As I noted yesterday, last evening I accepted an invitation to speak on a panel…
Progressive cause in Australia seriously undermined by … progressives
I am travelling most of today with heavy commitments at the other end so only a short blog today with some great music to calm the soul. Yesterday, a group of high-profile, so-called progressives in Australia placed a paid-for advertisement in the leading daily newspapers as part of a new campaign for the government to increase taxes to get back into surplus so that (as their narrative goes) it can afford to maintain services for the needy. Yes, it was not the Right voices in our debate articulating this. The campaign is being led by a group that is often referred to as ‘left-leaning’ and calls itself the “most influential progressive think tank” in Australia. Modesty doesn’t exist it seems. But these sorts of descriptors are when the English language loses all meaning. The advertisement and subsequent follow-up interviews in the media yesterday by signatories and supporters of the “Letter” articulate a pure neoliberal line of deception about fiscal positions, the role of taxes and the virtuousness of fiscal surpluses. From my assessment, this headline-grabbing display of stupidity will set back the progressive debate in Australia even further. A total disgrace.
A sad day for progressive debate in Australia
I don’t want to write much on this. I personally know many of the signatories to the Open Letter that was included as a full-paid advertisement in the major Australian newspapers yesterday (April 17, 2018).
Some of the signatories are leading members of the Society of Heterodox Economists (SHE) in Australia.
Others are from the Political Economy program at Sydney University.
Others are from leading social policy agencies.
Some have previously held high political office under Labor governments.
Others are from a think tank, which the press calls “left-leaning”, and, which it bestows upon itself the (inflated) title of being Australia’s “most influential progressive think tank” and claims its work it to “inform public debate and bring greater accountability to the democratic process”.
Those sort of descriptors are when the English language loses all meaning.
I heard interviews on the radio from some of the signatories yesterday who would claim to be leading progressive voices in the economics debate here.
They basically laid out a neoliberal narrative as pure as you would find dressed up as a concern for equity and fairness.
Here is the original – Full-page advertisement – with all the signatories.
The text of the Open Letter read:
To Prime Minister Malcolm Turnbull
Data from the OECD, IMF and World Bank make clear that Australia is a low taxing country. To have world class health, education and transport services we need to collect the revenue to fund them.
A debate about tax reform should begin with the question of how much tax is required to fund the services we need to build a fair and decent society in Australia.
And real tax reform also requires fairness. A serious tax reform package designed to be ‘fair’ should address as a priority the current generous tax concessions to the top end of town, the inequitable distribution of superannuation tax concessions and the capital gains tax discount, not how to give big business large company tax cuts at the expense of services that everyday Australians rely on. Cutting programs which support needy Australians to give more tax benefits to companies or large income tax cuts to the wealthiest is not fair.
The OECD says inequality harms growth. While inequality will always be in the community, what matters is its extent, its direction, and its causes. What’s more, increasing inequality hurts the economy and divides the community.
The pursuit of equity and fairness must lie at the heart of our national goals. Fortunately, not only is the pursuit of equity broadly supported by the community, it is good for our economy as a whole. Collecting more tax, more equitably, will make Australia a better place to live and work.
We urge the Prime Minister and all political leaders not to cut taxes at this time — and certainly not for companies.
The wording is framed in the constructs and language of neoliberalism.
For example, “required to fund the services” – in other words, conveying the message that it is necessary to tax the higher income groups more to provide essential government services to the disadvantaged and those missing out.
The so-called progressiveness is based on their opposition to the current government policy to extend tax cuts to corporations, which they claim will necessitate “Cutting programs which support needy Australians”.
That is only inevitable if the sort of arguments that this lot choose to perpetuate and give authority to are not challenged and debunked.
The assertion that “collecting more tax … will make Australia a better place to live and work” is an absurd claim as it stands.
It is clearly a progressive concern to ensure that equity is advanced. I am the Director of a research centre called the Centre of Full Employment and Equity. So it is central to my own work that we have fairness in the way in which the government and non-government sectors interact.
But it is ridiculous for a progressive to conflate that concern with the standard neoliberal macroeconomic propositions that the Australian government can run out of money and cannot ensure fairness and service delivery to the ‘needy’ unless it taxes the rich more.
To see how bad this is as a public intervention, the Open Letter was “backed” by a former Cabinet secretary Michael Keating who expanded on the campaign in this interview with the ABC (April 17, 2018) – Open letter urges Prime Minister to collect ‘more tax, more equitably’ to make Australia a fairer place.
The ABC as a major neoliberal media machine these days chose not to scrutinise any of the macroeconomic propositions put forward in the Letter – it thus became just another media mouthpiece.
I note that since the appointment of the new CEO to the ABC by the conservative government the number of interviews I do has dropped to close to zero. I was often interviewed on economic matters. But that voice is not wanted as it fine-tunes its neoliberal message.
Anyway, Michael Keating told the ABC that:
… by raising taxes we could avoid crisis levels of deficit and pay for the services “that everyday Australians rely on”.
The ABC reported that the so-called leading progressive think tank (Australia Institute):
… warns if we do not improve the nation’s tax take, future governments will not be able to fund the services and infrastructure that the country needs.
And Keating claims that the current “federal budget is … a ‘structural deficit’, meaning the Government is spending beyond its means”.
This is the well-known deficit dove (which is just neoliberal in another guise) claim that there should be a structural balance with cyclical swings around it possible.
That doesn’t even stack up.
If the private domestic sector wants to save overall and there is an external deficit (both conditions holding in Australia at present), then there has to be a fiscal deficit at full employment – that is, there has to be a structural deficit, or else the economy will fall into recession.
But seemingly blithe to that reality, Keating still demands the government return to surplus.
Think about this:
1. Australia’s real GDP growth rate is around 2.2 to 2.3 per cent per annum whereas the previous trend (prior to the GFC) was close to 3.2 per cent.
2. Australia’s broad labour underutilisation rate is close to 15 per cent (probably a bit higher given depressed participation rates).
3. Youth labour underutilisation is reaching chronic proportions with the NEET rate rising.
4. Real wages are flat to falling.
5. Inflation is subdued and below the central bank target.
6. Households are carrying record levels of debt and the current saving rate is half of what it was before the credit binge.
7. Australia has had an external deficit of around 4 per cent of GDP since the mid-1970s, with no change in sight, largely because we rely on imported capital for business investment.
Then ask whether the Australian government should be cutting its deficit.
If we followed Keating’s advice and the strategy outlined by these so-called progressives in the Open Letter to the Prime Minister, Australia would be in recession or growth would only be maintained by increasing private domestic sector indebtedness. That is what an understanding of the sectoral balances indicates.
Sure, the external deficit would shrink a little because the resulting recession would crimp imports with the commensurate loss of living standards and productivity growth.
But trying to run a fiscal surplus when the nation is in this sort of shape is a recipe for disaster.
Only fools advocate surpluses in these conditions.
Keating also invoked the intergenerational claim (grandkids being burdened, government deficits rising) and all that nonsense but failed to point out that by suppressing economic activity now via the pursuit of surpluses we also undermine the future (lower productivity, wasted labour, lack of work experience, etc).
It might be reasonable to change the tax mix if you want groups that currently have higher disposable income to have less and so on.
It is certainly a progressive strategy to redistribute purchasing power to those with less and away from those with more. But it is not sensible to do that while at the same time reducing aggregate demand via increasing taxes.
Claiming that raising taxes overall – and thus cutting the fiscal deficit – is a responsible strategy is plainly false.
It was a really shocking day (yesterday) for the advancement of progressive ideas in Australia.
The Right must be sitting back, relaxing, laughing their heads off. They know the government won’t increase taxes along the lines that these high profile Australian progressives are demanding.
And they also know that these so-called progressives are just reinforcing and advancing the right-wing neoliberal narratives about fiscal austerity and the dangers of deficits etc.
Here we have a situation where the so-called Left (once again) are perpetuating the very things they should be rejecting.
Shocking.
Music for the plane trip …
I first saw Taj Mahal in the early 1970s when I was first at university. He is such a skilled performer and I recently saw a concert with him. So durable to.
This is one of my favourite songs and his version is from his 1993 album – Dancing the Blues.
This classic R&B track was written by the American songwriter Roosevelt Jamison who was made famous by the song, largely because in 1965 Otis Redding covered it.
Then, in the same year, it was released on the brilliant Rolling Stones album Out of Our Heads.
Here is my favourite version by The Rolling Stones.
Recorded May 10 & 11, 1965.
The piano parts were played by Ian Stewart (who was really the sixth Stone).
All calming after the opening salvo above.
That is enough for today!
(c) Copyright 2018 William Mitchell. All Rights Reserved.
The question I would ask, are these so called left of centre politicians and academics really left of centre?
I would doubt it, I know you have commented about him before, but Simon Wren-Lewis claimed to support Jeremy Corbyn only to leave his team amid the so called Chicken Coup, and then tried to imply that his policies were not achievable in language that was not openly hostile. Then later tried to introduce the idea that a different form of Neo-Liberalism was possible quoting a new book on the topic, I forget what the title was, but clearly letting the cat out of the bag that all his criticisms about Jeremy Corbyn were not focused on genuine issues, as most I believe deduced anyway, but were efforts to dismantle faith in Labour’s new policy direction.
Fundamentally money is the way that the establishment maintains control of the masses, once the masses realise that money is not in short supply, but that development is being withheld by it in order to serve the interests of a minority elite, then perhaps certain academics appear to falsely toe the establishment line in order to discredit any opposition, it may also serve certain academics personal interests as they get funding from private institutions to support their students studies, money is not short in Oxford or Cambridge unlike a lot of other Universities.
That’s thoroughly depressing Bill.
This is an example of when having your heart in the right place is counterproductive to the interests of those you profess to care about.
Hello,
“The Right must be sitting back, relaxing, laughing their heads off. They know the government won’t increase taxes along the lines that these high profile Australian progressives are demanding.
And they also know that these so-called progressives are just reinforcing and advancing the right-wing neoliberal narratives about fiscal austerity and the dangers of deficits etc.”
The thing is that recessions, poor growth, and depressions hurt the Right as well.
Apart from denying resources to the rest of the economy how does this help the Right who would also prosper more in a stronger economy?
The simple truth might be that the Right believes the crap they are saying and pushing for.
I write a blog on Functional finance and monetary sovereignty and full employment etc, in a very neoliberal web platform (so neoliberally poisonous that Bill will not allow the link, and good on him for that) however, come up against intelligent people in the comments section that believe the neoliberal line, hook, line and sinker. I know that for every one of them that I defeat in logical argument a million more stand behind them. It is good that there is cut and paste to keep up with it all and I see it as penance for once being an unwitting neoliberal myself.
I saw a description of the mission governments are thought to enact recently. This sad advertisement by The Australia Institute shows up its futility. I’m not sure who penned it initially. it was in my notes, but it resonates;
“The idea that government’s mission is to make things better is a myth. Government is best understood as a natural struggle between the ‘outsiders’ and the “insiders’.
We are outsiders. The Unions, once insiders, are now outsiders [betrayed by Labor]. It is in reality a monumental task to overcome ignorance. Neo-liberal policy is on the inside, still entrenched. Still, we will continue to work towards enlightenment, in the economy at least thanks to people like you,Bill.
That “progressive advert” is right to say that more taxes are needed to fund more public spending if the economy is at or near capacity. The normal criterion used to determine whether the economy really is at capacity is inflation, and inflation in Australia is only just under the standard 2% target.
If MMTers want to claim that more public spending can be funded via money printing, they need to show why that near 2% inflation can be ignored: e.g. showing that inflation is mainly cost-push would be a valid argument (an argument used by the Bank of England to ignore the above 2% inflation that existed in the UK early on in the recent recession).
Also my above argument assumes “all else equal” in particular that no JG system is introduced: and that’s a realistic assumption. That is the chance of a large scale JG scheme being implemented in Australia or anywhere else in the Western world is slim at the moment.
Dear Ralph Musgrave (at 2018/04/18 9:02 pm)
Your claim that:
is an outright lie and please refrain from repeating that in this space again.
There has to be real resource space created to increase public spending if the economy is at full capacity but the taxes that might create that space are NOT funding the subsequent spending.
best wishes
bill
To brighten up this space with a bit of good news: at Getup’s ‘Future to Fight For’ launch tonight the implementation of a national federally funded Job Guarantee is top of their list for action.
http://www.getup.org.au/f2f4-webinar?t=oPnbOUD86&utm_content=24989&utm_campaign=Reminder__Future_To_Fight_For_Webinar_Tonight&utm_source=blast&utm_medium=email
Hello Bill, I have learnt that taxes do not fund government spending. The proof I need must be available so I can show others. Surely the TAX must go into an account which is NOT used for government spending. And government spending on government employees, infrastructure, defense, police, etc. must come from another account(s) into which money is simply created. If we knew the arrangement of these accounts it would be a simple task to show people that TAX is not spent or used to fund public spending. Is it possible to get this exact information then everyone will know.
Yours
Ron
“Surely the TAX must go into an account which is NOT used for government spending”
I’ve hung around accountants, and I’ve learned that General Ledger accounts in a business are not things. They’re categories, concepts. They’re items of vocabulary that management has cooked up so it’s convenient to discuss what’s going on in the business.
In your dealings with your bank, the account is an item of vocabulary that your bank has cooked up to describe the financial services that it will provide for you. If the bank won’t honour your cheque without sufficient funds in the account, that’s a decision the bank has made. You can prove this by arranging a line of credit, then the bank won’t need sufficient funds; that’s just a different service. These are the rules that private banks impose on people who want to use the banks’ money and services.
A sovereign government and its central bank will have different arrangements between them, and their accounts will be used differently. Certainly the government will keep track of what it spends, and certainly it will keep a record of what it takes back. This is just proper management, staying on top of what’s happening. There won’t be the kind of rules that a private bank imposes on a customer — that’s not the service that a central bank provides to a sovereign government.
Bill, you claim that “the taxes that might create that space are NOT funding the subsequent spending.” That’s true in the sense that it can be argued that $X of money vanishes into thin air when $X of tax money is received by the central bank, and that $X of new money appears from nowhere when the state spends $X on public spending items. Likewise it is often said that $Y vanishes when a $Y loan is repaid to a commercial bank, and $Z appears from thin air when a commercial bank makes a loan.
But that’s all very semantic. It’s equally valid to say the $X of public spending is dependent on collecting $X worth of tax. I’d prefer MMTers to stick with the latter common sense view, because getting politicians to understand the former “vanish” story will be near impossible. What will happen is that they’ll fail to understand it, and accuse MMTers of saying governments can print money willy-nilly, an accusation which is already leveled to MMT every day.
Apalling.
Thank god for this blog
Dear Ron (2018/04/19 at 12:31 am)
How a government accounts for things does NOT tell you anything definite about underlying causality. You have to impose an understanding on the processes that generated the flows that are accounted for before you know what is happening.
In that sense, I prefer the educative route even if it might appear at the superficial level to be counter-intuitive.
best wishes
bill
Dear John B (at 2018/04/19 at 12:27 am)
Yes, good about GetUp.
I met with them last year after they approached me with the idea that they were attracted to MMT and wanted guidance on how to mount a campaign based on its principles, including the Job Guarantee.
After the meeting they followed up with some draft documents and we had some interchanges about them.
It is a major game changer in Australia if GetUp push an MMT understanding as part of their campaigning. It will make those so-called progressives who write Open Letters to our media demanding the government cut the “dangerous deficit” and “tax the rich to pay for welfare services” look like fools. These so-called progressives naively think they are being politically smart by wedging the conservatives.
All they are doing is the conservative work, while the latter sail off on yachting holidays, go skiing and play golf.
best wishes
bill
Dear Ralph Musgrave,
“But that’s all very semantic. It’s equally valid to say the $X of public spending is dependent on collecting $X worth of tax. ”
If the government has its budget approved by the parliament and a decision is made to allocate $X on spending for the year ahead, spending $X will not be halted if the Treasury suddenly discovers mid-year that the tax revenue they are collecting is not $X but 0.75*$X. The difference will be covered by more of the so-called “borrowing” that is by creating net financial assets for the non-government sector. It is possible that the spending decision and taxation rules will be revised for the next cycle – nobody questions this. The government may try cutting the budget deficit etc… But all of this will happen in the context of the next year budget. In the current period $X is being spent and 0.75*$X is being collected. So it is plainly incorrect to say that “$X of public spending is dependent on collecting $X worth of tax” and it is not just semantics. The so-called government budget constraint (G-T)=delta(BL) is an ex-post identity. The value of G is set ex-ante. Both T and delta(BL) are not set ex-ante, they depend on private sector activities and can only be forecast, delta(BL) being the residual. You may say that G_t+1 depends on T_t and (obviously) that T_t depends on G_t but you cannot say that G_t depends on T_t. It might depend on the expected value of T_t_e but this is just another way of saying that G_t depends on T_t-1, T_t-2… (past tax revenue).
There might be some “flexible” components of G such as unemployment benefits or natural disaster relief but spending rules are also set in advance. Also – the budget might get revised mid-year. But none of this affects the underlying mechanism – government spending is set ex-ante and approved by the parliament or a similar body. In the era of commodity money (in the middle ages) a ruler might have run out of coins and metal to mint them. His/her spending was therefore to certain extent revenue and borrowing constrained. The system has evolved precisely to bypass this limitation.
“All they are doing is the conservative work, while the latter sail off on yachting holidays, go skiing and play golf.”
Yep, definitely gonna join the neolibs.
Bill said:
“….but the taxes that might create that space are NOT funding the subsequent spending…”
So what do the taxes do?
Very few economists have any idea about the national accounting identities, let alone causation. I’m pleased to say that Bill knows his stuff and good on him for continuing to publish this blog. I hope the get up campaign goes full steam ahead.
Dear Henry Rech (at 2018/04/19 at 1:13 pm)
It was in the section you requoted: taxes “create that space” (real resource space by depriving groups of purchasing power).
best wishes
bill
“taxes “create that space””
OK, I get that, but then the government does receive these funds (huge mounts) then does what with them? I can’t see what the problem is with saying taxes fund government expenditure.
Great work Bill,
– you are indeed a great Australian – the modern day embodiment of the mores of Chifley, Curtin and Coombes.
John Doyle – (Wednesday, April 18, 2018 at 20:52)
“…We are outsiders. The Unions, once insiders, are now outsiders [betrayed by Labor]…”
Your first 3 words stated above are certainly true, but the sentence following belies observed reality.
Union members are outsiders, but ALP affiliated (corporate colluding) union execs of the larger unions are defacto ‘insider’ controllers of both Labor policy platforms and political candidates/appointees.
It is ironic that trade unions are the power base of undemocratic, unchallengeable ruling powerful left and right factions which exercise ruthless control over ALP peak governance conferences – they enable/empower pro-corporate neoliberalist ALP policies.
The current neoliberalist parliamentary ALP is a product of factional power brokers of both the left and the right exercising & defending unelected reign – when it comes to retaining institutionally bestowed undemocratic power, ‘left’ or ‘right’ ideology becomes irrelevant – there is an unholy unity of purposeful self interest – retain power at any cost.
Any democratic rule reform proposed by betrayed rank & file members is ruthlessly suppressed before reaching conference floor or systematically voted down.
Despotic factional power is derived from flawed party platform rules; both left & right vehemently oppose democratising amendment of those rules.
Union leaders don’t appreciate that each JG employee is a potential new union member – all 1.75 million current underutilised workers, more than the current (~1.5m) total membership of unions in Australia.
JG participants could use a unified voice to government on the local planning, administration and job delivery functions; payment rates and OH&S standards need to be monitored and defended against fraud and inevitable attacks from neoliberalist beancounters.
These are real jobs on offer, not casualised/’subbied’ out temporary labor, free of discrimination from hostile union hating employers.
I think the union movement could gain much from a JG – it should join the Getup push against rampant inequality.
Henry Rech,
When the natgov extracts tax out of the economy the money is destroyed, it ceases to exist in the same way that credit money from a bank ceases to exist when you repay a loan to them.
The tax dollars cease to exist on any measure of money, not M1, M2 or M3. Simply destroyed.
Every dollar taken out of the economy in this way shrinks it and deflates it, causes unemployment recessions and depressions and poverty and destruction and death.
If you were legally entitled to created money on your PC at home why would you take it or borrow it from other people? That is the situation the natgov is in.
The only barrier to fiscal spending is inflation, at some stage too much is too much and we have industries dedicated to measuring inflation and little danger of getting it wrong.
Do you get it now?
Alan
Alan Longbon,
“Do you get it now?”
No.
“When the natgov extracts tax out of the economy the money is destroyed, it ceases to exist…”
Don’t get this at all.
“Every dollar taken out of the economy in this way shrinks it and deflates it, causes unemployment recessions and depressions and poverty and destruction and death.”
According to Bill it makes space for government consumption of the part of the economy’s output.
Hi Bill, This is a sad day for progressive activists.These economists are now showing their true colours. Very sad as I know many of them as well. Some of these blokes taught me Economics and others I have had the highest respect for over many years. I am very disillusioned by their actions. More organisations will see the truth about macroeconomic reality, it’s just a matter of time. Bring on MMT university! As for Mr Musgrave please spare us your misinformed comments.
Regards
Wayne
“Don’t get this at all.”
Probably time to go on an accounting course then and do ‘group accounting’. Then work in a bank on the core accounting systems. Then you’ll get it.
There is no connection between taxing and spending financially. They operate completely independently as parallel process. Neither has any natural control function on the other.
Taxation is a way of freeing up real resources by reducing planned expenditure, so that there can be no price competition with government demands. It’s probably the worst of the tools to do that at the disposal of the authorities – akin to carpet bombing the economy. Once you realise taxation is there to free up resources, you realise there are other tools that are more direct: reducing bank lending on certain types of resources, delaying access to resources via planning restrictions, etc, or simply banning private access to certain resources (as we do with the military).
“According to Bill it makes space for government consumption of the part of the economy’s output.”
Perhaps thinking of it as a static screenshot may help. If in a specific day the value of the produced output is 1000$ (10 cars worth 100$ each) and both the public and the private sector want to purchase it, you would have excess demand for the given supply. The public sector can reduce the purchasing power of the agents in the private sector by making them pay taxes which reduces their capacity to buy and frees up the space (in real terms) for the public sector’s spending without causing excess demand relative to the given supply. It would be like allowing the private sector to only buy 8 cars rather than all of them, and ensuring the public sector can buy the other two without competing in prices.
Neil,
“Probably time to go on an accounting course then and do ‘group accounting’. Then work in a bank on the core accounting systems. Then you’ll get it.”
“Funds” in, “funds” out. “Funds” do not self immolate.
“There is no connection between taxing and spending financially. They operate completely independently as parallel process. Neither has any natural control function on the other. ”
I think this is stretching the explanation. It’s too dogmatic. To say they are independent is too farfetched.
And your explanation goes nowhere near explaining this:
“When the natgov extracts tax out of the economy the money is destroyed, it ceases to exist…”
Neil,
‘group accounting’
Thinking about this, are you referring to the elimination of transactions between intra-group entities on consolidation?
Henry @8:00, I think Neil Wilson is entirely correct to say that for a currency issuing government there is no connection necessary between the taxing and the spending. Even in the rare case of absolute full employment the government has other options to free up the non-inflationary space for additional spending than taxation. Some of which Neil Wilson also pointed out @1:49 in his comment. MMT doesn’t think much of interest rate policy, but making borrowing more expensive for banks and consumers by raising rates also would tend to (seems to me at least) reduce demand, at least short term, for products and investment that are typically financed. And then there can be the rare case where the government is not particularly concerned about inflation occurring- it is pretty clear in that case that spending can go on without any commensurate taxation at all.
So no- it is not too dogmatic, or overly stretching, or far-fetched to explain it exactly the way Neil does.
As far as “When the natgov extracts tax out of the economy the money is destroyed, it ceases to exist…” that statement is better understood with an as if- ‘When the natgov extracts tax out of the economy IT IS AS IF the money is destroyed, it ceases to exist’. There is not a real difference between the government destroying the money or recycling the physical coin or notes, and well, it probably saves paper and copper if the government reused the few tax collections it receives in physical currency. But the real point remains that the national government can and does create its currency each time it spends, and it, in effect, destroys that currency each time it taxes. That it may have made rules it follows (until it doesn’t) to disguise that point, does not alter the situation.
Dear Henry Rech (at 2018/04/20 at 8:08 am)
When you sit at your computer and log in to your bank and transfer funds to pay the ATO (I assume you are in Australia) for your provisional tax liability, or when your employer’s payroll officer logs on to the ATO site and transfers funds on your behalf as part of your pay-as-you-go tax liability associated with your weekly, fortnightly, monthly or some other period pay, what do you think happens to the digital bytes that zoom off into the ether?
Do you think they are stored somewhere in Canberra?
Do you think they somehow transform into real matter and are stored away in a tin shed somewhere in Canberra behind the Tax Office?
Do you think the government finance department then drives a truck around to the shed to pick up the ‘bytes’ (transformed or otherwise) to take back to their offices so that the government can spend them?
They clearly hit the ATOs accounting structure, are accounted for, and disappear into the ether.
That is what Neil is talking about.
In the US, there was a tradition in the days when taxes were paid using physical notes (stamp purchases) for the IRS to destroy the collections.
Same end.
best wishes
bill
This is a fun discussion with Henry.
How about this perspective?
What Neil & co are saying about government spending is basically true about all spending. It always has been, but the removal of physical token accounting aids has made is easier to see.
When I swipe my credit card at the checkout I create the money needed to complete the transaction. I don’t rely at that time on having the funds, either in physical tokens or “stored up” in any sense. The bank keeps track of how much money I create and at the end of the month I can make a credit card payment to destroy that created credit. This sort of thing is going on all over the economy, regulated by accounting standards.
Note that there is no inherent connection between my credit creating purchases and my later credit card payments. If there was, we would not need the elaborate accounting and loans practices to regulate it.
It’s a very different sort of transaction to say eating a meat pie. To eat a meat pie, I need a meat pie.
To make a “purchase”, I just need to convince the vendor I am “good for it”. This is very clear with a credit card purchase and made even clearer by the whole phenomena of “fraudulent” purchase. However, it was just as true of a “cash” purchase. The cash economy is just another way of doing the accounting to decide who is “good for it”. The phenomena of counterfeiting makes this pretty clear.
Fundamentally, each individual’s personal credit tallies are created and destroyed independently of all other credit tallies. Accounting practices attempt to socialise some order into this situation, but phenomena such as mouthing, sponging, counterfeiting, fraud, account hacking make it clear that there is no inherent structure.
So all transactions essentially progress by the creation and destruction of personal “virtual” credit tallies and all of this is regulated by the legislative authority of a particular currency regime.
Now consider the position of currency authority in this creative chaos.
Now consider the position of the legislative authority.
It’s important to note that physical notes and coins are not money in a fiat system. They are transferable *receipts* for money – specifically liabilities of the government sector (bank or treasury depending upon how your jurisdiction allocates them).
That’s the reason banks lock up physical cash in a vault to stop people stealing it – because at that point it is just paper and metal. The ‘money’ bit was taken away on deposit and is only reallocated on withdrawal. However if somebody nicks the paper and metal, you can’t differentiate it from that which has been withdrawn via the correct process.
If we had a ‘print on demand’ machine in a bank, then it would indeed shred the notes on deposit and reprint them on withdrawal.
Indeed when physical money supply or bank deposits have been interrupted for whatever reason in the past, the function of transferable receipts has been taken over by endorsing cheques. The Irish banking strikes of the late 60s and 70s being the classic case.
Here in the UK that receipt for money function is obvious because it is written on the front of every note: “I promise to pay the bearer on demand the sum of X pounds”.
Bill said:
“They clearly hit the ATOs accounting structure, are accounted for, and disappear into the ether.”
What would happen if the government did not have the power to create money at will?
Neil said:
If we had a ‘print on demand’ machine in a bank, then it would indeed shred the notes on deposit and reprint them on withdrawal.
So what? There is a record generated of the money being deposited. The currency might be destroyed but the money is not destroyed.
Brendanm said:
“So all transactions essentially progress by the creation and destruction of personal “virtual” credit tallies and all of this is regulated by the legislative authority of a particular currency regime. ”
Why can’t this be seen as a transfer of credit (money)? Why does it have to be seen as destruction then creation?
If someone buys an apple from me they take the apple in exchange for transferring their purchasing power to me. I now have purchasing power instead of the apple.
Everybody has the power to create money at will, Henry. We all do it all the time.
Government just has the power to force you to use their particular money. We give it that power by common consent.
The value of that money is then what you have to do to get hold of it.
Neil,
“Everybody has the power to create money at will, Henry. We all do it all the time. ”
I don’t see it that way. If you are referring to the sort of explanation offered by Brendanm above in his credit card story, it is the bank that creates the money. If there was no bank behind the credit card, there would be no money created. I could not walk into a retail establishment, present an unbranded rectangular piece of plastic across the face of which is emblazened “I am good for it”. No one in their right mind would accept it.
“Government just has the power to force you to use their particular money. We give it that power by common consent.”
I agree. So what?
“The value of that money is then what you have to do to get hold of it.”
I agree with this also – the logic to take you from one end of your sentence to the other is multifaceted, however.
Money is a notion in our heads – it resides no where else – although, in a sense, it also resides in the statutes that we concoct . We produce standardized bits of paper or numbers on a physical ledger or electronic representations of numbers because we don’t trust our memories and we don’t trust each other. These representations of money are sanctioned by the force of law.
While I appreciate peoples’ efforts above to disabuse me of my opinions, I am not convinced.
To say that tax money disappears into the ether, is Modern Monetary Nonsense. Why do we bother to compel governments to produce accounting records of their receipts and expenditures? We don’t trust them. We want control and accountability. The means of control and accountability is the political process.
The tax system does not merely create the space for government consumption. It redistributes income and wealth according to prevalent societal values and it is used to modify patterns of economic behaviour to suit a policy prescription.
If government is running a surplus, tax money is vanishing into the ether. It’s not like there’s a bathtub filling up with tax water. If we were discussing a gold-backed currency, then the bathtub analogy would be closer to how that form of money works. You would need the gold-backed water to be able to spend it.
Robert said:
“If government is running a surplus, tax money is vanishing into the ether.”
So, if you personally are creating a surplus, it disappears into the ether?
“It’s not like there’s a bathtub filling up with tax water. ”
Yes there is, it’s just that Bill thinks he’s pulled the plug out.
Dear Henry Rech (at 2018/04/21 at 5.24 am)
Taxes are a flow – and they flow right down the drain – to nowhere. The government accounts for that flow as part of their legal relationship with the person instigating the flow as a means of relinquishing their legal obligations.
best wishes
bill
Dear Henry Rech (at 2018/04/21 at 5:20 am)
You asked:
No.
You need to understand the difference between a vertical (between government and non-government entities) and horizontal transaction (between non-government entities) to grasp the reason for the answer.
You are confusing these flows.
Please read the following introductory suite of blog posts – Deficit spending 101 – Part 1 – Deficit spending 101 – Part 2 – Deficit spending 101 – Part 3 – for basic Modern Monetary Theory (MMT) concepts.
best wishes
bill
Dear Henry Rech,
It is true that at least in some (most?) jurisdictions the accounting system will show the taxes being transferred to the Treasury account. In Australia this is implemented by Australian Office of Financial Management. From their website: “Cash proceeds not required for immediate purposes are invested in term deposits with the RBA. During periods when there are short-term funding needs, these can be met by increasing the volume of Treasury Notes on issue and/or redeeming term deposits. As part of the Australian Government’s banking arrangements with the RBA, the RBA provides an overdraft facility to the government. The terms of this facility provide that it may only be accessed to cover unexpected temporary shortfalls of cash (for example, to cover a sudden previously unplanned outlay). This means that it is used very infrequently.”
So strictly speaking these numbers are not deleted. Numbers on some accounts are decremented while numbers on some other accounts are incremented. But what are these numbers and what is modern money?
You have stated that “Money is a notion in our heads – it resides no where else – although, in a sense, it also resides in the statutes that we concoct . We produce standardized bits of paper or numbers on a physical ledger or electronic representations of numbers because we don’t trust our memories and we don’t trust each other. These representations of money are sanctioned by the force of law.” – I am fine with that.
Modern money is in fact (according to credit theory of money which is at least difficult to invalidate) a record of credit/debt relation. I am not talking about commodity money which had intrinsic value but is not “modern”. Bank money is from the user’s point of view an asset which is a bank’s liability (I have a deposit for $X = “they will pay me $X dollars in cash”). We cannot escape double accounting rules here. The same with fiat currency. It is nominally a Central Bank’s liability. (In some cases, e.g. for coins a Treasury’s liability). Neil mentioned that in the UK there is a “promise to pay” phrase on bank notes. The BoE web site states the following:
“What does the ‘promise to pay’ on banknotes mean? The words ‘I promise to pay the bearer on demand the sum of five [ten/twenty/fifty] pounds’ appears on all of our banknotes. This phrase dates from long ago when our banknotes represented deposits of gold. At that time, a member of the public could exchange one of our banknotes for gold of the same value. For example, a £5 note could be exchanged for five gold coins, called sovereigns. However, the value of the pound has not been linked to gold for many years, so the meaning of the promise to pay has changed. You can no longer exchange banknotes for gold. Bank of England banknotes can only be exchanged for other Bank of England banknotes of the same face value. We now maintain public trust in the pound through operating monetary policy.”
So having $X means that I have an asset which is a nominal liability of the Central Bank. We have in fact a system of linked databases, some of the records in the form of electronic records, some in the form of pieces of paper or stamped pieces of metal. “The Reserve Bank of Australia (RBA), like most central banks, issues the currency notes in general circulation, while the Commonwealth Treasury issues coin produced by the Australian Mint. ” – this comes from the RBA’s website, “Measuring Profits from Currency Issue”.
Here comes the critical point. After collecting let’s say $4000 in taxes from someone over the PAYG system by the ATO (over the one month period) from someone this number is recorded in the accounting system within the RBA as being transferred to one of “Official Public Accounts”. What does it mean from the macroeconomic point of view that the Treasury has $4000 in the RBA? We know that RBA’s currency liabilities (physical notes and commercial bank reserves stored in the electronic form) and Treasury currency liabilities (coins) are identical from the user’s point of view. They are different forms of currency, which itself is a special form of State liabilities. The critical point of reasoning is that MMT scholars treat both Central Bank and Treasury as branches of the Government sector. From my (user’s) point of view ten $1 coins and one $10 note are identical. Now what does it mean that the RBA holds a record that Treasury owns $4000 of the RBA’s/Treasury liabilities? It is identical to me lending/borrowing money to/from myself. The net position against the non-government sector is what matters and it is in the case of the stock of collected taxes, zero. The government has a record of owing $4000 to itself. From the non-government sector point of view this credit/debt record cancels itself out. It is the same as me owing some money to the bank and having a deposit in the same bank – my net position is (deposit – debt). Economists coming from neoclassical positions may say that the Central Bank is just a scorekeeper, the Central Bank is “independent” and its money is not the government sector’s liability but from functional point of view it is and this is all what counts. You stated on 14/04/18 that “The point I am making is, that starting from an historical (ex post) balance equation, the effect of changes in one “variable” (loose use of term) on other “variables” is indeterminate without knowing the actual behaviourial relationships (if ever they can be known given our state of knowledge about these behaviourial relationships).” I will use this argument here to emphasise that a record the government owning $4000 of RBA’s liabilities belongs to the category of “ex-post” accounting statements. Owing $4000 to itself does not enable anything and it is not a precondition for anything. It has no “ex-ante” meaning from the macroeconomic point of view despite all the “smoke and mirrors”.
“The tax system does not merely create the space for government consumption. It redistributes income and wealth according to prevalent societal values and it is used to modify patterns of economic behaviour to suit a policy prescription.” – This is true but where did anyone from the MMT camp disagree about the “redistribution”? If you take away $X from everyone, proportionally more from the poor (by levying an income tax and GST/VAT, the tax rate on the income from capital is generally lower and there are ample loopholes) and give $Y to the rich (for example in the form of interests on Treasury bonds or by funding building a new tunnel, or worse, as stadium, in Sydney as a “private-public partnership”), this corresponds to the redistribution of $Y of real income and taxation is one leg of this process.
Adam K,
“Modern money is in fact (according to credit theory of money which is at least difficult to invalidate) a record of credit/debt relation……..Here comes the critical point…..from functional point of view it is and this is all what counts….. ”
I guess this has something to do with Neil’s exhortation to study “group accounting”? With the treasury/central bank seen as an entity, the central bank created money (liability) runs around the economy, returns as taxes (asset) – the liability and asset netting to zero. Is that what you are essentially saying?
” This is true but where did anyone from the MMT camp disagree about the “redistribution”? ”
My point, which I didn’t make explicit, was that taxation has a multitasking role and that this would somewhat complicate its role as a means of stabilization (inflation control).
Bill,
“Taxes are a flow – and they flow right down the drain – to nowhere.”
OK, taxes are a flow, an income flow (not just a monetary flow), and they represent the government’s command over resources. If this command over resources was to dematerialize along with the monetary flow then in effect the space created for government consumption/investment would also dematerialize. The monetary flow might notionally be netted out as Adam K explains (if I understand him correctly), the income flow persists.
“Please read the following introductory suite of blog posts….”
Thanks Bill.
I printed these out sometime ago. My pile of MMT papers and material is growing at a rate faster than I can read and digest.
“…they represent the government’s command over resources…”
And isn’t this the reason that the treasury/federal budget superstructure exists and why this accounting is separate from that of the central bank?
The federal budget accounts for the income flows and the central bank’s accounts are about monetary flows.
Dear Henry Rech,
“With the treasury/central bank seen as an entity, the central bank created money (liability) runs around the economy, returns as taxes (asset) – the liability and asset netting to zero. Is that what you are essentially saying?”
I think that we are on the same page now. This point of view combines the ex-post accounting and ex-ante causation (it is the government sector what decides how much to spend and pays the private sector with its own liabilities for real goods and services, the private sector cannot refuse as it is paid in legal tender, then net financial assets are drained from the private sector to suppress their own demand and prevent excessive hoarding of real and financial assets).
Unfortunately the aspect of taxation as preventing excessive hoarding of real and financial assets by the richest is not well understood even among the so-called “progressives” who want to “redistribute income” instead of, to put it bluntly, confiscating wealth siphoned by the social class of cleptocrats. This is why right-wing politicians like Donald T. acting in the interest of US oligarchs want to reduce taxes paid by corporations and by the richest. The fact that a few people have accumulated tens of billions of dollars in “liquid savings” is severely destabilising the real economy by distorting prices of other assets such as land and equities and contributing to the destabilisation of the global forex markets which are no longer driven by trade but the flows of speculative capital. It is not stimulating productive investment. It is one of the driving forces of the financialisation but obviously more research is needed to establish a clear causation.
“and they represent the government’s command over resources.”
It is the *imposition* of taxes that represents the government’s command over resources – which happens before there is any spending. You expect to be taxed and act accordingly. The spending is just settlement of pre-existing debts and happens after the induced activity has happened.
I give you a liability to deliver some currency to me. That imposes an obligation upon you to give up some amount of time for me, or to trade that obligation with somebody else and give up the time to them instead. Once you have given up the time, you get the currency which allows you to settle the debt. Transitively that ensures that time and the output of time is delivered to me, and it is delivered *before* I have to issue any of my currency.
That’s why I say it is the buying that matters, not the spending. If you focus on the spending you’re looking at the situation after all the interesting stuff has already happened.
“The simple truth might be that the Right believes the crap they are saying and pushing for.”
Agreed. I believe that real world evidence show us that indeed this is the simple truth…