In the latest IMF Finance and Development journal (March 2023), there is an interesting article…
The inner Groupthink camp is breaking up – paradigm shift continues
Last week, there were some rather significant shifts in the public discourse surrounding macroeconomic policy and challenges made to the orthodox economics taboos that have been used to prevent governments from acting in the best interest of the citizens. First, the Australian treasurer broke away from the government’s previous obsession with fiscal surplus pursuit to announce that for the foreseeable future it was only going to concentrate on jobs and growth. In his statement, he basically refuted all the mainstream macroeconomic claims about fiscal deficits – higher interest rates, lower private investment, lower growth, lower private sector confidence etc. There is really nothing left of the mainstream position now and any politician or economist that tries to resurrect the ‘debt and deficit’ narratives of the past will find it hard gaining the same politician traction that they were able to garner some years ago at the height of the neoliberal period. And, if that was not enough, a former Federal treasurer attacked the ‘high priests’ of the central bank, demanding they buy up government bonds and help the government run “Mountainous” deficits to achieve full employment. The flood gates opened just a bit more after those interventions along the way to jettisoning all the mainstream nonsense that should have been abandoned decades ago.
I saw this headline last week in the UK Guardian (September 24, 2020) and tweeted accordingly.
We haven’t seen anything like this for years.
And remember this is a conservative Liberal government in Australia that is now abandoning the ‘deficit and debt hysteria’.
On September 24, 2020, the Federal Treasurer said in a – Speech to the Australian Chamber of Commerce – in Canberra that:
Under the previous strategy our plan was to deliver budget surpluses of sufficient size to significantly reduce gross debt and eliminate net debt by the end of the medium term.
Unfortunately, in the face of this shock, this is no longer the prudent or appropriate course of action.
It would now be damaging to the economy and unrealistic to target surpluses over the forward estimates – given what this would require us to do in terms of significant increases in taxes and large cuts to essential services.
This would risk undermining the economic recovery we need to bring hundreds of thousands more Australians back to work and to underpin a stronger medium-term fiscal position.
It is getting Australians back to work and having profitable businesses hiring and investing that offers the greatest leverage in repairing the budget …
The first phase of our revised fiscal strategy is focused sharply on boosting business and consumer confidence and promoting jobs and growth throughout the economy …
… we will maintain our central focus on jobs and growth, combined with structural reforms that increase our economy’s potential …
Only through repairing the economy can we repair the Budget.
While the terminology is marginally problematic (for example, ‘repair’), this signals the end of the narratives we heard during, for example, the GFC.
The import of what the Treasurer is now saying:
1. Spending growth equals real output growth when there is idle capacity.
The IMF narratives of the ‘fiscal contraction expansion’ and ‘growth friendly austerity’ is categorically rejected by the Treasurer’s framing.
You cannot get growth without spending increasing.
2. When non-government spending is insufficient to maintain employment growth then there is only one game left in town – increased government spending.
3. The neoliberal lie that governments do not create jobs only markets do – is categorically rejected.
The Treasurer now admits that increasing the deficit is essential to “bring hundreds of thousands more Australians back to work”.
4. The mainstream economics claim that rising fiscal deficits drive up interest rates and ‘crowd out’ private investment is categorically rejected.
The Treasurer now admits the rising deficits are essential to “having profitable businesses hiring and investing”. In other words, rising deficits can crowd in private spending including business investment.
A far cry from the sort of rubbish that is taught in most undergraduate economics programs about loanable funds and crowding out.
Any time that you hear or read an economist say or write that fiscal deficits drive up interest rates and damage private investment you can conclude they are lying – deliberately or through ignorance.
5. The mainstream claims, characterised by the Ricardian equivalence proposition, that private firms and households undermine the expansionary impact of fiscal deficits by increasing saving to ensure they can pay for so-called future tax increases, is categorically rejected.
The Treasurer has acknowledged that one the positive impacts of abandoning the obsession with fiscal surpluses – “our revised fiscal strategy” – is to boost “business and consumer confidence”, which will promote jobs and private spending growth.
The exact opposite of what the mainstream try to claim is the reality.
6. The mainstream claims that you have to indulge in fiscal contraction/austerity first to provide for the conditions that improve the economic performance is categorically rejected.
The Treasurer notes that you get the economy right and the fiscal position will then take care of itself and withdrawing stimulus initiatives are appropriate.
The goal of fiscal policy is not to achieve some particular number but to support the non-government sector spending and saving decisions.
The Treasurer has finally conceded that context matters. The only way we can make sense of any particular fiscal position is to understand the strength of the non-government sector (including the external sector) and overall spending strength that is required to maintain full employment.
The fiscal position should be whatever is necessary in that context.
The neoliberal period has perverted that essential understanding, and, instead, diverted our focus to meaningless obsessions with particular fiscal outcomes, for which the government really cannot control anyway.
Remember, that the final fiscal outcome in any period is the product of the discretionary fiscal choices made by government (spending and tax parameters) and the spending and saving decisions of the non-government sector.
The latter drive overall activity and influence the fiscal outcome via the cyclical impacts on tax revenue and welfare spending
So, after the Treasurers concessions, what is left of the mainstream treatment of government fiscal policy?
Any politician or economist that tries to resurrect the ‘debt and deficit’ narratives of the past will find it hard gaining the same politician traction that they were able to garner some years ago at the height of the neoliberal period.
They simply will be looked on with curiosity.
Because people will be observing as time passes and the very substantial fiscal deficits persist that all the dread outcomes predicted by my profession do not materialise or come to pass.
They will start to appreciate what we have observed in Japan for 3 decades. That even when fiscal policy parameters are pushed to previously considered limits and beyond the mainstream predictions fail.
We also saw last week another major brick in the neoliberal dam break.
The former Treasurer who became our Prime Minister, Paul Keating issued a letter last week which attacked the RBA for “indolence” and failing its responsibilities.
He was responding to a speech to the AI Group, given by the Deputy Governor of the RBA last Tuesday – The Australian Economy and Monetary Policy.
The AI (Australian Industry) Group is the peak employer organisation for large business in Australia.
Paul Keating – was the Labor Treasurer between 1983 and 1991 (whereupon he usurped Bob Hawke and became Prime Minister).
As Treasurer, he embraced the neoliberal obsessions with privatisation, outsourcing and fiscal austerity. His government ran fiscal surpluses in 1988, 1989 and 1990, before the economy crashed in the early 1990s on the back of the fiscal drag and the high interest rate environment that was pursued as the government and RBA embraced the mainstream monetarist ‘inflation first’ strategy.
When the government admitted the economy was in recession in 1990, after promising a ‘soft landing’, Keating claimed that it was the “recession we had to have”, thereby abandoning all empathy with the workers who had voted for his government.
His track record is thus questionable (in the extreme) and he now appears to be singing from a different song book.
After the Deputy Governor’s speech last week, Keating issued a press statement, which was a scathing attack on the mentality of the central bank – its conservative leanings and failure to use its currency capacity to generate generalised well-being.
The RBA like many central banks around the world has overseen inflation rates well below their lower-bound target range (2 to 3 per cent). So even in their own terms of meeting their inflation targets they have consistently failed over the many years now.
Defenders of the bank are thus on shaky ground if they suggest the RBA is meeting its legislative responsibilities.
And I remind everyone that the Reserve Bank Act 1959, Section 8 empowers the central bank “to buy and sell securities issued by the Commonwealth and other securities”, “to establish credits and give guarantees” and more.
Note also that under Section 10 Functions of the Reserve Bank Board, Clause (2):
It is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the Bank under this Act and any other Act, other than the Payment Systems (Regulation) Act 1998, the Payment Systems and Netting Act 1998 and Part 7.3 of the Corporations Act 2001, are exercised in such a manner as, in the opinion of the Reserve Bank Board, will best contribute to:
(a) the stability of the currency of Australia;
(b) the maintenance of full employment in Australia; and
(c) the economic prosperity and welfare of the people of Australia.
In other words, the RBA is required by legislation to maintain full employment with price stability so that all people in Australia are prosperous and secure.
However, the RBA has been significantly influenced by the NAIRU concept and it conducts monetary policy in Australia to meet an openly published inflation target. The persistently high unemployment in Australia over the last 30 years, would suggest that the RBA is not working within its legal charter.
This was more or less the point that Paul Keating made in his press release following the Deputy Governor’s speech, which outlined what the RBA was doing.
But in doing so he went to the heart of one of the mainstream taboos – central bank purchase of government bonds and fiscal deficits.
He seemed to reject all his previous economic rhetoric by writing:
Knowing full well that monetary policy can now no longer add to nominal demand – something that now, only fiscal policy is capable of doing – the Reserve Bank is way behind the curve in supporting the government in its budgetary funding measures …
This is in the context of near zero nominal interest rates.
For a moment, it showed some unlikely form in pursuing its 0.25 per cent bond yield target for three-year Treasury bonds and a low-interest facility for banks. But now, after 600,000 superannuation accounts were cleared and closed down, with 500,000 of those belonging to people under 35 – a withdrawal of $35 billion in personal savings, and further demands arising from the employment hiatus in Victoria – the deputy governor of the bank, Guy Debelle, yesterday strolled out with debating points about what further RBA action might be contemplated.
As history has shown, when a real crisis is upon us the RBA is invariably late to the party. And so it is again …
The problem about central banks, and this is true of the Reserve Bank of Australia, it has become a sort of deity, where lesser mortals might inquire, however respectfully, what the exalted priests might be thinking or have in mind for their prosperity or the country at large …
The only difference between the deity and those to be governed is that the governor and his deputies do not wear clerical collars and black suits. But that is the only difference in their comport and attitude.
Deputy governor Guy Debelle’s meandering thoughts yesterday about the bank and monetary policy is way not good enough. Not good enough for those likely to be unemployed.
Not good enough for those who have already lost their retirement savings. Not good enough for a government trying to fund a massive support program for an economy in distress.
And the RBA should “help the government meet the task of full employment”.
And this is a major turning point in our public discourse:
The bank should be explicitly supporting the government so the country does not experience a massive fall in employment – impacting particularly on younger workers – those who have already been obliged to wipe out their superannuation savings to support themselves …
But instead of that, in funding a level of government outlays by buying appropriate levels of government debt and locking it away on its balance sheet, thereby making the government’s funding task much easier and support for the country better, the deputy governor conducts a guessing competition on what incremental step the bank might take to help.
It has to be remembered, these are the high priests of the incremental. Making absolutely certain that not a bank toe will be put across the line of central bank orthodoxy.
Certainly not buying bonds directly from Treasury – wash your mouth out on that one – what would they say about us at the annual Bank for International Settlements meeting in Basel?
Not even ambitiously buying sufficient bonds in the secondary market, like the European Central Bank or the Bank of Japan …
The Reserve Bank might do as it was set up to do – help the Government. Be a utility. Shoulder the load. And in a super-low inflationary world, that load is funding fiscal policy. Mountainous sums of it.
He was thus calling on the RBA to directly fund “mountainous sums” of government spending that will be necessary while capitalism is on state life-support systems.
He advocated the RBA buying all the debt that would be issued to match the large fiscal deficits that will be required to achieve full employment.
He also paid the RBA out over their reluctance to reduce interest rates in 1989 as Australia was heading into recession and said “The Reserve Bank is now having another one of its dalliances with indolence”.
The ABC article (September 24, 2020) – Paul Keating says the RBA is not doing what is needed to stop the COVID recession worsening – said that Paul Keating “appears to be siding with proponents of a school of economic thought called Modern Monetary Theory who have been arguing there is no need for the RBA to buy bonds from the secondary market to fund government spending measures.”
There is absolutely no need for the RBA to buy bonds indirectly in the secondary markets.
There is absolutely no need for the Treasury, via the Australian Office of Financial Management, a division of Treasury, to issue any debt to match the net public spending (deficits).
The charade the government and the bond markets play, pretending that the non-government sector provides the financial wherewithal to allow government to run deficits, is just an elaborate form of corporate welfare.
The funds that are used to buy the government bonds come, ultimately, from past government spending anyway.
Paul Keating is another person among many that are now crossing the line and calling out these neoliberal charades, that are buttressed by the ‘fictional world’ that mainstream economists create to give justification to what is an unnecessary sop to investment banks.
It is another sign that the paradigm shift in macroeconomics is underway.
The ‘high priests’ are hanging on for dear life but the challengers to the orthodoxy are increasing in number and profile.
Paul Keating’s intervention demonstrates that the inner camp is breaking up.
Article in latest issue of Australian Quarterly
The – Australian Quarterly – was established in 1929 and is “Australia’s longest running political science journal”. It has been a staple in my life and has always published progressive articles that providing challenging insights into the issues of the day.
I contributed to the latest edition that is just out.
Here is the front cover and the title is taken from my article. I urge people to support this journal.
Presentation for GIMMS, September 27, 2020
I have been doing a lot of Zoom workshops lately – mostly for private groups.
Last night, I did a Q&A with Dr Phil Armstrong which was organised by the Gower Initiative For Modern Money Studies (GIMMS) – in the UK.
The video will be available in the coming days but Christian Reilly and Patricia Pino took an audio stream and have made it available on their podcast.
It is – Episode 67 Phil Armstrong and Bill Mitchell: In Conversation.
We covered a lot of topics in the 100 odd minutes.
It was a late night for me but I am very thankful for the GIMMS team and Christian and Patricia for making these types of interactions possible in this era of no travel.
I must say, though, that I miss the face-to-face interaction.
That is enough for today!
(c) Copyright 2020 William Mitchell. All Rights Reserved.
This Post Has 46 Comments
Bill, when you have the time please re-edit this wonderful bog with its wonderful news.
I saw about 6 places that need work, including this one —
“The former Treasurer who became our Prime Minister, Paul Keating issued a letter made a rather
He was responding to a speech … ”
The 1st part there is not a complete sentence, it is missing some words.
Others are: missing commas, confusing extra words, the wrong word, etc.
one nuance in this sentence is worth highlighting…
“The funds that are used to buy the government bonds come, ultimately, from past government spending anyway.”
I’m pretty sure that the funds used can also be obtained via loans created by private banks.
I’ve heard some interesting thoughts on why lowering interest rates doesn’t increase inflation – being that once private debt gets big, a lower interest rate means “debt based currency” is destroyed at a faster rate (ie as people continue to pay off their loans). If you don’t replace that “paid off debt” with either more private debt or higher net government spending, then there is less currency in the economy. Less currency means prices should decrease (ie deflation).
I think this is happening now, and is behind the intention to relax private bank lending standards announced last week in Aus by the treasurer.
We would very much love to believe this could be so, but elsewhere it is suggested that we are simply seeing a minor retreat to Reaganonimics style supply side stimulus. https://www.abc.net.au/news/2020-09-27/government-coronavirus-economic-recovery-plan-looks-at-supply/12707936
The onion has many layers and workers may need to wait a while yet before equity returns to labour markets.
“Structural reforms” tells me that the neoliberal mantra is still there.
Yes, they know it doesn’t work.
They know it’s nothing but a pack of lies.
But it worked so well for them, it would be a pitty to let it go.
The problem for them is the possibility of loosing hegemony and people starting to ask to get them out of power.
So they reharsing some progressive moves to keep power.
But it’s just another lie.
“I’m pretty sure that the funds used can also be obtained via loans created by private banks.”
They can’t. For you to buy government bonds you have to use central bank money, not private bank money.
The private bank has to obtain central bank liabilities from somewhere to transfer to the OPA (in the case of Australia).
And that can only come from government sector buying something. Remember the government sector includes the central bank, so even if the central bank operates a discount window or provides repo facilities it is buying a charge over a private sector asset.
” Less currency means prices should decrease (ie deflation).”
You are Milton Friedman and I claim my $5!
“Structural reforms” tells me that the neoliberal mantra is still there…” etc (Paulo Rodrigues)
Exactly the same mantra has been the leitmotif of numerous pious homilies issuing from the high priests of the Eurozone over the past decade – and is even now beginning to surface again for reinstatement (with intensified ferocity) from 2022 after the corona crisis-support has timed-out.
It – in conjunction with “convergence” – forms the raison d’être for the notorious fiscal straitjacket of the EU’s temporarily suspended,”Growth and Stability Pact”.
Both of these Orwellian mantras in truth operate – for fear that otherwise the contents of the admirably industrious and frugal Germans’ bulging coffers might be distributed among profligate self-indulgent “southern European” nations, thus rewarding those miscreants for their deplorable failure to turn themselves into abstemious, masochistic, “northern Europeans” – with the aim of *suppressing*, or extinguishing, growth and as a result have engendered chronic *instability* – all in the sacred name of “financial sustainability” (one is supposed to genuflect and cross oneself reverently when uttering that holy incantation).
It’s enough to make a cat laugh.
“…and as a result have engendered chronic *instability*,,,”
please insert:- “…and ever-increasing *divergence*…”
“Convergence” is just another lie.
The “profligate” south europeans have food Banks to the lower classes and money banks for the 1%.
Notwithstanding the private defaults the “frugal” bastards left behind, they kept pace, even after the GFC, asking for more money from banks and getting it, as if nothing happened.
As long as the elites in Germany are satisfied, nothing is wrong with the EU.
The bloody thing is a postponed corpse, but we got to go trough all the way until it bursts.
Paul Keating is quoted as saying:
“600,000 superannuation accounts were cleared and closed down, with 500,000 of those belonging to people under 35 – a withdrawal of $35 billion in personal savings …”
Is this the Australian equivalent of people in the U.S., when economically challenged, cashing in their IRAs?
@RobertH: “It’s enough to make a cat laugh.”
Hahahahaha!! Didn’t know that expression. Very funny.
It may be changing in Australia but not in the UK, yet. Sunak is still advocating and in fact operating to some extent in a neoliberal manner. His new scheme is nowhere nearly as good as his furlough scheme, flawed as it was. He claimed his new scheme was original and radical whereas in fact he borrowed it from the Germans and, being a Tory from the finance sector, screwed it up completely. He has given no indication at all of doing anything as ‘radical’ as MMT. Of course, given this government’s record of incompetence and inconsistency, this is no indication that he won’t accidentally do something right.
Here in Canada the neoliberals are on the defensive. Our federal Liberal government, supported by the social democratic New Democratic Party, is continuing generous support for the unemployed, introducing national sick-leave for Covid related illness, a national childcare program, national drug coverage, vastly expanded intercity train transit in Eastern Canada and a variety of other things. It has even said the federal government needs to take on the debt that Canadians cannot afford. Very MMT (functional finance part) friendly. Of course the Conservatives are concerned by the “huge. huge deficits”, especially for new social programs, although nothing should be done yet to rein them in. The business press is horrified and has lined up a former Bank of Canada governor, the CEO of one of the leading business think tanks, and every one of its business columnists against the upcoming deficits. However their ostensible worries are always vague, especially with respect to exactly when the world will end. Weirdly, one thing they sometimes focus on is a 1995 editorial in the Wall Street Journal that accused Canada of having a northern peso (the Mexican currency) due to the size of our debt/deficits at the time. It’s actually pretty pathetic. What a bunch of backward colonial-minded losers!
“He claimed his new scheme was original and radical”
Employer pays 55% of salary for 33% of the time, at which point government will pay 22% of the salary up to about £700 per month.
It’s too complicated. Too full of the “bail-in” nonsense that seems to be all the rage for some reason. And is nowhere near enough.
The general line on Accounting forums is that very few people will be using the scheme. You’re almost certainly better off making one person redundant and dumping the entire workload on the second person.
My back of an envelope calculations says we will be 4.4 million FTE positions short of true full employment with a following wind, which is about 668 million hours per month lost, requiring a £6.68bn pm injection at £10 per hour. Rishi Washy is talking about £300m per month – 4.5% of what is required.
It’s going to be carnage.
This Covid pandemic is The Great Disruption, perhaps The Great Deconstruction, of the neoliberal world order. TINA now stands naked before the eyes of the world, and the view is most unlovely, unbeautiful. Slowly but inevitably it is being realized by more and more people that we are now forced to come to terms with the fundamental issue of whether an economy exists to serve people and planet, or vice versa. And the answer is obvious. No doubt we face a jarring, precarious, and dangerous ride in making this transition from death to life, especially in the most neoliberal places like the United States, but the survival instinct, from which Schweitzer derived his sublime ethic of reverence for life, will surely triumph in the long run, as it has since life began more than three billion years ago. Evolution is a far bigger deal than neoliberalism, a fact as opposed to a fiction. Just like Covid.
I still can’t believe it or trust they are ever going to change due to Geopolitics.
Geopolitics is the alter they all kneel down at and worship. We all pretend we are free and have free elections but is that really the truth? The UK has never been free since World War 2. Washington is our boss. The only gift we got for winning World war 2 was we are allowed to run trade deficits.
Call me an old cynic I just can’t see it from the left or right in the UK. They are making all the wrong noises and are desperate to keep neoliberal globalism on track. I could very easily be wrong and talking complete and utter garbage. It is just the way I see the geopolitical landscape as I watched it develop growing up.
Yes the virus kills and I have a very simplistic view on it. For me everything else is just politics. It is just noise to keep the fire under the culture wars burning.
My simplistic view is as follows. The NHS can’t handle any winter for the last 20 odd years. Every winter is the same year after year it ends up in crises. What they are” all ” afraid of is with the virus added to that is the political consequences of a national health meltdown.Their simple strategy has been send the public outside in the summer keep them indoors in the winter until we get a cure. For me everything else is just noise, politics and the rest of it.
Yes, the annual winter crises has also been used as propaganda to further privatisation within the NHS. Using the exact same model they used On the Post Office ( where I used to be an auditor). The same model they are now using on the BBC. Two thirds of which has already been privatised as they move to the channel 4 model. After every programme wait until the end of the credits and you will see which private sector company has produced it. This used to be zero until John Whittingham and Tim Davie changed all of that. The BBC produce very little content nowadays it is bought in instead and keep the news as a revolving door with the city of London.
Send the public outside in the summer keep them indoors in the winter until we get a cure. Is what the plan was all along in my opinion. I see no change in that strategy regardless of the r number or fancy charts, the NHS and other health departments just won’t cope during flu season. The culture wars are going to reach absurd levels. For some the winter can’t get here quick enough.
If they ease restrictions during the winter. I will ride a horse completely naked down Sauchihall street singing the blue ridge mountains of Virginia. If anything “full” lockdown is quickly approaching again.
Vote for Pedro. Hey Pedro. You’re talking nonsense. Only federal reserve liabilities can be used to buy federal bonds. Or anything else for that matter. All private debts are created in, and settled with reserve liabilities. If you can get this you will have learned something.
“He was thus calling on the RBA to directly fund “mountainous sums” of government spending that will be necessary while capitalism is on state life-support systems.”
It would appear “capitalism” cannot not survive unless there is a “socialist” foundation supporting it, as has been proven every time there is a great depression, GFC, Pandemic or even war…..Capitalism is corporate socialism………
I have heard that MMT is hostile to taxing the rich.
Is it true?
“All private debts are created in, and settled with reserve liabilities. ”
That isn’t quite the case either. If you take the vertical circuit out of the equation you’ll find that the central bank tries to step out of the equation every day with a zero balance. Net private bank transfers are settled by the destination bank becoming the depositor in the source bank. And they do that at a price.
Central bank base rates bind because the central bank offers to become a depositor in a commercial bank at a particular price. Which means commercial banks have to better that offer or end up with a lower paying deposit at the central bank. The difference between the central banks lending rate and its deposit rate is the penalty payment banks incur for not agreeing a price between themselves and cutting the central bank out of the middle.
Since banks usually want to avoid the penalty payment that leads to the central bank dropping out of the equation on clearing in a purely private setup.
It’s when you add the vertical circuit back in and do government transfers that you get positive reserve balances at the central bank overnight.
“I have heard that MMT is hostile to taxing the rich.”
It isn’t hostile to taxing anybody. It just points out that would be mostly for political purposes rather than economic ones.
You tax the rich because you want them to have less money. That’s a perfectly respectable position.
@ Aleeza, @ Neil
“I have heard that MMT is hostile to taxing the rich.”
What Neil is saying is sort-of-correct. If you or I are taxed more, or less, then we’re likely to spend less, or more, as a consequence. The very rich are much less likely to be affected. You’d have to give a billionaire an enormous tax bill to prevent their buying that next Lamborghini for example.
This would be the economic effect. So, on a superficial level, you could argue there’s no point bothering about the tax paid by the very rich. Some MMT advocates, not Bill I should add, stray pretty close to saying something like this at times. But if we don’t chase them up to pay their correct amount we undermine the fairness of the system. All economists, and MMT ones are no exception, would agree on the need for an effective system of taxation. This can only happen if their is widespread acceptance of its integrity.
This is the “political purpose” that Neil refers to, although I wouldn’t put it quite the same way myself.
If I was in charge, I wouldn’t bother with income taxes at all; sales taxes on luxury goods might come in handy.
Let the private sector rip, fund public spending/policies via treasury money creation, and deal with inflation directly by transparently offering to the public the choices to be taken to overcome the excess demand, with real full employment and above poverty JG being the only non-negotiables…….
And by the way I’d get rid of private banks who mostly exist to take a profit from lending to borrowers.
And I’d offer a wage premium to some of the more disgusting, but necessary, jobs out there.
I think a limited free market would survive somewhere in that scenario.
“you could argue there’s no point bothering about the tax paid by the very rich.. This is the “political purpose” that Neil refers to”
That specifically isn’t what I’m referring to and I rather resent the implication.
Tax evasion is a crime. A very serious crime. There is nothing I’ve said anywhere, or any other economist would say that would suggest tax evasion shouldn’t be treated with the biggest stick you have – no matter who the person evading the tax is.
You pay what it says on the charge sheet or you go to jail and your assets confiscated.
It is utterly central to the basis of a tax system – the ability to enforce it. You lose any power you have to command resources if you cannot enforce the tax system. That’s one of the reasons developing countries have trouble, and it has been the cause of great problems in places like Greece where they are already hamstrung by the Euro.
The political purpose I’m referring to is raising the tax rates on the rich just because they are rich. That is because you want them to have less money for political reasons. Which is a perfectly respectable political position to hold and can be argued for and against.
However if your tax system is too complicated, too fragmented, or full of failed attempts at social nudging then people will be able to, quite legally, game the rules. That is tax avoidance. Tax avoidance is nature’s way of telling you your tax system is too complex. So simplify it.
A genuine true MMT analysis of a tax system is one that leans towards simplicity to stop any issues with gaming the system, and one where you don’t pay over your own tax. A third party does – and is jointly responsible for getting it right. The gold standard being the various Pay as you Go approaches which ensures tax is not only calculated correctly but withdrawn from circulation as soon as possible – allowing tax to be a better auto-stabiliser.
Once you get away from the idea that tax systems raise money you can massively simplify them and target them at their job – releasing resources. That makes them more efficient in terms of their operation and their outcomes.
The problem is that, outside of the MMT community, there is very little understanding of the reason for taxation in a nation with its own (soveriegn, fiat, non-convertible) currency.
For as long as the majority of the population, including politicians, believe that taxes are required to *fund public spending*, then there will always be resitance on the part of the powerful and wealthy who are reluctant to pay taxes if they think that they will be used to fund public services for which they have absolutely no (perceived) need.
Unfortunately these people are ever-present, not only in right and centre parties in parliaments, but also vocal and powerful in the think tanks and pro-business pressure groups which inform, and successfully lobby, those political parties.
Then you have the fear exhibited in less wealthy cohorts, that the increased and improved public services that they would ideally like to see, can only be implemented by increasing the taxes that they have to pay – which provides a strong disincentive for voting for a party intent on implementing those increases and improvements. Thatcher knew exactly what she was doing, appealing to that very cohort, with her false pronouncements that government had no money of its own – only what it could borrow, or raise in taxes.
Ordinary people need to be educated about the true function of taxation – with particular emphasis on its role in fighting inflation. There is essentially a choice: you can be taxed directly in order to keep inflation low, or you can, as an extreme example, pay little or no tax, but see prices double, triple or quadruple over the following years as a result of a continual flood of newly created, but untaxed, currency – in which case your money buys a half, a third or a quarter of what it did previously – the net effect of which is pretty much like being taxed, except that the end results can be far more unpredictable.
In other words, there is no escape. You either hand over half your money in tax, or you hand over twice your earnings in increased prices. I imagine most sensible people would prefer the former.
It must also be explained that the amount of tax that you pay has no direct bearing on how much the government of the day can, or would like to, spend. The govt could tax you “till the pips squeak”, and yet decide to run a balanced budget or even a surplus, and not spend a penny extra. Equally, it could cut taxes, and yet still be hugely generous, and just run large budget deficits.
Crucially, people need to know that the government *spends first and taxes later* – and, additionally, that increased spending (e.g. Sunak’s recent largesse in the UK) does not *necessarily* mean that future tax *rates*, or their scope, will increase – which is the nonsense that Tory MPs and the IFS in the UK are currently promulgating.
Inevitably, in aggregate – and all other things being equal – the *amount* of currency that HMRC will eventually reclaim in taxes may well increase – but purely as a function of taxation being imposed automatically on those extra transactions that resulted from the extra spending – similarly to how you would expect to pay more tax as the result of a pay rise. Unless you exceeded a tax threshold, your *rate* of tax, or the *type* of tax you pay, would not increase at all, just the amount, because you earned more – but who’d turn down a pay rise because of that?
As far as the wealthy go, yes, by all means tax them to reduce their power, and for the system to look fairer. But it may be more politically astute to defang their opposition to any political party in favour of increasing public spending with a kind of grand bargain: if it’s widely understood that their taxes don’t fund anything, but mostly function to reduce the inflation that would otherwise result from endless untaxed public spending, then, for as long as they save it, onshore or offshore, then there is no inflation risk, and the govt can continue to spend – up to the capacity of the real economy to absorb it without overheating – and, if necessary run a budget deficit.
But the other half of the bargain should be this: the individual, institutional, and corporate tax dodgers, and their lobby groups, need to quit opposing budget deficits and promoting austerity – because there is absolutely no need for them to do so. Public spending is *not* coming out of their taxes! On the contrary; thanks to trickle-up – or rather, “flood-up”, increased public spending fills their coffers even further (see e.g. Serco, Deloitte etc. profiting greatly from massively increased govt spending on the Covid crisis).
It’s not that MMT opposes taxing the rich – it’s just a useful recognition that, like everyone else, their taxes don’t actually *fund* anything at all – so they don’t need to be afraid of it… and nor do we.
OK. Apologies if you’re offended. The point I was making was that there’s more to the taxation system than just economics, even of the MMT variety, and ‘political purposes’. There’s the need to maintain the confidence of all taxpayers of all political persuasions – even the ones that don’t see that Govt doesn’t need taxation revenues to be able to spend. Having said that, I noticed that you’d got into a heated discussion about the finer points of that concept yourself recently.
I agree with most of what you say except I’m not totally convinced tax avoidance is a sign of too much complexity. If your’re running an international company it’s ultra simple to transfer your costs to where taxes, even the most simple ones, are highest and so transfer your profits to where they are lowest.
“If you’re running an international company it’s ultra simple to transfer your costs to where taxes, even the most simple ones, are highest and so transfer your profits to where they are lowest.”
It isn’t if the company tax is zero, the income tax is zero and the main tax is a payroll tax (or more broadly a “transfer of value to an individual” tax). Very difficult to transfer your employee costs elsewhere without exiting the currency zone and becoming just an importer. At which point the employees will be picked up by a competitor and your goods sales become subject to exchange rate fluctuations.
What you learn is that you can tax what doesn’t move, or is unlikely to leave. And you cut your coat to that cloth. Which then fits in ideally with the “releasing resources” requirement of MMT. Raise the payroll tax and you immediately make somebody unemployed – which is then resolved via the public purse.
An MMT view allows us to think outside the box. Including in the realm of tax system design.
But company and income tax rates aren’t zero. There are few places in the world where they are even close to it. Maybe they should be, I’m prepared to be convinced, but I have to say that goes against all my political instincts. Has Bill ever outlined what he thinks an ideal MMT designed tax system should look like?
“As far as the wealthy go, yes, by all means tax them to reduce their power”
Never understood this argument. If they truly had power then they would be able to stop you ever getting to the point where you can impose a tax upon them.
Therefore if you get to tax them, they didn’t have that much power in the first place. And you have to look elsewhere for your actual reasons.
Taxing doesn’t reduce anybody’s power. The power is in the “little black book” and you can’t easily remove the contacts from their phones, or more importantly the minds of the influential people that know them.
Getting in with the crowd is a one way gate. You can’t unbake that cake.
Point taken Neil, but are you suggesting that, beyond the usual rates of income, inheritance, and capital gains taxes – which they still bend over backwards to avoid – there should be no further taxation on the very wealthy at all?
I’m sure when the suggestion is made to “tax the wealthy”, it means *in addition* to the normal taxes we all pay.
I’m sure that the above poster had that in mind, when suggesting, erroneously, that MMT excused the rich from *any* taxes!
I know that the Treasury doesn’t need their money, there aren’t that many of them, and that they can skip jurisdictions both commercially and personally (eg Ratcliffe just last week).
So the reason for additional taxation appears to be because they are “too rich”. Of course, they are. But if they’re not spending their money, then they’re not contributing to inflation. (If they do spend it, taxation on transactions is incurred in the normal way).
It would seem that the only rational reason then would be to deprive them of some of the power and influence that their wealth permits, which is most usually, and damagingly to the rest of us, deployed to maintain and enhance their wealth and status, as well as the primacy of their corporate interests.
What other justification is there?
“It would seem that the only rational reason then would be to deprive them of some of the power and influence that their wealth permits”
You said they weren’t spending it. If they’re not spending it then it’s not giving them access to any resources.
And if there were genuinely powerful, then you won’t be able to get to the point where you can tax them anyway.
It doesn’t reduce the influence. It doesn’t reduce the power.
What money does is open the gate and let you in. Once you’re there the job is done. You then have permanent influence because you have back doors into places other people don’t have by virtue of your contacts and reputation.
“What other justification is there?”
Very little rational. Hence why people cling onto the “power and influence” mantra much like Rishi clings onto the “not sustainable” mantra.
It’s a comforting story.
Personally I’m more interested in levelling up those at the bottom end of town. Leave the rich to count their coins and maybe then they’ll slip a few of them your way to fund your political campaign to level up those at the bottom end of town. Particularly if the alternative is a bunch of psychos intent on wholesale confiscation.
Well that’s what I was getting at in the rest of my original post.
It annoys me when people think that “taxing the rich!!!” is going to be any kind of solution.
George Galloway has founded a Workers Party of GB, as a reaction to Labour tacking once more to the right – and I see on Twitter that they have announced a major new policy: a one-off “Corona Tax” on the wealthy, to pay for helping the poor during the pandemic – complete with a dramatic photo of a flashy super yacht, to trigger the faithful.
It’s desperate… if only they’d just learn MMT!
It taps the emotions though – appealing to envy primarily and then jealousy. But those are negative emotions and they don’t get you very far. They quickly become fear, hate and anger and a visceral belief in a zero sum game.
We can do better than that. Levelling up means the same game, but future rounds will be harder to win for those who’ve already won previously.
Neil Wilson:”Never understood this argument. If they truly had power then they would be able to stop you ever getting to the point where you can impose a tax upon them.”
The argument is easy to understand. The rich have power. Governments and peoples have power. But power is not a black and white either/or. Nothing is. Like everything else, it’s a fight with an uncertain outcome. High tax rates do have an effect, they’re one tool among many to fight plutocracy.
NW: “It doesn’t reduce the influence. It doesn’t reduce the power.”
These statements are like saying any move that is not checkmate in a chess game does nothing. Taxation certainly can and has reduced concentrated power and influence. It can allow higher non-inflationary government spending. There are short-term situations where a government trying to represent the 99% rather than the 1% has a temporary advantage over the wealthy for whatever reason. The sound chess procedure is to convert such temporary advantages into long-term ones – higher taxes might be one. And not pressing and converting your (temporary) advantages that way is a pretty sure way to lose a chess game.
It is not the way the rich play the game! When they had a temporary advantage in the 70s to destroy the full employment era – they converted it – into less rationally organized, productive, wealthy and sane societies – but ones with them more securely on top, not slowly losing their position due to the hateful bane of full employment.
Some people overstate it and don’t get the economics exactly right like Sam Pizzigati- The Rich Don’t Always Win_ The Forgotten Triumph over Plutocracy that Created the American Middle Class, 1900-70- Seven Stories (2012). But his basic thesis is sound. There was a period where the mansions of the opulent of previous generations became museums because the heirs could not afford to keep them up, and there were no such new mansions being built. Taxation was part of that.
“Personally I’m more interested in levelling up those at the bottom end of town. Leave the rich to count their coins and maybe then they’ll slip a few of them your way to fund your political campaign to level up those at the bottom end of town.”
Yes, sure. But the rich as a class are not that naive. Very few are Warren Moslers. As a class, they do their damnedest to defund and derail campaigns to level up those at the bottom end of town – not fund them. Historically, they care far more about fighting a Job Guarantee than they do about fighting against taxes, which is a quite rational strategy – for their shameful, irrational goals. For they know “Workers spend what they get. Capitalists get what they spend” – including what they spend on taxes, largely. Yes, if necessary give in a bit on taxing the rich, trade in a lesser permanent advantage (high taxes) for a greater permanent one (a job guarantee). But don’t give advantages away for nothing!
“What other justification is there?”
It’s a simple one of fairness. Warren Buffet famously said that his secretary paid a higher rate of tax than he did. That was still the case in 2013. It’s probably still true now. Even though it’s not difficult to understand taxation from an MMT viewpoint, it still doesn’t mean that anyone who thinks it should be the other way around has succumbed to “envy”, “jealousy”, and “negative emotions”.
This line of argument is straight out of the Tory playbook and used to justify a highly unequal society.
So what are you going to do with said secretary if she also doesn’t agree? Send her off on a compulsory MMT re-education course?
“It’s a simple one of fairness.”
I’ve heard that line since Blair’s time. What’s fair to you isn’t fair to somebody else. What it means is in the eye of the beholder and the spin story behind it.
The counterargument is simple, and we hear it all the time. Rich people pay far more in tax than anybody else. The vast majority of the tax take in fact and are responsible for paying over nearly all of it. Therefore they should have a greater say in how society functions and what that money is spent on. That’s also fair.
Fair is the classic Humpty Dumpty word straight out of the spin master’s handbook. Because it’s non-falsifiable.
Or you can take the opposite approach and eliminate income tax completely so that everybody always takes home exactly the amount they get paid. Then the secretary is also very happy – never again having to worry about tax because they never see it. Yet the tax take remains the same because you’ve just made the tax calculation de jure match the what actually happens with the cash de facto.
“There are short-term situations where a government trying to represent the 99% ”
How do you get that in power without money?
The whole post falls into the “well I wouldn’t start from here” category as all these positions do.
Particularly if it was up against an alternative that said you don’t need to do all that, here’s a better way.
Of course everyone has their own idea of what’s fair. Yours and mine won’t be the same. All we can do as a society is to try to establish some sort of consensus. That consensus is the one that matters.
Nearly all political groupings accept the concept of a graduated scale of tax. So nearly everyone would agree that there should be zero or a very low tax rate on bread but a higher tax on, say, a gold Rolex. Or that the first few thousand of anyone’s income should be tax free ( its £12.5k p.a. in the UK) but that those on higher incomes should be pay higher rates. So we have 20% and 40% bands after that rising to 45% for incomes higher than £150k.
There’s never going to be total agreement on exactly what the rates should be or where the bands start and end, but there is near unanimous agreement that the rates should be progressive in nature. Marx advocated a progressive income tax in the 19th century. So what was once revolutionary is now generally and widely accepted.
But of course that doesn’t stop anyone making their case as to why we need a much different type of tax structure. Have you written up anywhere what you think it should be?
“Or you can take the opposite approach and eliminate income tax completely so that everybody always takes home exactly the amount they get paid… …Yet the tax take remains the same because you’ve just made the tax calculation de jure match the what actually happens with the cash de facto.”
Sorry, but I’m unclear, firstly as to what you actually meant by the last sentence, and secondly, as to whether the argument that there should be no income tax is just simply describing an oppostional approach to flat or tiered income tax, or whether it’s a position that you hold yourself?
If so, to echo Peter Martin’s question, what flavours of taxation do you personally prefer instead? And for what reasons?
Genuinely curious, as I do I value your opinion!
Well happily in the next blog Bill advocates a steeply progressive tax regime.
The point about fairness ,maybe justice is better is relatively simple.
Why should a wealthy investor or footballer have so much more claim on others people
labour than say cleaners and nurses.
The rich want first dibs on everything ,the land and the fruits of others labour .The gap in
their wealth and the 99% is most important not just to satisfy their entitlement and feelings
of superiority but so the poor cannot compete for the best stuff.
@ Mr Shigemitsu,
Neil seems reluctant to engage in further discussion of what an MMT inspired tax system should look like. Which is a pity.
I agree Neil’s pithy comments on MMT, and economics generally, are often insightful. But there has to be a political dimension too and that does involve getting the message across without getting people offside. There has to be some allowance for constructive disagreements and discussion.
@ Mr Shigemitsu/Peter Martin
“Sorry, but I’m unclear, firstly as to what you actually meant by the last sentence…
“…that does involve getting the message across without getting people offside…”
I wish you both luck in your quest for enlightenment, but I don’t honestly fancy your chances. Others have tried and failed.
Apparently, the curious are first required to be able to enter upon a more rarified intellectual plane called “system thinking”, whereupon all will become clear to them.
To misquote Gordon Gecko:- “Explanations are for wimps”.
I’m not quite sure what you’re getting at.
Like Mr Shigemitsu, I’m genuinely curious about how it can be possible for our “secretary” to “never again worry about tax” but “the tax take to remain the same”. I’m sceptical that this will be possible. Even if it is, I’m expecting that I might disagree with the method used to achieve it.
But I could be wrong. I’m trying to keep an open mind and reserve judgement until I know more.
Robert H writes:
“I wish you both luck in your quest for enlightenment, but I don’t honestly fancy your chances. Others have tried and failed”.
It’s informative to read the reviews of Stephanie Kelton’s new book: “The Deficit Myth”; invariably, Conservative commentators accuse her of skimming around the issue of inflation.
Stephanie does call for further research on the matter (and imo no doubt it IS possible in this age of AI and IT for government to keep track of the actual resources and productive capacity of every firm in the nation…).
But of course Conservative ideologues will not be interested in searching for any such answers; they are only concerned to prevent general acceptance of knowledge that will enable implementation of minimum acceptable conditions, which will render obsolete their NAIRU dogma.
progressive tax is a test of political perspective.
Those on the right see envy those on the left see social justice.
“Progressive tax is a test of political perspective.
Those on the right see envy those on the left see social justice.”
As I see it, it is not only social justice, it is also economically necessary.
It is necessary because without it the capitalist system is designed to move the money from the workers to the owners. This is fine for a while, but when all is said and done, it has to result of reducing the incomes of the workers so much that they can’t buy what the comps. of the owners are making, and then so much that they can’t survive. At this point thy have no choice but rebellion. Another step on the way down is when the workers can’t afford to start a family, and then the men can’t support even a wife. At this point the women choose not to marry because there is no man with the income to support their children.
. . . Do we see signs of these problems in all Western nations and Japan? I can see them, can you?
By the way several weeks ago, I put forward an analogy to illustrate this process. It was attacked by you-all over stocks vs flows, and the use of the “bathtub analogy”. So, I’m sure no one could see the underlying truth being illustrated for the errors that trigger their pet peeves.
If any asks, I’ll write it here again.