Taxpayers do not fund anything

At times some document from the past is discovered that no-one much has read or paid any attention to but which offers fundamental insights into the options facing governments operating a monetary system based on a fiat currency. We have available now one such document which I will discuss in some detail. The essential insight can be summarised by the title of the blog – taxpayers do not fund anything. So when you hear commentators and politicians and the like use terms like “taxpayers’ funds are being mis-spent” etc, you can immediately conclude they do not understand how the monetary system functions. At that point, it is advisable to ignore what they have to say – given it is likely to be erroneous as a result of the initial false premises. The problem is that the public policy debate is largely based on these false premises. As a result, the policy positions that emerge are typically inferior and in many cases extremely damaging to the fortunes of the disadvantaged.

Two news stories over the weekend were interesting demonstrations of how ill-informed the policy debate is in the UK. And the debate in the UK is just a replica of the debate that is being conducted everywhere.

Statements are continually being made by economists and others about important matters of public policy which are based on outrageously incorrect premises about how the monetary system operates and the opportunities that system provides to government policy choice.

While it is heartening to see Goldman Sachs now being pursued in the courts (how long did that take?), my choice of target for prosecution would be my professional peers in economics who should be charged with torturing the minds of our youth with lies and ideology made to look like eternal truths.

On Thursday (April 15, 2010), 77 economists wrote a letter to the UK Times saying:

As expected, a key election issue concerns how much to cut government expenditure in 2010/11. The main opposition party now proposes to cut an extra £6 billion in 2010/11, on top of the measures already planned by the government. This cut is described as efficiency savings. But in macroeconomic terms it is just a cut by another name. It will lead directly to job losses and indirectly to further falls in spending through the standard multiplier process. At a time when recovery is delicate, it could even affect confidence to the degree that we are tipped back into recession – with much larger job consequences.

This is not the time for such a destabilising action. The recovery is still fragile. Firms and households are saving more to rebuild their balance sheets. This means that firms are investing less and households are spending less. Only when the recovery is well underway, will it be safe to have extra cuts in government expenditure.

The first step is to make sure that growth returns, and thus that tax receipts recover. Rash action now could imperil not only jobs but also the prospects for reducing the deficit.

While many of the 77 economists are mainstreamers who have helped to perpetuate the NAIRU myth (for example, Lord Layard) over the years and contributed to supply-side policy developments (for example, the OECD Jobs Study) which have damaged the life prospects of millions by prolonging unemployment, others among the 77 are leading Post Keynesians. Again, it is another demonstration of the enemy within

Predictably, the letter was reported as providing a boost to the current UK government (Source).

As you read the text you will probably find yourself nodding in agreement. But the underlying tenor of the letter is orthodox. They are expounding a deficit dove line that old-style Keynesians follow. While they argue that tax revenues “funds spending” they are not loathe to see governments use deficits sometimes. They worry about public debt issuance and totally fail to understand why it is issued. To tell them when deficits are sustainable they have nonsensical rules about stable public debt-GDP ratios. They think that these rules, if followed, will limit the size of the deficit – or so they think.

So “deficit doves” think deficits are fine as long as you wind them back over the cycle (and offset them with surpluses to average out to zero) and keep the public debt-GDP ratio in line with the ratio of the real interest rate to output growth. Torturous formulas are provided to students on all of this under the presumption that the government faces a financing constraint and as long as it is cautious things will be fine.

The point is that deficit-doves are essentially no different to the mainstream in perpetuating myths about the way the monetary system operates. The letter has all the deficit-dove hallmarks.

=> Now is not the time to cut but later will be.

=> Wait for recovery and then cut government spending.

=> Wait for tax revenue to rise then cut.

=> Cutting too early will increase the deficit which is a bad thing.

You will see all of those sentiments expressed in the letter. From the perspective of Modern Monetary Theory (MMT), none of the sentiments is of any applicability to a fiat currency-issuing government.

You might say that MMT would consider cutting too early to be a bad thing. That is certainly the case but the point is that it is the underlying sentiment that is misplaced and inapplicable. Cutting too early but having to cut later because you have to balance over the cycle is the erroneous sentiment that is rejected by MMT.

The overwhelming anxiety of the doves is that a government can live on the “wild side” (deficits) for a finite period only and then have to cut net spending and achieve surpluses during the other times. There is a constant level of anxiety underlying the positions offered by the doves.

They know that deficits help underpin demand and employment but are in fear of their inflationary consequences and also consider high public debt ratios to be dangerous and indicative of higher future tax rates. Doves think that governments are financially constrained.

MMT doesn’t offer an opinion about public deficits in this way. MMT considers them to be endogenously generated by non-government spending (and hence saving desires) and have to be whatever is necessary to underpin aggregate demand to achieve adequate employment growth. The goal is not a particular deficit position but other more important indicators of socio-economic well-being – for example, full employment.

Whether the budget deficit required to achieve full employment is 1 per cent of GDP or 10 per cent of GDP is immaterial to MMT. The differing scales just signal differences in non-government spending behaviour.

But a deficit-dove clearly sees a limit on the size of the deficit relative to the economy and current proportions are seen as needing attention. MMT also sees a limit on the deficit to GDP ratio – 100 per cent!

So while these 77 economists are trying to appear reasonable they miss the boat as badly as the more extreme mainstream economists.

Another glaring example of how economists get it wrong is found in the recent report from the UK-based Institute of Fiscal Studies, which was reported in the Guardian on April 18, 2010 as saying Chancellor Brown left public finances “ill-prepared for the crunch”. I plan to write a separate blog about the logic contained in this report.

The Guardian was content to just pass on the myths contained in the Report to its readers. So we read that:

IFS says Gordon Brown as Chancellor fell short of efforts by other industrialised nations to cut government debt … Gordon Brown put Britain’s public finances in a better shape in the run-up to the credit crunch than the Tories managed prior to the recession of the early 1990s, but he fell short of efforts by other industrialised nations to cut government debt and left the UK in a weak position to handle the fallout from the financial crisis, according to the Institute of Fiscal Studies.

The IFS is described by the Guardian as a thinktank (although not much thinking of substance seems to go on there given the poverty of reasoning contained in the Report) admitted evidence from the Office for National Statistics showed that “public services have improved considerably over the period from 1997 to 2007 with measured outputs suggesting a one third increase in the quantity and quality of public services” as a result of deficit spending.

But their main emphasis is that the “high debt levels going into crisis meant the UK would have one of the weakest fiscal positions in 2010 after a deterioration in public finances only exceeded by Ireland and Iceland over the past three years”.

The IFS said that:

Most OECD governments did more to reduce their structural deficit during the period from 1997 to 2007 than Labour did. This fiscal position formed the backdrop to the financial crisis …

To which I would add the sentences: However most OECD governments in slashing their deficits in a headlong, obsessive pursuit of surpluses also maintained higher unemployment rates and lower levels (quantity and quality) of public service delivery as a result. The UK government achieved far better outcomes as a consequence of their fiscal strategy in terms of indicators that matter (employment, etc) than the governments which were intent on abandoning their fiscal responsibility.

But the main point that you should take away from this is the nonsensical notion that past fiscal stances can in some way inhibit or constrain the capacity of a currency-issuing government to implement whatever fiscal policy choices they deem fit now. That belief is a myth and underpins much of the deficit-dove and mainstream thinking.

To be clear: a government which runs a surplus or deficit budget position last year (or for longer) is in a no better or worse position to run a deficit now should it deem that necessary.

For a start, the endogeneity of the fiscal position (driven by the automatic stabilisers) promotes swings in the balance as private spending fluctuates. This provides some counter-stabilising aggregate demand flows. But, in addition to those flows, a currency-issuing government can choose whatever level of discretionary net spending that they want.

Running surpluses in the past does not provide the government with any extra capacity to spend. In the same way, running large deficits in the past does not reduce the capacity of the government to spend and maintain those large deficits. Whatever large means anyway!

The UK government had exactly the same capacity to meet the economic crisis head-on with a properly-scaled fiscal intervention as any other sovereign currency-issuing government. That is, they all had an unlimited financial capacity.

The limitations on fiscal policy are all real. The government can only purchase what real goods and services are available for sale. Further, when there is strong private demand for these resources, the government’s bid can drive prices up.

But with nations all around the globe facing a depression, the government was unlikely to be competing for resources with non-government demand.

Taxes for revenue are obsolete

As noted in the introduction, sometimes a document emerges that categorically exposes all these myths that economists perpetuate. Unfortunately, these documents get very little attention when they were originally published and then lie buried somewhere as the mainstream economists continue with business as usual.

In the last year of World War II, the then Chairman of the Federal Reserve Bank of New York, one Beardsley Ruml addressed the American Bar Association.

You can access Guide to the Beardsley Ruml Papers 1917-1960 at the University of Chicago Library.

Historical records suggest the speech was a non-event and “attracted then less attention than it deserved”. In January 1946, the speech was published in the periodical American Affairs and you can see the full text HERE.

The title of the speech (and article) was Taxes for revenue are obsolete and I bolded this to make sure it resonated in your consciousness for a little time. Read it again – taxes for revenue are obsolete.

The Editor of American Affairs at the time wrote that Ruml’s:

… thesis is that given (1) control of a central banking system and (2) an inconvertible currency, a sovereign national government is finally free of money worries and need no longer levy taxes for the purpose of providing itself with revenue. All taxation, therefore, should be regarded from the point of view of social and economic consequences. The paragraph that embodies this idea will be found italicized in the text. Mr. Ruml does not say precisely how in that case the government would pay its own bills. One may assume that it would either shave its expenses out of the proceeds of taxes levied for social and economic ends or print the money it needs. The point may be academic. The latter end of his paper is devoted to an argument against taxing corporation profits.

Ruml was writing at the time after the gold standard had broken down and before the Bretton Woods agreement which re-restablished currency convertibility and fixed exchange rates. Ruml, himself, was a major player at the BW conference.

But in 1945, the US was a sovereign currency-issuing nation as it is today! The intervening years saw world governments voluntarily cede this sovereignty to the fixed exchange rate system outlined in the Bretton Wood agreement which collapsed, finally, in 1971.

The main political intent of Ruml’s speech was to make a case that taxation is bad for business which is certainly not a central MMT perspective. But Ruml makes his case by arguing that if a government doesn’t need to tax to spend and when it taxes it hurts business then why would the government levy taxes.

So there are several propositions that are linked but separable.

This is how Ruml started to make his case:

The superior position of public government over private business is nowhere more clearly evident than in government’s power to tax business. Business gets its many rule-making powers from public government. Public government sets the limits to the exercise of these rule-making powers of business, and protects the freedom of business operations within this area of authority. Taxation is one of the limitations placed by government on the power of business to do what it pleases.

There is nothing reprehensible about this procedure. The business that is taxed is not a creature of flesh and blood, it is not a citizen. It has no voice in how it shall be governed — nor should it. The issues in the taxation of business are not moral issues, but are questions of practical effect: What will get the best results? How should business be taxed so that business will make its greatest contribution to the common good?

It is sometimes instructive when faced with alternatives to ask the underlying question. If we are to understand the problems involved in the taxation of business, we must first ask: “Why does the government need to tax at all?” This seems to be a simple question, but, as is the case with simple questions, the obvious answer is likely to be a superficial one. The obvious answer is, of course, that taxes provide the revenue which the government needs in order to pay its bills.

First, you understand that taxation is a way that government imposes limits on the non-government sector. Ruml is specifically interested in the busines sector but the argument generalises to all non-government entities.

Second, you also glean from the text that the question that needs to be asked in relation to some policy choice that imposes limitations on the non-government sector – is what “will make its greatest contribution to the common good”? In MMT we talk about advancing public purpose as the fundamental goal that should inform public policy choices. The correspondence between this concept and common good is close.

Third, are these limitations necessary? “Why does the government need to tax at all?” The superficial answer presented is the underlying claim of mainstream (and intuitive) thinking with regard to the purpose of taxation. But like all superfical appearances they are bound to be wrong. The point is that taxes do not “provide the revenue which the government needs in order to pay its bills”.

Ruml then continued to outline how governments could historically spend more than they received in tax revenue by borrowing. He says that borrowing “is an alternative which governments use to supplement the revenues from taxation in order to obtain the necessary means for the payment of their bills.” But:

… if a government persisted in borrowing heavily to cover its expenditures, interest rates would get higher and higher, and greater and greater inducements would have to be offered by the government to the lenders. These governments finally found that the only way they could maintain both their sovereign independence and their solvency was to tax heavily enough to meet a substantial part of their financial needs, and to be prepared —if placed under undue pressure — to tax to meet them all.

So at this stage you will be thinking what is Bill quoting this guy for – all this sounds very mainstream – crowding out; increasing debt forcing taxes up in the future and the rest of it.

But then you will see what is going on by the next passage:

The necessity for a government to tax in order to maintain both its independence and its solvency is true for state and local governments, but it is not true for a national government.

And the penny drops! State and local governments are similar to a household in the sense they face financial constraints on their spending. They have to raise funds before they can spend. Sure enough, state and local governments have a taxing power that households do not possess. But this is a matter of degree not form.

But a national government is unique in a fiat currency monetary system. Ruml considers two developments to that point (in the last 25 years) had “substantially altered the position of the national state with respect to the financing of its current requirements”.

Final freedom from the domestic money market exists for every sovereign national state where there exists an institution which functions in the manner of a modern central bank, and whose currency is not convertible into gold or into some other commodity.

The United States is a national state which has a central banking system, the Federal Reserve System, and whose currency, for domestic purposes, is not convertible into any commodity. It follows that our Federal Government has final freedom from the money market in meeting its financial requirements. Accordingly, the inevitable social and economic consequences of any and all taxes have now become the prime consideration in the imposition of taxes. In general, it may be said that since all taxes have consequences of a social and economic character, the government should look to these consequences in formulating its tax policy. All federal taxes must meet the test of public policy and practical effect. The public purpose which is served should never be obscured in a tax program under the mask of raising revenue.

So that statement is as clear as you will get and totally consistent with the fundamental insights offered by MMT. When there is no currency convertibility and exchange rates are flexible, then the central bank has total liberty to create financial assets (money) and the federal government is totally free from any financing constraints.

Please read my blog – Who is in charge? – for more discussion on this point.

So this raises the question: if the government is not financially constrained then why does it impose taxes (especially if they are bad for growth etc)?

Ruml offers four insights into the purpose of taxation:

Federal taxes can be made to serve four principal purposes of a social and economic character. These purposes are:

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

2. To express public policy in the distribution of wealth and of income, as in the case of the progressive income and estate taxes;

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

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

Purpose 1 is about inflation control. A fundamental principle of MMT is that the imposition of taxes allows the government to manage the state of aggregate demand. So if nominal demand is outpacing the capacity of the economy to respond in real output terms then tax rises withdraw non-government purchasing power from the expenditure system and reduce the multiplier.

Ruml says that “(i)f federal taxes are insufficient or of the wrong kind, the purchasing power in the hands of the public is likely to be greater than the output of goods and services with which this purchasing demand can be satisfied. If the demand becomes too great, the result will be a rise in prices, and there will be no proportionate increase in the quantity of things for sale. This will mean … inflation. On the other hand, if federal taxes are too heavy or are of the wrong kind, effective purchasing power in the hands of the public will be insufficient to take from the producers of goods and services all the things these producers would like to make. This will mean widespread unemployment.”

Purpose 2 is about redistribution and the point is obvious. Purpose 3 is obvious.

Purpose 4 is awkwardly expressed because it invokes the superficial logic. But it is actually about hypothecated spending. The argument is that politically contentious spending should be transparent. Taxes are, in fact, “demand drains” and so reduce the capacity of the non-government sector to spend. In this sense, the transparency allows the non-government sector to see exactly what “demand injection”(say highway spending) is replacing the command on resources that households and firms would have had in the absence of the taxes. It has nothing to do with the taxes funding anything. Just a $-for-$ matching to help expose the opportunity cost.

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

Ruml then outlines the notion of public purpose:

In the recent past, we have used our federal tax program consciously for each of these purposes. In serving these purposes, the tax program is a means to an end. The purposes themselves are matters of basic national policy which should be established, in the first instance, independently of any national tax program.

Again, nothing could be clearer. National policy priorities are the central question. Then the taxation serves as part of an overall functional finance policy package to advance these goals as best as the government can. For Ruml “(t)he tax program should be devised as an instrument, and it should be judged by how well it serves its purpose”.


This speech as delivered in 1945 as the US economy was in transition between the gold standard and the Bretton Woods system. In other words, the US government has much the same currency sovereignty that it enjoys today.

The insights provided by Ruml accord with the essential principles outlined by MMT.

They are totally at odds with the intuitive logic applied by the person in the street and the lies expounded in mainstream macroeconomics textbooks.

Taxpayers do not fund anything. They just lose or gain purchasing powere as the national government manipulates the policy parameters in search of public purpose. The fact the government doesn’t achieve desirable outcomes (through incompetence etc) is not the point.

The Fiscal Sustainability Teach-In and Counter-Conference Update

I mentioned that a group has formed in the US to promote MMT and the first event is a conference on fiscal sustainability on April 28, 2010 in Washington DC to rival the sham conference exploring the same topic which is being sponsored by the Peter Peterson organisation.

You can see Update with program etc.

The conference Home Page also information about purpose etc.

If you are near to Washington DC and have the means it would be great to meet you next week. As soon as a venue is confirmed I will post more details.

That is enough for today!

This Post Has 38 Comments

  1. Just an idea:

    Japan is the country with the largest debt to GDP ratio
    … (do not know which one but lets say Australia) is the country with the lowest debt to GDP ratio

    Does Japan have a lower capacity to spend fiscally in own currency than Australia? No and from political standpoint Japan probably has greater capacity to spend fiscally than Australia.

    Maybe it could be used in discussions about debt if properly worded. By a native speaker 🙂

  2. Bill: The IFS is described by the Guardian as a thinktank (although not much thinking of substance seems to go on there given the poverty of reasoning contained in the Report)

    Let’s just call a spade a spade. Most “think tanks” are part of a propaganda apparatus used to give credibility to disinformation that supports interests. Generally, investigation of their funding sources and connections of their principals reveals the interests involved.

  3. Remembering the Peso and Lira from the 70s and 80s with the long strings of zeros after the denominating digit, as someone not trained in economics and no doubt indoctrinated to the status quo, I have a little trouble with the implication of much of what I’ve read as I’ve followed this blog for the last several months.

    Much above and in the months before implies that in a fiat currency system there is no constraint on government debt. Is this true and if so how does the system maintain credibility, or am I misinterpreting your position?

    Those memories of old Mexican and Italian bank notes are filed right next to memories of collapse and gross miss-governance in those countries, but all observed in ignorance of MMT. Thank you in advance if you can find the time to respond.

  4. John,

    I’m not the expert on MMT here and I’m sure the experts will jump upon your question. My 2 cents in regard to “how does the system maintain credibility?”. I’m assuming you’re coerced by your government to pay taxes? Most probable in the currency your government issues – i.e. US$? Thus there’s only one way to comply: you need to get somehow some green paper. Otherwise … all the gold in the world won’t help. Uncle Sam does not accept it. In regard to the implications of MMT there’s a lot to say. For us in Europe I think the following link from Greece speeks for itself, what happens if you’re caught up in some lunatic monetary arrangements:

  5. Thanks Stephan,
    Perhaps it is the depths of my indoctrination, but I’ve come to rather enjoy the water, roads and police protection as well as the scale of economy and concomitant standard of living that my multiple and hierarchical governments provide me. Sure I’ve got issues with our imperialist bent, but that is sort of the point of my question.

    If there is not some real constraint on government debt, we can finance our most deleterious tendencies ad infinitum. Neocons summarize those tendencies to be the appurtenances of of the welfare state where I see them as those of empire. I don’t see how you can have an open ended funding system for one without it being equally available for the other. It may be that MMT is simply stating that these are political and not economic issues, an idea to which I’m open, but if it is true I’m exceedingly baffled as to why Neocons aren’t entirely on board with MMT: is this what Dick Cheney meant by “deficits don’t mater”?

  6. John,

    Again not the expert on the issue. But you can only purchase what’s on the market. This is a hard lesson the Spanish Crown learned already in the 16th and 17th century. You can have the biggest silver mining (Potosi, now in Bolivia) at your disposal and ship tons of the stuff to the homeland and still you can’t buy victory. The limit on government spending is the real output it can purchase from the private sector without causing inflation. The Spaniards bought inflation. And lost to the Dutch, who ironically waged their war on debt based on IOU without recourse to silver and gold.

  7. “Taxpayers do not fund anything. They just lose or gain purchasing powere as the national government manipulates the policy parameters in search of public purpose”

    hi bill,

    but this is the poblem, in that the political process has a considerable degree of inertia built into it in terms of raising taxation when required, and so we have this miss guided attemp to control aggregate demand through monetary policy and all its pervers distributional impacts.

    dont get me wrong , im a convert when it comes to mmt, but i seem to recall looking into treasury white papers from the late 80’s early 90’s many years ago when keating had his obsession about the current account deficit, and the tenor of treasury policy recommendations where in favour of raising taxes not interest rates. and guess what , the government chose not to raise taxes, no surprises their,

    not that raising interest rates arent going to lose you an election, john howard can attest to that.

    given that our current policy obsession is with controling inflation, i suppose the challenge for mmt is to put together a detailed policy framework that adresses the whole issue of how a taxation regime would operate under mmt. i presume ELR(employer of last resort) would be a fundamental plank of such a regime as far as controlling the inflationary pressures in the economy.

    but exactly how would mmt dynamically adjust taxation policy given changing circumstances, outside of just imposing ELR. so as an self actualising exercise how would you re constitute the tax act and taxation policy.

    forgive me if these laymen questions border on the bleedin obvious, because you may have addressed these issues in some detail elsewhere, and i would be greatfull to be pointed in the right direction.

    great post as usual, and all the best

  8. i was going to add,

    so much of taxation is about symbolism and not about what actually works.

    reward and punishment based on the predelictions and prejudices of the particular group of zealots who walk the corridors of power at the time. so public good or purpose can mean whatever hair brained sceme thought to be politically advantageous at the time.

    so whilst it may be a good idea to raise property taxes and lower other transactional taxes, the chances of it happening in a real estate mad nation like ours are virtually zero until we have our little cathartic moment with our property market.

    mmt has some considerable political hurdles to jump

  9. Several points.

    1. As I have mentioned before in comments to this blog, taxation can act as a means to restrain excessive behavior as speculation and overconsumption as in purpose nos. 1,3 in addition to distributional/allocational effects.

    2. As far as inflation is concerned, it depends on the source of inflation. If it is the result of excessive demand, taxing consumption and public spending automatic stabilizers can help. However, in cases of stagflation and structural inefficiencies/inadequacies as in small non diversified economies, dependent on strategic materials, automatic deficit spending imposes inflation from supply bottlenecks and currency devaluation. In order for public deficit spending to be effective, it must be discretionary(horizontal) directed in projects of infrastructrure, alternative technologies/innovative practices, human capital development and skill training. You cannot base MMT analysis only on large and developed economies

  10. John, You mentioned constaints on govt debt. One thing Bill teaches in MMT is govt debt is the private sector’s desire to net save. The following example is simplistic but makes the point. If the govt spends X amount of money and the recipient of that money then spends 100% of the money, it becomes income to someone which the govt taxes. If each recepient spends 100% of their income and the govt collects a certain percent in taxes, the govt will eventually collect back all of the original X amount. The number of transactions to collect all the money back will be based on the tax rate, but eventually all the money is returned to the govt. Now try the same exercise again, only this time each recipient pockets (saves) 10% of their income. You will find the govt will collect back all the money except what the private sector desired to save (pocketed).
    Again, this is simplistic and can take years to eventually play out. But it demonstrates that govt spending and tax policy does not determine the size of the national debt, the public’s desire to net save does. At least this is my understanding and hopefully Bill will correct me if I am off base on this.

  11. Hi Bill,

    Would you agree or disagree with the following statement:

    “Over the long term (averaged over multiple business cycles), it’s reasonable to expect government debt and GDP to follow the same growth trend, and thus to maintain an approximately constant ratio.”

    My thinking here is that money/govt securities fulfill a role as a store of value, and it’s reasonable to expect that the desire for stored value would fluctuate over the business cycle, but in the long run would scale with overall economic activity.

  12. Inflation should neither be targeted let alone even mentioned until everyone who wants a job has a job.

    Neo-liberals always worry about inflation and yet you never see the bastards knock back pay increases for themselves that are above and beyond any change in the CPI or indeed their own productivity.

    cheers, Alan

  13. @John,
    “why Neocons aren’t entirely on board with MMT: is this what Dick Cheney meant by “deficits don’t mater”?”

    I think you are on to it here. Back in 2008, when the US economy was starting to show sputter in 1Q, the Bush Admin went to the tax cut playbook. I was following it closely. they floated typical “supply side” ideas like accelerated depreication, addl section 179 expensing, modifying withholdings (like they had done severalyears before), combination of all, etc.. There was all of this talk and it looked like things started to bog down after several weeks of discussion. When all of a sudden the Whitehouse came out with the edict that they were going to rebate $165B in $650 checks to most all taxpayers as fast as the IRS could print and mail them. To me, it was if one day someone wlked into a Whitehouse meeting and said “enough of this bs already, just send out some gd checks we have an election in several months!” I think this was Dick Cheney. I think he understands the true nature of debt/deficits/etc…he’s basically in paradigm (with Laffer whom I think Warren M. converted). the tragic thing is he is playing pure politics with this now as he believes that in 2010 Nov elections, the “fiscal conservative” position will get the GOP many seats in both houses. Not until after the elections, if the GOP takes both houses, will Cheney (as GOP patriarch) be approachable on a major policy shift for GOP that officially adapts to the MMT framework and showcases major tax cuts, maybe not even then if he thinks it better to take the current policy of “fiscal conservative” into the 2012 elections. Sad.


  14. John

    Regarding Dick Cheney and his comments, this is exactly what he meant. Cheney understands these truths Bill talks about here because he was there when Art Laffer drew his infamous curve on the back of a napkin during the Reagan years. Art Laffer is someone who has worked with Warren Mosler in the past so he knows this stuff. Trouble with Cheney and Laffer is that they are political hacks who talk out the other side of their mouths when out of power. As Bill has pointed out often MMT is non ideological. It simply describes the mechanics of spending not what you should do with it.
    Using MMT principles you can build a war mongering empire that leaves workers in its wake (sounds like the US) or you can fully fund a job guarantee program. Try the latter and everyone who wants the former will scream about the deficits.

  15. OOPS sorry Matt!!

    You addressed the Cheney question right before me. Damn my hunt and peck typing!!

  16. ” Inflation should neither be targeted let alone even mentioned until everyone who wants a job has a job”

    agree with your sentiments alan,

    my apologies if ive verbaled mmt, but i presume with ELR(employer of last resort) policies , mmt would argue we can do both, that is control inflation through government pricing power over labour and other resources, as well as maintain full employment.

  17. Dear Bill,

    MMT conference is a great idea!! Kind of a problem for me is the date, but I will try my best to attend this historic event.

  18. Greg, Matt, Mark & Stephan,
    Thanks, I’m getting the hang of this now. Essentially MMT is a good tool for a responsible government and a powerful lever for charlatans to wreak mayhem! If you don’t believe good government is possible you join (over here) Ron Paul, otherwise you vote progressive and pray to a god or gods you probably have doubts about.

  19. Re: “If you don’t believe good government is possible…”

    And that’s the crux of it. We are largely governed by predatory demagogues, charlatans, con-men, sociopaths–in a word, by knaves. How to keep the knaves out of government has perplexed men as far back as history records. How to control the ones that inevitably find their way in is almost as perplexing.

  20. Noticed ‘Taxpayers do not fund anything’ on Crikey Business 20 Apr. Is somebody waking up over there?

  21. jrbarch, it’s gonna happen, and there’s gonna be a Nobel for one or more of the MMT’ers down the line.

  22. Tom,

    The Nobel Prize in economics is not a true Nobel award and is in many respects a complete farce.

    Krugman was being banded about as a winner almost 20 years before he even won – and yet he’s done practically no empirical work of any note. Then there is John Hicks – the man responsible for bastardising Keynes.

    The Ponds Institute has more credibility (It’s a joke people – don’t google it).

  23. I would say that much like other economic theories, this MMT is going to be proven junk if/when put into practice.

    Printing money does not solve any budgetary problems, at least not in the long run. Because money or pieces or paper only have value if people have even slightest faith in them. If national governments started printing to pay their bill, those paper will lose value at a geometric rate. No faith means no exchange of papers for goods and services. I guess in that sense, governments won’t need to pay anything since people will likely get rid of the government and replace it with a system that engenders a modicum of faith in currency issued.

  24. It is in practice, they just don’t know it. And whose budgetary problems are you referring to? The government from the start puts you in the position as a debtor and you have to settle that debt by paying your taxes. And these pieces of paper are claims on wealth and since the government is the issuer of the currency , it has a claim on anything that is for sale.

    “Render unto Caesar the things which are Caesar’s, and unto God the things that are God’s”

  25. PCP,

    You are completely wrong .

    All money is created by the government / Central bank. That’s how a modern monetary system works. If you open your wallet and look at some of your cash it will probably tell you where the note came from. You will find it is from either a government / Central bank, or a mint of some description. But I am pretty sure it won’t come from a non-government resident or a household.

    The faith / demand for the governments fiat money is embodied in the fact that the government issuing the money demands that it is also the only legally accepted medium for paying taxes. If people were to loses faith then they would also have to default on their tax obligations and effectively risk large fines or indeed a spell in a prison.

    The tax system creates the need / demand for the governments otherwise worthless money because we need it to pay our taxes. To get ourselves some of this government created money we offer our goods or services to the government and they pay us. Come tax time we give some of it back and avoid being fined or going to jail for tax evasion.

    Very simple really.

    What you are discussing is a fantasy world created in mainstream economic textbooks to advocate the lies and deceptions of Neo-liberalism.

    You can disagree with how MMT wants to spend or distribute the money but when it comes to how the money is created they are 100% correct.

    cheers, Alan

  26. “To get ourselves some of this government created money we offer our goods or services to the government and they pay us. ”

    Is that a freudian slip, or is it a consequence of the theory that everybody is required to sell their stuff to the government?

    I don’t make pig iron what should I do? 😉

  27. Alan Dunn says:
    Friday, April 23, 2010 at 11:58


    I agree with one thing you said. The Nobel in economics is a joke and not in any way, shape or form equivalent to other Nobels (although the Peace prize is certainly giving the economics prize a run for its money these days).

    To your second point I would say that government creates debt, not money. There are no printing presses that create money. The government created paper is fungible and can be traded for things I want but if govt started printing more and more of it then I will have a problem b/c I won’t be able to trade it for what I want.

    Ultimately, wealth and money are independent of any social contracts. The junk created by government is completely dependent on social contracts and everyone honoring those contracts. I can’t believe folks are seriously talking about government just printing money. Didn’t enough countries try that already and failed to convince any economists that the idea is total junk?


  28. PCP.

    I looked back over my previous post and I still can’t find where I said the government creates money solely through the printing press.

    I think the term I used was money creation. I did not mention a printing press.

  29. PCP,

    You said:
    “I can’t believe folks are seriously talking about government just printing money. Didn’t enough countries try that already and failed to convince any economists that the idea is total junk?”

    You are comparing a gold standard / fixed exchange rate economic world with that of a modern money economy with flexible exchange rates and highly developed capital markets.

    Feel free to misquote me again if you like.

  30. Perhaps some of the difficulty in understanding MMT models is that idea that it could be put it into practice. MMT as with other models describes a system’s behavior. Fiat currency systems follow MMT stock and flow models because that’s how they work. A parallel in physics would be questioning whether we should implement the general theory of relativity.

  31. MMT doesn’t say that a gov should just “print money ” , it says that the gov is the source of money in the first place , tax does not create money , gov spending creates money and tax gives that money value .

    Of course the gov could in theory put that much money into circulation that we end up with hyperinflation , the reality is though that given our current unemployment rate the gov is not spending enough .

  32. I have been trying to work out why MMT fails to gain mainstream traction, in Australia one reason could be that the government has outsourced the creation of money to the banks by allowing them to loan out more money than they hold, they then charge interest at the same rate as on the money they loan out for which they do hold assets, all the interest on those “extra” loans is pure profit and a powerful incentive for their economists to muddy the waters and perpetrate the myths around the national economy. Those banks are a powerful lobby and financial supporter of both sides of politics in this country, the separation of political parties from the requirement to raise election funding is the obvious answer, and MMT refutes the arguments of costs against the public purse being prohibitive, where is the political will, has it all been bought and sold?

  33. It fascinates me that we go to such lengths to attempt to persuade people that tax dollars are not spent by the federal government, when anyone who has any understanding of the law will know it is not only true, it happens by operation of law.

    To explain;

    When a government spends on anything it creates two things:

    1. a credit to the supplier of the good or service provided
    2. a debit against the country (in other words, it treats money as a liability in its own books)

    When a government taxes (and assuming it is taxing the same supplier it paid money to), it creates two things:

    1. a debit (debt/liability) against the supplier
    2. a credit in favour of the country

    When any entity becomes both the creditor and debtor of any particular debt, by operation of law the debt is extinguished. For it is impossible for anyone to ‘own’ their own debt.

    Thus, taxes are destroyed (extinguished) by operation of merger.

    This will also explain why charities etc get tax exemptions..this does not happen because a government feels a moral duty to do so, it happens because a charity already holds its assets or resources in trust for the whole community – how can the government than ‘tax’ something which is to the communities credit already? They would be attempting to become creditors twice over the one resource – an impossibility


  34. Interesting. This supposed that taxation level is the only thing that determines whether people buy things. Call me naive , but I think how much someone is paid before taxes is a more determinative factor.

  35. Don’t ignore what the say because they are ignorant. Denounce what they say as an unpatriotic lie against the Republic.

  36. A number of MMT arguments are based on “the government must spend first”, and “tax removes money from the economy, effectively destroying that money”. My understanding is that it is the private banks that account for more than 90 percent of the money in the economy by making loans and that there is effectively very little control of this as “fractional reserve banking is a myth. Could someone please explain how this squares with the two arguments I refer to above. Thanks.

  37. I have continually struggled with the idea that taxes don’t fund anything.When the tax is removed from the taxpayers account that isn’t the end of the transaction. The reserves are returned via tax and loan accounts to the reserves of some bank or they are added to the balance in the treasury’s general account. That account can then be used to increase the reserves in some bank whether it be for a given social program or ultimately for the reserves that the bank may then use in creating loans that pass between banks. So when MMT says that taxes don’t fund anything I really don’t get it because apparently they do fund things. The return of someone’s tax revenues is not a one-sided transaction. I hope somebody can help me on this.

  38. You could look at this in light of the claim that for a proposition to be meaningful, its opposite also has to be meaningful. Think of a guy going around constantly snapping his fingers, he says, to keep the elephants away. If we ever find him asleep, not snapping his fingers, and there are still no elephants, we can judge that his habit is meaningless.
    We can see that in modern fiat economies, if a government wants to do something seriously enough, they will do it. *Lack* of tax revenue will not *de*fund this desired policy. They’ll get their business partner, the Central Bank, to cook up the necessary account balance.
    So even though you can tell a story about sufficient tax revenue accumulated in the General Account, and so on, it doesn’t make any difference.

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