Monday 15 October 2018

Taxes don’t fund public spending?


MMT has suddenly become much more popular and widely recognised in the last three months or so. The recent converts and some of the old timers keep banging on about the MMT claim that taxes don’t fund public spending: rather, governments simply print / create money and spend it, then they collect whatever amount of tax is needed to control the resulting inflation.

The truth is that that is just ONE WAY of looking at it. Another equally valid way of looking at it, is the more traditional way, namely that governments aim to have taxes fund public spending, and they then ideally run whatever deficit is needed to maximise numbers employed without bring excess inflation. Indeed the latter way of looking at is the way Keynes “looked at it” for what that’s worth, the MMT can almost be defined as Keynes writ large.

However, the above first way of looking at it is certainly a useful mental exercise: it’s a particularly useful exercise for the more clueless members of the economics profession. That’s the members of the profession who suffer from “debt-phobia” and “deficit-phobia”, or “mediamacro” as Simon Wren-Lewis calls it.

In short, I don’t think the above first “taxes don’t fund public spending” is a big insight. At least it’s not an insight of the same importance as the demolition of “fiscal space” idea (popular in IMF circles) which various MMTers have set out. E.g. see this “Billyblog” article, and one of my articles on the subject.




6 comments:

  1. MMT also says that the purposes of taxes is to create unemployment. The government can then employ the unemployed without causing inflation.

    Another way of looking at it...

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  2. The MMT is not a monetary theory but an political movement of the International Left with a communist agenda. I'd like to know how they get financed.

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    1. I look forward to you producing some evidence to support that bizarre theory.

      Re financing, MMTers are to a significant extent just private individuals who are financed by no one. That applies to me and Mike Norman Economics for example - not that running this blog of mine actually costs anything in terms of money, though it does absorb time. In contrast, some MMTers are university based, e.g. the Levy Institute and Bill Mitchell who is an academic.

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  3. MMT at least in Europe is defended by intellectuals from the left and from the communist party. Indeed, they propose that it should be the responsibility of the government the creation of jobs for everybody. They want a massive intervention of the government in the economy, control the companies, jobs and wages. One important speaker of MMT said clearly in the radio recently. MMT is only a tool in their wider agenda.

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    1. I agree that MMT policy does have a leftward slant, but I’ve never noticed any actual self-confessed communists backing MMT. That leftward slant is partially because economists in my experience are COMPLETELY HOPELESS at distinguishing between economics and politics. For example MMTers often claim that stimulus should come in the form of more public spending, where they should say it should come in the form of more public spending or more private spending (i.e. in the form of tax cuts). Personally, and speaking as an MMTer I’m always careful to be politically neutral on that point.

      Also MMTers tend to support the Job Guarantee and JG is often advocated in the form of public sector type work (regardless of whether the JG advocates are MMTers or not). There again, I have devoted a lot of effort to arguing that JG employees should be allocated to private sector employers as much as to public sector employers (if JG is worth doing at all, which is debatable).

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  4. Eduardo Garzón is a communist economist, brother of the leader of the communist party in Spain (Izquierda Unida) and perhaps the next minister of economy if the extreme left Podemos wins the elections, although that is not probable. In Spain the public stimulus through tax cuts in not considered at all. MMT is all about the government creating money to grab a bigger part in the economy, make companies public and create public jobs.

    I find your discourse abot MMT reasonable and clear, even when I don't agree. And you also defend some key ideas of Positive Money and full reserve banking (ideas that I like). That makes you a non standard MMTer, at least compared with the ones I read here in Spain.

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