect: What will get the best results? How should business be taxes so that business will make the greatest contribution to the common good?

Ruml said that before we answer those questions:

… We must first ask: “Why does the government need to tax at all?”

He noted that a “simple answer” was “likely to be a superficial one”:

… that taxes provide the revenue which the government needs in order to pay its bills.

He noted that this was not true because governments had demonstrated a capacity to borrow to “supplement their revenues”. He observed that when government became reliant on borrowing and hence “the sources from which the money can be obtained”, the bond markets have the power to push up interest rates.

Ultimately such a government had to fall back on taxation to get clear of the power of the bond markets and remain solvent.

But, and this was his substantive point:

The necessity for a government to tax in order to maintain both its independence and its solvency is true for state and local governments, but it is not true for a national government. Two changes of the greatest consequence have occurred in the last twenty-five years which have substantially altered the position of the national state with respect to the financing of its current requirements.

The first of these changes is the gaining of vast new experience in the management of central banks.

The second change is the elimination, for domestic purposes, of the convertibility of the currency into gold.

So, where the currency issued by the central bank “is not convertible into gold or into other commodity”, then Federal government “has final freedom from the money market in meeting its financial requirements.”

And this means that decisions to tax have to be made on non-revenue grounds as noted above. Ruml said “All federal taxes must meet the test of public policy and practical effect. The public purpose which is served should never be obscured in a tax program under the mask of raising revenue”.

Most recently, I have been critical of Jeremy Corbyn’s campaign for leadership which has emphasised taxing the rich to fund public expenditure on progressive programs.

Please read my blogs:

1. Corbyn should stop saying he will eliminate the deficit

2. Correcting political ignorance and misperceptions

3. Jeremy Corbyn must break out of the neo-liberal framing

4. British Labour must escape from its austerity lite prison

Ruml would have made the same criticisms.

Public purpose is the goal (however defined) and taxation policy should support that aim and never be justified as a means of raising funds to permit government to spend.

In 1943, American economist Abba Lerner published his article – Functional Finance and the Federal Debt:

Many of our publicly minded men who have come to see that deficit spending actually works still oppose the permanent maintenance of prosperity because in their failure to see how it works they are easily frightened by fairy tales of terrible consequences.

His aim was to provide a roadmap for governments aiming to eliminate “economic insecurity” and to elucidate the “principles by which appropriate government action can maintain prosperity”.

Lerner understood that people are “easily frightened by fairy tales of terrible consequences” when new ideas are presented. The sense of fright is driven by a lack of education that leaves people unable to comprehend how the economy actually operates.

His approach should be a source of empowerment to progressives. I have read a lot in the last few weeks in the context of Jeremy Corbyn’s campaign about how it is correct for him to adopt neo-liberal narratives (eliminating the deficit etc) because otherwise the electorate will reject him.

Lerner never believed that sort of surrender politics. To him it would have represented the anathema of leadership and public purpose pursuit.

Neo-liberals magnify that sense of fright, by demonising what are otherwise sensible and viable explanations of economic matters. They know that by elevating these ideas into the domain of fear and taboo, they increase the probability that political acceptance of the ideas will not be forthcoming.

That strategy advances their ideological agenda.

The basic rules that should guide government fiscal policy are, as Lerner noted, “extremely simple” and “it is this simplicity which makes the public suspect it as too slick”.

Neo-liberals who have vested interests in ensuring that the public does not understand the true options available to a government that issues its own currency manipulate that suspicion. In the place of these simple truths, neo-liberals advance a sequence of myths and metaphors that they know will resonate with the public and become the reality.

Significantly, Lerner distinguished between what he called “functional finance” and “sound finance”, the latter being the orthodoxy he confronted.

‘Sound finance’, which also dominates the public debate in the current period, is usually expressed in terms of some defined fiscal and monetary policy rules. For example, governments should aim for a fiscal balance or not allow deficits to exceed 3 per cent of GDP.

Equally, the central bank should only allow the money supply to increase in line with the rate of output growth. These rules, which are rarely challenged, usually disguise an underlying conservative morality about the role of government (for example, deficits are characterised as “living beyond the means”).

Ruml clearly knew that this morality appeal was fallacious and diverted the public from the truth of the matter.

Abba Lerner considered a government should always use its policy capacity to achieve full employment and price stability and thought that fiscal or monetary policy rules based on conservative morality were not likely to help in that regard.

In contrast to “sound finance”, Lerner said:

The central idea is that government fiscal policy, its spending and taxing, its borrowing and repayment of loans, its issue of new money and its withdrawal of money, shall all be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine about what is sound and what is unsound … The principle of judging fiscal measures by the way they work or function in the economy we may call functional finance.The first responsibility of the government (since nobody else can undertake the responsibility) is to keep the total rate of spending in the country on goods and services neither greater nor less than that rate which at the current prices would buy all the goods that it is possible to produce. If total spending is allowed to go above this there will be inflation, and if it is allowed to go below this there will be unemployment. The government can increase total spending by spending more itself or by reducing taxes so that taxpayers have more money left to spend. It can reduce total spending by spending less itself or by raising taxes so that taxpayers have less money left to spend. By these means total spending can be kept at the required level, where it will be enough to buy the goods that can be produced by all who want to work, and yet not enough to bring inflation by demanding (at current prices) more than can be produced. (Emphasis in original)

Lerner”s “first law of Functional Finance”, recognises that the government responsibility should be to adjust its spending and taxation to ensure that all production is purchased and that this level of production generates jobs for all, such that the society cannot produce any more goods and services with its current available inputs.

What are the financial implications of this? Lerner noted that if in fulfilling its responsibilities, the government recorded a fiscal deficit, then it:

… would have to provide the difference by borrowing or printing money. In neither case should the government feel that there is anything especially good or bad about this result.

The goal is to “concentrate on keeping the total rate of spending neither too small nor too great, in this way preventing both unemployment and inflation” (p. 40). Importantly, assessments of “good” or “bad” are defined purely in terms of whether the government is achieving its goals.

Obviously, moral considerations enter at the stage of setting goals. It is clearly a values-based position to aim for a state where everyone who desires work can find it. Once agreed that this will be the societal goal, then we should be indifferent, if in different circumstances, a deficit of 1 per cent of GDP or a deficit of 5 per cent of GDP is required to meet that goal.

Thinking in this way flushes out the role of ideology. The neo-liberals obscure their disregard for mass unemployment by claiming that the 5 per cent deficit is dangerous and unsustainable.

If the public truly understood that the 5 per cent deficit is as sustainable as the 1 per cent deficit, then the neo-liberals would be forced to debate their preference for mass unemployment.

Clearly, the public would not generally accept that ideological preference and that is why the neo-liberals have to obfuscate their true motivations and hide behind the financial myths concerning the sustainability of government deficits and erect the metaphorical defense structures.

Lerner noted that:

… taxing is never to be undertaken merely because the government needs to make money payments … [it should] … be imposed only when it is desirable that the taxpayers shall have less money to spend”

Lerner also understood (as Ruml did) that a federal deficit could be matched by central bank credits (the so-called “printing money” option).

The term “printing money” is not used in MMT because it is not descriptive of the actual process that underpins government spending. The term also invokes irrational emotional responses about hyperinflation with the Weimar Republic or Zimbabwe immediately entering the conversation, and reasoned debate then becomes impossible.

Lerner was keenly aware that the conservative economists considered the “printing money” option to be taboo. He remarked that the:

… almost instinctive revulsion that we have to the idea of printing money, and the tendency to identify it with inflation, can be overcome if we calm ourselves and take note that this printing does not affect the amount of money spent.

To put it another way, the only reason the government would increase its deficit would be to fill a widening shortfall between the total spending required to maintain full employment and current private spending.

This would not be inflationary if the sales boost allows firms to maintain their current levels of production and eliminate unsold inventory. If governments expanded the deficits beyond that point then inflation would threaten. But the inflation risk lies in the spending growth rate, not whether the government matches its deficit with debt issuance or new money.

If the non-government sector, upon receipt of this new money, decided to reduce its current saving rate and to spend more, then the deficit would have to be lower to avoid higher inflation.

Equally, holders of government bonds could decide to liquidate their stocks and spend more. In the same way as before, this would require a lower deficit. The choice of debt issuance or new money creation is separate to the desire to avoid a surge in inflation.

For example, the Labour politicians in the United Kingdom confront the austerity debate with claims that they would “fix the budget” over a longer time period to avoid the massive damage that immediate austerity brings. Of course, even debating the “health” of the fiscal position in terms of some financial ratios is ceding ground to the conservatives, ground that is illegitimate.

Lerner (1951: 15) called progressives who argued in this way “proponents of organized prosperity” and said:

A kind of timidity makes them shrink from saying anything that might shock the respectable upholders of traditional doctrine and tempts them to disguise the new doctrine so that it might be easily mistaken for the old. This does not help much, for they are soon found out, and it hinders them because in endeavoring to make the new doctrine appear harmless in the eyes of the upholders of tradition, they often damage their case. Thus instead of saying that the size of the national debt is of no great concern … [and] … that the budget may have to be unbalanced and that this is insignificant when compared with the attainment of prosperity, it is proposed to disguise an unbalanced budget (and therefore the size of the national debt) by having an elaborate system of annual, cyclical, capital, and other special budgets.

Progressives should first and foremost seek to educate the public about how the economy and money actually operate and what opportunities the government has to act on our behalf to advance our well-being.

If we think in this way, then options that have been constructed by the neo-liberals to be “dangerous”, “radical” or “taboo” will start to appear reasonable and grounded in reality.

The next step is that they eventually become the mainstream orthodoxy. Progressives should avoid petty conversations that lead to statements such as ‘we will reduce the deficit more slowly than you but we will still reduce it’.

Ruml clearly was operating with this understanding. He said that “Federal taxes … serve four principle purposes of a social and economic character”:

1. As an instrument of fiscal policy to help stabilize the purchasing power of the dollar;

2. To express public policy in the distribution of wealth and income …

3. To express public policy in subsidizing or in penalizing various industries and economic groups;

4. To isolate and assess directly the costs of certain national benefits, such as highways and social security.

So the government might impose taxes:

1. To control inflation.

2. To redistribute purchasing power from the rich to the poor (high income to low income).

3. To alter the allocation of resources away from undesirable ends – such as tobacco taxes.

4. To provide some hypothecated public transparency for major projects/programs.

So from a functional finance perspective, taxation must be designed to advance these purposes and the public discussion must be about the idea of public purpose and never about raising revenue.

In my recent blog – Correcting political ignorance and misperceptions – I made the point that the progressive challenge is to reframe macroeconomics to ensure that the neo-liberal myths are exposed. But it must begin, not with discussions about “facts” and “logic”, but rather broader outlines of the the social purpose of government policy.

This broad vision is in sharp contrast with the neo-liberal view of the economy as a natural entity, separated from us, which gets sick if government attempts to alter its natural course.

The social purpose of government policy should be articulated and narrated in ways that will resonate with and activate the frames in our brains that constrain the way we interpret information.

This is what Ruml is on about when he said that the starting point are not “tax questions” but “questions as to the kind of country we want and the kind of life we want to lead”.

He understood that a primary role for taxation was “the maintenance of a dollar which has a stable purchasing power … the avoidance of inflation”:

If federal taxes are insufficient or of the wrong kind, the purchasing power in the hands of the public is likely to be greater than the output of goods and services with which this purchasing demand can be satisfied.

The result would be inflation. Note that implicit in this statement is that the government wants to command a certain quantity of the available real goods and services to fulfillits socio-economic program.

The excessive private sector purchasing power is thus assessed relative to the total available real output and the government’s desire to command some of that output.

He went on to discuss the other purposes of taxation and when a tax might be considered a “bad tax”, which he considers undermine the capacity of corporations to advance public purpose. I will leave it to your interest to read the rest of his argument which really just illustrates his substantive point that “Taxes for Revenue Are Obsolete”.

Interestingly, in the same issue of American Affairs, there was an article by a Bradford B. Smith, who was introduced as a “one of the brilliant young economists on the conservative side”. His article – “Why We Can’t Buy Full Employment” – was a textbook exposition of what we would now consider to be neo-liberal thinking.

Lerner would have considered it to be one of those “fairy tales of terrible consequences” that scare people into conservativism.

How one could construct Smith’s exposition as that of a “brilliant” mind is beyond me. He goes through the “three ways to find the money” that the government would need to generate full employment and concludes they would all be disasters.

He focused on “The Printing Press” – that is the central bank just crediting bank accounts on behalf of the government. His argument against this essentially comes down to this:

If the government should print money wholesale it would scare people, for too many of them have heard about “continentals,” “greenbacks,” the “trillion-to-one” depreciation of the German mark. So, just to print money in too obvious a fashion would require a great deal of explaining and reassuring, and this could well prove rather inconvenient.

If that wasn’t enough, he went on to claim that allowing a government to pursue full employment via increased fiscal deficits would “constitute a major victory for totalitarianism in America.” Forced labour at slave wage rates follows.

Hmm, not much has changed in nigh on 70 years has it.


Beardsley Ruml was an important contributor to our understanding of the opportunities available to a government which uses its central bank to advance public purpose.

His insights – as the Chairman of the Federal Reserve Bank of New York – were consistent with the body of work that Abba Lerner provided under the guise of Functional Finance.

Both economists contributed to the literature that has been woven into what we now refer to as MMT.

In the current context, it demonstrates how lame the British Labour leadership debate is. The statements from Jeremy Corbyn’s opponents appear to be asinine in the extreme when one applies a deep understanding of the issues being debated.

But as I have said previously, statements about eliminating the deficit are also based on false premises and should be abandoned.

As Lerner said when he addressed the problem of progressives who present their arguments in a conservative way because the public might not understand the fundamentals of functional finance:

The scholars who understand it hesitate to speak out boldly for fear that the people will not understand. The people, who understand it quite easily, also fear to speak out while they wait for the scholars to speak out first. The difference between our present situation and that of the story is that it is not an emperor but the people who are periodically made to go naked and hungry and insecure and discontented – a ready prey to less timid organizers of discontent for the destruction of civilization. (Emphasis in original)

Developing comprehension is just the first step. A bold confidence is also required to withstand the vilification that comes with expressing ideas that are contrary to the neo-liberal norms.

Upcoming Event – Reframing the Debate: Economics for a Progressive Politics, London, August 27, 2015

The NHA is very pleased to be able to present an evening with Professor Bill Mitchell, Professor of Economics and renowned proponent of Modern Monetary Theory, during his visit to the UK at the end of this month.
Come and join Professor Mitchell in conversation with Richard Murphy (Tax Research) and Ann Pettifor (Prime Economics), both currently economic advisors to Jeremy Corbyn”s campaign.

The original venue has proven to be (very) small relative to demand. It was fully subscribed in a few hours. The organisers are now seeking a larger venue.

All readers who have E-mailed me indicating that you wanted to attend but could not get tickets please go to the WWW site for Registration and use the Contact link (at the bottom) to send your name and contact details to the organisers so they can ensure you get in to the new venue – should they find a larger venue.

The Event will be held on Thursday, August 27, 2015 from 18:30 to 20:30 (BST)

That is enough for today!

(c) Copyright 2015 William Mitchell. All Rights Reserved.

This Post Has 62 Comments

  1. The cost and limit to spending is real resources.
    Government spends from its buffer by crediting bank accounts and then backfills the buffer. The DMO is constantly reshuffling gilts for reserves to backfill the buffer?
    Question: Why? The buffer is infinite in a country that issues its own currency? Because the treasury starts with a certain amount of money. But it makes no sense to save up your own IOUs. And in the UK, the government has access to the Ways and Means Account (central bank money.) The UK is MMT ready, except we don’t know it yet!
    “Instead of

    ‘what are you going to cut to fund programme X/tax cut Y[1]’

    you can have:

    ‘fund programme X/tax cut Y[1], which will either pay for itself by expansion in the real economy (in which case inflation will stay steady and there will be no compensatory tax/interest rate[1] rises), or it won’t (in which case this tax/interest rate[1] will change).’

    (1 – delete as applicable depending on political prejudice/religious belief[1]).

    In other words the policy options switch from ‘pre-fund’ to ‘post-fund as required to maintain stable prices’. Taxation is no longer linked rigidly to the amount of government spending, but to the combination of government spending, net private sector nominal saving and the real expansion of the economy.”

  2. Bill, you may face a series of nasty comments on the “tax the rich” fascists on this 🙂
    Should we tax the rich? Maybe but who cares! That is low on the list of priorities. The left are acting like idiots.

  3. Also, remember this is only for currency issuing governments. Greece should “tax the rich” unless they Grexit 😉

  4. I think that Geoffrey Ingham in his ‘The Nature of Money’ has some useful insights on this topic that largely resonate with MMT.

    He agrees with MMT that taxes are ultimately what gives money its value. This is not directly related to spending but still, I think, too important to dismiss too lightly.

    A corollary of this would seem to be that illegal tax avoidance would decrease this value and should be taken seriously.

    I think this is a challenge for MMT because this is a much harder idea to get across than taxes fund spending.

    I think Ingham has the right idea in that the debt/credit relationship is too deeply rooted in political and social relations to be treated as purely a mathematical concept even one as convincing as functional finance.

    I think MMT has the right idea that deficits are important but in addition to a sovereign being able to ‘print’ its own currency I think maybe even more important is its ability to create a sovereign money of account that can be trusted and that is largely created by its power to tax.

  5. It’s true that Governments don’t need to tax the rich.

    They don’t need to make smoking quite as expensive as it is either!

    So, isn’t it just a case of recognising that there is we need to do and what we desire to do ?

  6. “This observation destroyed the existing ‘macroeconomics’ of the day which had maintained that unemployment was due to excessive real wages and that wage cuts would restore full employment”

    Christopher Kent, an assistant governor at the Reserve Bank of Australia, didn’t get the memo.

    In a recent speech:

    “low wage growth across the economy has enabled firms to employ more labour than would otherwise have been the case”

  7. Judging by his blog Mr Murphy is getting closer to MMT every second and is definitely reaching out.
    It’s going to be a very interesting discussion I think. He is so close. Just hope his baby, the PQE thing, doesn’t get in the way.

  8. ” The left are acting like idiots.”

    I don’t believe that’s true. Taxation according to MMT is primarily not to raise revenue but to control inflation and establish a value for the currency but there are secondary reasons for imposing taxes too. The left want to tax the rich to reduce the imbalance of wealth in society.

    So they want to impose the tax for a secondary rather than a primary reason in MMT terms. Is that a big problem?

  9. I agree with Pete Martin. Inequality, inequality, inequality as Tony Blair didn’t say.

    It has negative impacts on the economy and society more generally. Taxation is needed to address this.

  10. @financial matters

    The Nature of Money is indeed a excellent read. I’m rather sure MMTers are right in theory, but I’m still not convinced they are right in practice.

    ‘To put it another way, the only reason the government would increase its deficit would be to fill a widening shortfall between the total spending required to maintain full employment and current private spending.’

    A president/prime minister could also throw money at his constituency in the hope of being reelected, and I’m not sure that money will always be as useful as claimed by Bill.

  11. Increasing taxes on the wealthy, and high income earners would remove them from the property market where they are seeking only investment properties. The more money that is chasing homes as investments, in competition with young parents needing to purchase a house to serve as their family home, the greater the strain on the finances of those young parents and the less they have to spend in ways that generate employment.
    In the housing market, asset value inflation, dampens demand for other products and tends to cause underemployment.
    It should always be remembered that employment in many financial services is parasitic to the real economy.

  12. It really is difficult to frame an argument that tax revenue is irrelevant to government expenditure. We see lazy thoughtless references to 1920’s Germany and Zimbabwe whenever “printing money” is mentioned. In reality the CB cannot create money except it be by paying for something, just like non commercial banks cannot create their money without customers wanting loans. There is no reserve of money awaiting something to spend it on in either sector. So it ought to be possible to explain that without a whole lot of existential angst. Except it seems not.

  13. Dear Bill

    If one of the functions of taxation in a modern economy with a fiat currency is to maintain price stability, or low inflation, then taxation will still be a very high percentage of the economy. In countries with an elaborate welfare state, total public expenditure is usually between 35 and 50% of GDP. Obviously, if all of that were financed without taxation, there would be high inflation, and inflation, as Milton Friedman liked to point out, is really another form of taxation, but not a progressive for of taxation.

    In the past, governments often suspended the gold standard during wars. Quite frequently, these wars were then followed by inflation. There was just too little taxation to maintain price stability.

    Taxes on the rich can easily be defended with the principle of the ability to pay. The higher a person’s income is, the more he will spend his income on luxuries. Better transfer some of that high income to people with modest incomes. I rather live in a country where Peter has 2 cars and Paul 1 than in a country where Peter has 3 cars and Paul none. If a government is very small, say, under 5% of GDP, then taxes can’t have a significant egalitarian impact even if all government expenditure is financed through taxation. That’s why libertarians, with their support for the minimal state, are really plutocrats.

    Regards. James

  14. A superb post, Bill. Best I have read.

    “I have read a lot in the last few weeks in the context of Jeremy Corbyn’s campaign about how it is correct for him to adopt neo-liberal narratives (eliminating the deficit etc) because otherwise the electorate will reject him.”


    “Progressives should first and foremost seek to educate the public about how the economy and money actually operate and what opportunities the government has to act on our behalf to advance our well-being.”

    I hope I can be conceited enough to believe the first refers to a couple of my comments. I hear what you say, but I have tried hard to get the concept over to friends, and I am always stonewalled because the neo-liberal message is marketed so strongly and ingrained in people’s understanding. Okay, I’m not a great orator – in fact a pretty rubbish one. I have just watched Corbyn’s speech at Glasgow, and have to admit he is. Maybe he is capable of putting it over. Bear in mind he will have Osborne to contend with and the backing of his Bilderberg Group pals.

    I’m greatly looking forward to your talk, but I hope the new venue is not too far from the existing one as that is an easy walk from Waterloo station. Good to know that there are such a lot of people in the UK who have got the MMT bug.

    BTW 3 out of 3 in this Saturday’s quiz.

  15. @petermartin2011,

    The left want to tax the rich to reduce the imbalance of wealth in society.

    But this is also what gives the most ammunition to the neo-liberals, when they start saying things like “why punish the wealth creators?” whatever that means.

    You could reduce inequalities in other ways, maybe by ensuring full employment and periodically raising the minimum wage (hopefully pushing the median wage along too) at a higher rate than the inflation rate. That way you’re increasing workers real income, and “devalue” the dormant wealth of the lazy rich? Of course there are practicalities to consider, but that’s the main idea.

    Of course you want to tax the rich and redistribute, but you don’t necessarily need to tax them more than they already are. Especially at times like now. I believe this is only hindering the progressive discourse, if anything by giving ammunition to the other camp.

  16. Dear Sam (at 2015/08/17 at 18:51) and Peter Martin

    You said:

    I agree with Pete Martin. Inequality, inequality, inequality as Tony Blair didn’t say.

    It has negative impacts on the economy and society more generally. Taxation is needed to address this.

    Why not start from the other angle – full employment, better jobs, better training, better education, pay in line with productivity, expanded public services, first-class health care, with strong means testing?

    That will reduce inequality and make everyone better off in a material sense and probably improve our souls.

    best wishes

  17. As a member of the LP I along with three other people gave a speech about our preferred candidate. Of course as a reader and student of this and other MMT sites, I showed them a graph of the UKs sectorial balances and a copy of the letter from the 77 economists sent to George Osborne explaining how cutting government spending via the deficit cuts would lead to a recession or maybe even a crisis. It was then easy to show how Jeremy’s manifesto which is mostly a stimulus package and redistribution package would improve the economy reduce debt and provide jobs. However, I was forced to talk about his “Green Quantitative Easing” programme as his stimulus package, just presenting it as a means of government issued currency which would create jobs. I did explain the basic idea that government issues the currency and can never run out of money, and that the neoliberal candidates misunderstand the monetary system.
    It was well received but it left me feeling as you state that the whole thing needs reframing, because it is difficult to tell people who have been propagandised into believing that the deficit is something that we owe rather than something that we benefit from.
    The GQE and benefits of the National investment bank in Jeremy’s manifesto needs to be explained to the public as to its real benefits in the context of government stimulus.

  18. Whilst i absolutely agree that the left must tackle the way the deficit debate is framed and
    any talk of future deficit reduction should be completely avoided i think Corbyn deserves great credit
    in much of his approach and i speak not as a labour party supporter or entryst voter.
    As bill often points out it is not about the money it is about what the money buys and here
    Corbyn has been excellent clearly saying the government should direct more real resources
    to education,health care ,housing and mass transportation.This ismore important than correctly
    describing the money mechanics.

  19. As to the tax question.Even on MMT terms taxes drive the currency and so are required to
    enable governments to spend that currency.That the government sector never needs to be
    in balance with its private sector indeed ideally that private sector needs to have significant
    savings always needs repeating.
    This blog often speaks fondly of the economy during the post war decades of near full employment
    but never remembers the very high rates of income tax on high earners .Sometimes as high as 90%
    in the US and prosperity for the majority never has increased so much.
    There is no ‘left’ politics without an advocacy for greater equality.Freedom ,democracy,fraternity
    all types of politics,religions,and organisations happily embrace these concepts but it is egalitariansm
    which is the stamp of the left.
    Unemployment,austerity,crusades against welfare recipients,anti trade unionsm ,deregulations these
    are not driven by a misunderstanding of monetary mechanics.This is a strategy to make workers
    desperate and docile for the crumbs of the rich mans table.This is about maintaining and increasing
    the fews control of real resources the pervasive corruption of wealth.
    We should be proud and commited to taxing the rich more .Corbyns message to reverse increasing
    inequality is resonating just as Sanders is in the USA.It is even resonating in this old cynic i might
    even join the party IF he is elected.

  20. Bill,

    Did the issue between Keynes and Lerner over the balancing of budgets ever get resolved technically?

    As far as I can gather Keynes was in favour of balancing the current budget and letting the capital budget take the countercyclical strain (via the usual ‘investment spending’ line). But ISTM that was entirely for *political reasons* – people wouldn’t go for the alternative back in the late 30s, early 40s. Very similar to his insistence on some sort of fixed foreign exchange mechanism, none of which every came to fruition properly – funnily enough for political reasons.

    Lerner however couldn’t see a reason for differentiating the budgets since the dividing line is largely arbitrary anyway and there didn’t seem to be a reason to differentiate between first order investment and second order investment caused by increased consumption demand.

    I found an interesting working paper on the subject from UWS which you may have already seen: Keynes, Lerner and the Question of Public Debt.

    Here in the UK there’s a bit of a ‘not invented here’ issue with Keynes – since he was English and remained English whereas Lerner emigrated to the USA.

    And so UK Labour is stuck with the Keynes notion that you should balance the current budget and let the variation happen solely on the capital budget.

    When they say they want to ‘balance the budget’, what they mean by omission is balance the current budget. But I can’t see a reason to hang a hat on that at all.

  21. “The left want to tax the rich to reduce the imbalance of wealth in society.”
    Except we don’t need to do that at all. In fact I would introduce across the board tax cuts.

  22. @Alexandre Hanin

    I note a similar question of yours on another post and it is a good question. What is to stop indiscriminate government spending to increase popularity with certain groups before elections, for example? I don’t know the answer and am wary of providing a “vague” answer 🙂 but I suspect it can be sorted out. Once the debate has changed from balancing budgets to exactly how a government should spend, the debate itself is likely to settle on views about what is responsible spending and what is not. Orthodoxy will change and I think “rules” or heuristics will be developed to determine when spending is appropriate and when it isn’t. For example, government spending should not be in competition with the non-government sector. There will be arguments about these but at least it will be an argument based on facts, unlike now, and the positive possibilities are important to address many of society’s social ills such as those stemming from youth unemployment. If the voters where better educated then inappropriate spending would be punished at the polls.

  23. The sad truth is that neoliberal tropes have become so embedded in the collective psyche that neoliberalism has become the latest flavour of populism for politicians to exploit. The influence of maintream media must be very strong because most people of average intelligence, in my experience, actually do get MMT very quickly (unless they are federal politicians) when they hear it’s central ideas described for the first time. It’s as if most had been searching for those answers but could not find them anywhere; and then, they go home and watch the news for an hour and become royally confused again after listening to politicians and the media commentary.

    What is truly mystifying is the steadfast adherence to the neoliberal paradigm despite it having effects that appear to contradict it’s own objectives. It’s as if the goal were to ruin national economies that were working at one time. Mechanics have a saying that applies here: If it isn’t broken it doesn’t need fixing. Doctors have a similar saying: First do no harm!

    There is one good reason to tax the wealth of the rich however, and that is to limit money available for the amplification of their political influence. One mouth one voice.

  24. JC,
    Campaign finance reform and pay politicians well, because if you don’t someone else will.

  25. Sorry, Bill, but just like Ruml, you left the government without a source of revenues for spending.
    After he incoherently claimed Guv didn’t need taxation as it could borrow, he glibly passed over the borrowing option due to bond vigilante-ism as real, and went back to taxation.
    Lest we forget, Ruml’s brillaince and boldness were aiming to end corporate taxation.

    If any of our countries has a PUBLICly-controlled central bank that is issuing the currency on behalf of the people and their government, then this makes sense.
    Until then …… the Guv is broke without taxation for revenue.
    Hardly a happy, progressive outcome.

  26. The comment about periodically increasing the minimum wage to reduce income inequality rather than use taxes is wrong-headed. What would actually do the most to alleviate income inequality, besides taxing the idle rich money, would be to change corporate taxation so that it is tied to wage differentials. Pick a max wage that is acceptable and defensible and then set the floor from there. Specifically, make it a policy that it is unacceptable that any top corporate exec makes more than (say) 60x the average worker pay in that corporation. To this end, make corporate taxes minimized (but never zero) only when the top compensated exec for a corporation (public or private) is NO MORE than 60x the average worker pay in that corporation. The company is free to pay the top exec more than 60x average worker pay but doing so will increase their corporate taxes (and taxed on the exec since his/her personal taxes will increase too). If a corporate exec wants more money/compensation, then they have to increase average worker pay so that their desired pay increase is no more than 60x their average worker pay. Now for the fun part: temps count as full employees. In other words, you don’t get to hire nothing but a “temp” workforce, claim they are all part-time or not actually employees, pay them crap, and then pay big to the exec(s). Temps, part-time, off-shored ALL count as employees and their average actual income, in domestic currency amount, is the value that exec pay cannot go 60x above.

    Thus, having a bunch of part-time workers wont save you because if you are paying them only the equivalent of $20,000/yr then all you can get as an exec, at best, is $120,000/yr. If you are paying off-shored employees $5/day then THAT COUNTS and that means you can only pay the top exec 60x $5/day. You don’t get to claim that $5/day in poor country X is “equivalent” to $100/hr domestically, it isn’t “equivalent” to anything but $5/day. Period. Ouch. Discourages off-shoring and part-timing the workforce, discourages worker pay or benefit cuts, because all that impacts the pay of the top exec(s). The whole thing can be tweaked as needed to prevent the top execs from pulling in more than 60x average worker pay without increasing corporate taxes (and personal taxes).

  27. J Christensen, your confusion is understandable only if you think neoliberals are primarily (and erroneously) believing a false narrative/religion with regards to economics. The confusion lifts when you accept that neoliberals are actually about control: political and economic. They intentionally seek and exacerbate income inequality. They intentionally seek job instability and crushing working wages. The intention is control – and benefits to the few at the expense of the many. They WANT income inequality to ensure an elite few (chosen by god) are on top and in full control, of everything. They WANT the equivalent of slave labor. They WANT sweatshops. They WANT healthcare only for those with money. They want society to be ugly and harsh for most people (just not themselves). They enjoy wielding the power, inflicting suffering upon the rude, dirty masses. They are the elect and they INSIST on everyone recognizing and living that “fact”. Neoliberalism is mostly about control.

  28. There seems to be no hint in this article that money is currently mostly created by banks. Are you talking about a system where the government pumps in money (which would be additional debt) and the banks money creating powers are retained? Or would banks power of money creation be abolished?

  29. Joe B.,
    From Former FED Chairman Marriner Eccles 1947 Congressional Testimony to the Committee of Banking & Currency pertaining to questions around the direct funding of the US Treasury by the FED:
    Mr. ECCLES. “…If Congress appropriates more money than Congress levies taxes to pay, then, there is naturally a deficit, and the Treasury is obligated to borrow. The fact that they cannot go directly to the Federal Reserve bank to borrow does not mean that they cannot go indirectly to the Federal Reserve bank, for the very reason that there is no limit to the amount that the Federal Reserve System can buy in the market. That is the way the war was financed. Therefore, if the Treasury has to finance a heavy deficit, the Reserve System creates the condition in the money market to enable the borrowing
    to be done, so that, in effect, the Reserve System indirectly finances the Treasury through the money market, and that is how the interest rates were stabilized as they were during the war, and as they will have to continue to be in the future. So it is an illusion to think that to eliminate or to restrict the direct borrowing privilege reduces the amount of deficit financing. Or that the market controls the interest rate. Neither is true.”

  30. Surely the question of taxing the rich to reduce inequality and filling the output gap are separate issues. The former desirable in my view and the latter mandatory but they need to be treated independently. That is from a practical perspective as well as for transparency but making it part of a cutting the deficit policy just leaves us exactly where we are in terms of spreading an understanding of how the monetary system works.

    If we’re just going to go with the politics then we might as well vote Burnham in and be done with it.

    Hell No.

  31. @Mike
    Commercial banks create deposits yes.
    With this channel of ‘horizontal’ money creation the instantiated deposit cancels out when it is resolved (payed back). Banks earning fee’s + interest being taken as their profit.
    This channel of money creation is in parallel (inseperable in circulation) with the way government spends which could be described as a ‘vertical’ component to money creation. Since government is issuer of its own fiat currency, sets the level interest it pays on its own currency (note even the liabilities are created as a voluntary constraint) it is not the same mechanics as private sector debt instantiated by a private sector entity.

    In this specific blog post there is no distinction/need to talk about endogenous bank deposit creation specifically: this deals with aggregate (both vertical and horizontal channels of money). And follows with the appropriate levels of taxation (deletion of issued currency in circulation) to promote/restrict certain behaviour in the private sector while recgnising the desire for savings and to obtain full employment.

    Indeed as you have eluded: with the incorrect paradigm (loanable funds) that the mainstream dogma uses to understand bank instantiated deposits and how they actually work there is no understanding by progressives like Corbyn (yet/hopefully eventually) that government will need to spend more than it taxes to maintain private sector solvency and employment.

  32. Bill has laid out a lot to unpack, here, and limiting to fixing unemployment-my two-cents from this side of the pond…..

    President Obama/Council of Economic Advisers:


    Unemployment oft has dire social consequences-both in the microeconomic, and macroeconomic sense-for instance, we have 60% minority unemployment [hereafter UE] in our inner-cities, with drug economies, and an epidemic of homicides….

    UE is a pernicious “social” problem, we, the larger society, have a solemn responsibility to address…in the interest of civility, alone….

    And not a clue how to fix….We do not have a single, stand-alone program with the SPECIFIC objective to address the most serious social problem facing America……

    And, why do we run from this responsibility as if it were the plague?

    And, why do we go on pretending that the market can provide anybody wanting a job, with a job-[a “Belief” hereafter identified as Magic Dust]….When the data shows that this has never resulted in a UE rate below 3% since WW II-with the exception of 1953-leaving millions jobless in its wake, and has caused our inner-city crisis, above?

    Being beholden to the above, however-when the market fails, the jobless are out of luck! And yet, we stand on one foot and then the other pretending that Magic Dust will provide us with a solution?

    Further, finding a solution to UE has tentacles that reach into the solution for ALL of our social ills….

    For instance, it is impossible to implement Prison Reform until we fix UE, and it is impossible to address the concerns raised by “Black Lives Matter” until we address the baneful downside of unemployment….

    In sum, UE is a No One Wins….the jobless lose, civility loses, and the Market loses, to wit:


    Short Definition:

    3% is the zero-sum threshold above which unemployment starts substantially undermining the Market–and the loss in income to the Market is compounded exponentially with each percentage point of increase in unemployment, above 3%.

    Humphrey and Hawkins were exactly on target in addressing our 21 Century economy-with “automation” alone resulting in fewer and fewer jobs going forward…and yet, save for a lone congressman in DC, Conyers [HR 1000]-Washington is deaf as an adder!


    Jim Green, Democrat opponent to Lamar Smith, 2000

    Thank you for contacting the White House!

  33. @joe bongiovanni

    Sorry, Bill, but just like Ruml, you left the government without a source of revenues for spending.

    The government which is sovereign in its currency is not revenue constrained. Taxation for such a government provides the primacy of the currency, and further allows the government to control private spending capacity so that the government may implement its socio-economic policy. In a high pressure (full-employment) economy it can further restrict spending in order to control inflation if nominal demand threatens to exceed the real capacity of the economy.

  34. With a functional finance policy of full employment and relative stable purchasing power of the currency, what would be the purpose of large net savings by private sector entities? Honest question.

  35. The Left and its advisors are in real danger of falling into the trap of thinking it knows what the electorate want and what it will vote for. They should remember that they didn’t have a clue a month ago.

  36. Households certainly need savings to manage risk and supplement pension incomes.
    But rich people want enormous savings to hoard future claims on the worlds land and peoples
    labour and pass on those claims to their offspring.Tax such future claims if you want
    a fairer distribution of resources in the future. The book the Spirit Level is a good statistical
    analysis for the benefits a more equal soceity.

  37. @Praedor

    I think these ideas are on track and more in keeping with the idea of a balance between the state and private sectors. Corporations get many benefits from the state and it’s superficial analysis not to take these into account. I think Mazzucato is on track with more appropriate state/private interactions.

  38. “What is to stop indiscriminate government spending to increase popularity with certain groups before elections, for example?”

    Nothing and why should there be? If a government wants to blow up an economy and the people are happy for them to do so, then what’s the problem. We live in a democracy right?

    Always remember when you say “We want to stop the government providing what the people are asking for” you are wishing in a form of autocracy or worse Facism.

    Be careful what you wish for. Remind yourself how the elected government in Greece has been treated.

  39. Tax the rich is well inside the neoliberal paradigm. First we have to give the money to the rich then tax them. But we must of course preserve and nourish this entity that lay golden eggs?
    Full employment will automatically create equality and give less to the top end of town. It’s the only way.

    So when full employment have equaled the playing field we have to make people unemployed so the rich can accumulate money that can be taxed?

  40. I have never understood the lefts fancy about so called Tobin tax. In their narrative these voluminous amounts that is bouncing on currency and financial market is a source of real wealth that could be milked to benefit the poor and many, there is almost no limit to what it could achieve.
    But to do this one of course have to preserve and nourish this entity of artificially inflated financial speculation that lay golden eggs?

  41. /L, the Tobin Tax is a beautiful thing on many levels. It would be taxing the very scum that repeatedly wreck the economy while they dance on piles of money they made while tanking the economy. It would absolutely kill HFT, wiping out a great deal of instability and short-term thinking and investing. All trades would have to be considered, sedate, and focused on more long-term gain because the cost is just too high from the tax to do otherwise. It also uses these parasite’s money to fund things they despise: free education for ALL, healthcare for ALL, a safety net, etc. Force those who oppose the social goods to pay for them in particular.

  42. ” It would absolutely kill HFT, wiping out a great deal of instability and short-term thinking and investing.”

    So would simply banning it.

    The love of the Holy Power of Taxation on the left is a little bit creepy. Almost like they really enjoy taking things from people rather than just fixing the problem.

  43. @ Allan,
    But, sorry, like most MMT-learners, you are confusing sovereignty with autonomy in monetary operations.
    EVERY nation is sovereign in its currency …. Always was, always will be. That is the definition of sovereignty. Thus, sovereignty means nothing to this discussion.

    At the same time, ANY nation can either establish autonomy over its money, and by utilizing that autonomy, CREATE and ISSUE the nation’s money itself (really, not theoretically nor imagining), or it can turn the operation of its money system over to a separate class of credit and debt issuers, entrepreneurs known as modern private commercial banks.
    Once the banks and government have colluded (1913 in the U.S.) to corrupt (privatize) the money system, there is no such thing as a government being in control of its money, being capable of creating and issuing its money, and thus being prevented from becoming insolvent in its fiscal operations.
    Ask ANY national Treasury Secretary.
    No modern nation is in control of its money. The bankers own the world.
    Every modern national government BORROWS its currency needs from private bankers.
    No nation could achieve modernity without agreeing to the bankers-school privatization of the issuance of its money, and the result of the government’s borrowing its own money from the bankers.
    As soon as you, Bill (respectfully) and other progressive friends get this reality, we will get somewhere together.
    Sorry, but LOL on your point that Guv through taxation prevents ‘too much’ private spending. Commercial banks provide all the purchasing power wanted for private spending; they create money via lending to borrowers.
    What does taxation have to do with that?
    A double LOL…….. seems you’re saying that we’re $US 18 Trillion in public debt because we wanted to slow down private spending, when in reality, we’re in debt because the Guv MUST borrow from these same private bank money-issuers in order to spend (procure public economic resources).
    And let’s discuss what either sovereignty or autonomy does for the full-employment economy when we get there. It will never happen without public money ( )

  44. @ joe bongiovanni

    “”Commercial banks provide all the purchasing power wanted for private spending; they create money via lending to borrowers. What does taxation have to do with that?””

    I think this brings up some interesting points.

    From Ingham

    “In short, the question is whether the state’s revenue is considered adequate for servicing the level of state debt.

    The creditworthiness of modern states and, consequently, their ability to produce high-powered money to meet the demand from the banking system and the economy is structurally linked to the fiscal system and the money-capital (government bond) market”

    First there is the question of regulation. Commercial banks are supposed to be regulated so the state doesn’t waste high powered money on fraud.

    Taxes give value to this money that the commercial banks provide. The banks don’t have the power to produce a money of account on their own.

    More problematic I think is how the fiscal system and bond market interact. MMT correctly shows us the mechanics. But for the system to work properly it also needs social acceptance. Here people need to trust that the money is used responsibly and that their taxes mean something. This is also what produces a reliable economy that generates a currency that can be trusted in foreign exchange.

  45. I really do not like to mock anyone on this wonderful site but /l assertion that taxing the rich
    is well within the neo liberal paradigm is a comment which leaves reality behind.We are living
    in the neoliberal paradigm it was introduced by Reagon and Thatcher when the top rate of
    income tax was reduced it was called trickle down economics.
    I have to say the tone of this discussion is scary.Left tax the rich fascism.
    The Holy Power of taxation .Taxing the rich is within the paradigm of neo liberal economics.
    Are you guys really that rich?Well at least you make it absolutely clear MMT is not interested
    in egalitarianism.

  46. The neo liberal paradigm is an economic ‘theory’ which legitimizes the accumulation of wealth
    and power of the elite.It has agency.It does not do taxing the rich.

  47. @praedor
    Well as I did understand the Tobin idea it was to eliminate unsound and for society destructive currency speculation. The tax was exponential so it would never come in action, it was negligible for financial operations necessary for trade in real gods and services.
    As MMT say society don’t need to tax to finance. Why should we allow and be dependent on unsound and for society destructive behavior cause of a finance illusion?
    If it is destructive for society it should be forbidden. And I don’t believe any Tobin tax compromise with the finance vigilantes and money masters will achieve that. Only make us more illusionary dependent on them.

  48. @JB

    Come on man, stop it. How many years now have you been trumpeting “public money” bs ?

    1. “Let me begin with a nation’s sovereign credit rating When there is confidence in the integrity of government, monetary authorities- the central bank and the finance ministry-can issue unlimited claims denominated in their own currencies and can guarantee or stand ready to guarantee the obligations of private issues as they see fit. This power has profound implications for both good and ill for our economies .
    Central banks can issue currency, a non-interest-bearing claim on the government, effectively without limit. They can discount loans and other assets of banks or other private depository institutions, thereby converting potentially illiquid private assets into riskless claims on the government in the form of deposits at the central bank.
    That all of these claims on government are readily accepted reflects the fact that a government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit.”
    Alan Greenspan (YOU can read entire article see below- Aug1997)

    2. When the federal government creates money, it does not debit itself or any other account. (When banks lend dollars, they put debits on the balance sheet of the borrower. There is absolutely no balance sheet operation in which the federal government spends its tax revenue.)

  49. for JB:

    No, the government does not utilize taxation for spending. Money has no physical existence. Money is nothing more than a “score.”

    See a scoreboard with three columns:

    1. In column “A” the government keeps a running tally of tax dollars received.

    2. In column “B”, the government keeps a running tally of spending.

    3. The difference between columns A & B. is called “the deficit.” The government issues T-securities in the amount of the “deficit,” the total of which is tallied in column C.

    There is no flow from A to B. They are just columns on a scoreboard, kept by the federal government.

    That is the reality.

  50. @joe bongiovanni

    EVERY nation is sovereign in its currency
    Not if you’re in the Eurozone.
    …there is no such thing as a government being in control of its money, being capable of creating and issuing its money, and thus being prevented from becoming insolvent in its fiscal operations.
    Ask ANY national Treasury Secretary.

    We could just ask the central bank if they would ever bounce a cheque from treasury. The answer would be no.
    Every modern national government BORROWS its currency needs from private bankers.
    Debt issuance is performed to maintain control of a positive policy rate. Apart from that, debt issuance may be purely for political reasons, such as in the US, where the government is legally bound to issue a dollar of debt for every dollar of net spending.
    …seems you’re saying that we’re $US 18 Trillion in public debt because we wanted to slow down private spending, when in reality, we’re in debt because the Guv MUST borrow from these same private bank money-issuers in order to spend (procure public economic resources).
    I didn’t say that at all. The US debt level is a reflection of central bank operations to maintain a positive policy rate and the legal requirement to issue debt for every dollar of net spending. They would not need to issue any debt if they changed the law (politics), and they were happy for the overnight rate to be driven down to zero. So your claim that the government needs to borrow from private banks in order to spend is wrong.

  51. I am sorry to keep banging on on this topic but as you can imagine it is something
    i think is very important.It is about human relationships .The society we can create
    Understanding first principles a progressive welfare/tax system is not about wealth redistribution.
    Money is not wealth .Money is a claim on wealth .Real resources in paticular human labour.
    Including previous human endevour(science and technology).
    It is not about taking stuff from the wealthy it is about restricting them accumulating more.
    More of the bounty of the sun and the earth more of the fruits labours of their fellow man.
    I know MMt.ers place great store on increasing the minimum with a guarentred job and yes
    the perilous low paid labour market helps the aquisitions of the oligarchs but the economic
    quest to remove the political ,the power relationships at root Human Will is a folly.There is
    no system which delivers greater equality automatically ,invisible hands do not exist.
    Yes the hands of the poor need to take more but the hands of the rich need to take less.
    As the book ‘The Spirit level ‘points out it is good for them too for humanity as a whole.

  52. To Allan at 18:32
    ‘EVERY nation is sovereign in its currency’
    Not if you’re in the Eurozone.

    I suggest a reading of “”Monetary Sovereignty – The Politics of Central Banking in Western Europe”” by Dr. John B. Goodman on this subject in order to distinguish between the two legal, operational aspects of money – sovereignty and autonomy in money.
    OF COURSE, the EMU countries are sovereign in their currency.
    Any one of them could use that sovereignty to drop out of the autonomy-killing Union and its counter-productive socio-economy tomorrow.
    Had they given up sovereignty, they could never utilize governmental authority in that way.

    “”We could just ask the central bank if they would ever bounce a cheque from treasury. The answer would be no.””

    LOL, again.
    Would be? In reality, the Treasury would never cut a check (keystroke) without a positive TGA balance. Fullwiler so acknowledges.
    It’s against the laws and regulations of public finance.
    Check it out.
    So, you postulate an impossible and totally irrelevant theoretical.

    “” The US debt level is a reflection of central bank operations to maintain a positive policy rate and the legal requirement to issue debt for every dollar of net spending.””

    Sorry, when you have a legal requirement that the government MUST fund its deficits with new (additional) debt issuance, that is exactly the same as:
    “”we’re in debt because the Guv MUST borrow from these same private bank money-issuers in order to spend (procure public economic resources).””

    “”So your claim that the government needs to borrow from private banks in order to spend is wrong.””
    No, Allan, it isn’t and in fact you just confirmed that its right.

  53. To Steve D at 15:39

    Well, I never said money had a physical reality, so, to what are you responding?
    Just because its digital in nature today does not mean that government does not utilize taxation for spending. A non-sequitur, if ever there was one.

    There are 189 Treasury Secretaries in the gloabal economy – just get ONE of them to say that they don’t need income(revenue) in order to spend, and then we can discuss this irrationality.

    Sometimes I can’t believe the scoreboard rationale actually being accepted by otherwise seeming smart people. WHERE in government is this scorecard, Steve? LOL Mosler.

    I explained elsewhere a pertinent reality ….. unless Column A has a positive balance, Column B is frozen ….. cannot be advanced. Ask ANYONE who works at Treasury.
    I have.
    They all say NO, gotta shut down the government.
    And, thus, the Austerians try to do so …. Because they CAN.

    “There is no flow from A to B”.
    LOL. Except for about $46 Billion on a daily basis.

    That is the actual reality, Steve.

  54. To Steve at 14:15
    “How many years now have you been trumpeting “public money” bs ?”
    No BS, but about 42 years, give or take.
    Quoting Greenspan, a real haven for progressive economic understandings.
    Soooo, does our
    “”Central banks (can) issue currency, a non-interest-bearing claim on the government, effectively without limit.””??
    Only if ‘currency’ includes things that ain’t money, have no purchasing power in the real economy and cannot be utilized by you, me or any reader to buy a stick of gum. Central banks issue no real money. So what has the Greenspan said there?
    Though widely touted by MMT-readers, nothing.
    If you read through the smoke, the reason that he, Randy and others end up saying that a sovereign government cannot become insolvent is because insolvency is not the primary threat, but austerity and the freezing of governmental spending.
    When the Austerians (Petersons, Stockmans, etc) rush in to shut down the government, it is the operating statement that is targeted as it ceases to function.
    You know, the operating statement, where incomes and expenses reside.
    Absent public debt proceeds to fund spending, the OS is frozen. In reality.
    The balance sheet looks fine. They never claim insolvency, nor push for insolvency. Nobody does. Did I mention it?
    Our well-being is threatened by freezing the ability for advance purchasing power BY the government. So, WGAS about insolvency (Randy)?

    Love this one Steve:
    “”2. When the federal government creates money, it does not debit itself or any other account. (When banks lend dollars, they put debits on the balance sheet of the borrower. There is absolutely no balance sheet operation in which the federal government spends its tax revenue.)
    Again, of course, I said nothing about government ‘debiting’ itself.
    Is that designed for economic-accounting fairyland?
    It seems you spend a lot of time denying facts not in evidence. Nice job.
    Since we know what a balance sheet is – a period-marking of account balances ; there can never be a connection between that BS and incomes and spending, except at the frozen end of a reporting period.
    During that reporting period, changes happen, but they are not reflected until the balance sheet of the GUV is reported.
    Elsewhere I provided Treasury’s Statement of Operations and Changes in Net Position…. being the resulting ‘flows’ of funds used by the government, that result in a change in net position (among others) that are then ‘journal-entried’ into the Guv’s Balance Sheet.
    ust for fun, if you don’t mind me asking …..
    When DOES the federal government create money, and HOW?

  55. To financialmatters at 2:01
    I want to be responsive but certainty in understanding (your comment) may elude me here.
    “”Taxes give value to this money that the commercial banks provide. The banks don’t have the power to produce a money of account on their own.””
    If I get that, the commercial banks issue their credit/debt as national money ($US-denominated in my country) , and the fact that their bank-credit can be used for public debts( to pay taxes) gives value to bank-credit money. Totally agreed, if correctly understood.
    BUT, the banks of any nation do not have the power to issue Koch-Buckaroos as a new national unit-of-account money …. on their own ….. meaning absent governmental authority. Well enough (if correct).
    “”More problematic I think is how the fiscal system and bond market interact. MMT correctly shows us the mechanics.””
    Where MMT acknowledges the governmental budgeting constraint (GBC) in this country, it does an excellent job. The bond market comes into play in that the GBC says that Spending must equal taxation plus changes in public debt plus IGT.
    It is the more widely questioned role of taxation in that equation where I question MMT ….. such that , in theory, government does not need/use tax revenue in order to spend (Bill’s present postulation) . Ostensibly, the loss of this tax-income balance to the GBC is made up by government money issuance …. something that never happens, but should happen, today (c.e.)

  56. to joe bongiovanni

    I like the idea of public banking and am supportive of Ellen Brown’s efforts in this area.

    I like the idea of banks that can generate money without having to concern themselves with shareholder value and executive compensation and that can function more as transparent lending organizations rather than dealers.

    I agree with MMT that taxes don’t directly fund spending but I would say that taxes enable spending. Better constraints on spending, I think would be resource allocation and an eye toward maintaining a useful foreign exchange.

    I think we need to try and make the case for public spending on worthwhile projects that can take time and aren’t necessarily amenable to a quick IPO. Also many social needs could be addressed.

    A good example of a system that doesn’t work is private banks lending money to students which then ends up increasing the price of education without the money necessarily going into improving that education in a type of non-productive asset appreciation. And we get students who are too indebted to productively add to the economy. I think we could come up with a better system.

  57. The only reason I can think of, that explains why “progressive” policy action has not yet been taken is the fact that banking, financial services, and the “deep, liquid, and transparent” financial markets that exist in developed nations currently benefit more from the rents they, and their multi-national corporations and energy giants collect through their monopolies and the intellectual property rents that developing countries are still willing to pay because that is the “price of admission” if they hope to succeed with their own strategies that will allow them to leapfrog from a 19th century economy to a 21st century economy on the back of technology and R&D advancements that the developed countries were able to achieve before the rest of the world.

    With globalization quickly coming to a point where it is no longer a win-win, we will see the end of “capitalism” as we know it, and nations will implement the types of progressive policy Keynes would have been proud of. Unfortunately, humanity had more to gain over the last 40 years by following policies guided by the idea that people behaving horribly in their own self interest was somehow good for society as a whole.

    The reality that were “necessary” during the rise and fall of globalization was the “lesser evil”, and “worked’ for a vast majority of the world’s population. Just as with globalization there were winners and losers, so will be the reality after globalization, as third-world nations will see much in the way of social unrest and ongoing civil war in a fight for survival and control and abuse of the nations people and natural resources.

    The only hope that nations have is that they are ruled by what amounts to benevolent dictators. That reality already exists in the developed world and in China and Russia. The question going forward is, will the rest of the world be able to become “free” and “democratic” in the same manner that have allowed institutions to come into existence so that, behind the veil of opposing ideology, nations can continue to follow the economic and societal “blueprint” that must be followed, regardless of which political party is in power.

  58. This argument is slightly, superficially true but in a way that distracts from the key reality. Sure, a fair level of taxes wouldn’t be enough in themselves to redress societal problems, though it would help a lot. The twin issues he ignores are that a) economics and politics have been merged in ways that almost increasingly and exclusively benefit the wealthy, while b) the taxes that DO come in are used in ways that directly benefit the wealthy (wars, bailouts, etc.) but denied to actions that benefit society as a whole (education, infrastructure, etc.). All surplus is skimmed upwards. The benevolent dictatorship he sees as the only hope has been aggressively blocked by the superrich, using their largesse– like the vicious Koch Brothers– to distort the system even more (like Citizens United) and funnel ever more into their pockets.

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