Wednesday, December 29, 2010

From comments: Krugman is part of the problem

Thanks to winterspeak reader Peter for drawing my attention to this Krugman quote in the comments:
“The key thing to bear in mind is that for the world as a whole, spending equals income. If one group of people — those with excessive debts — is forced to cut spending to pay down its debts, one of two things must happen: either someone else must spend more, or world income will fall.”
Please look at your paycheck and see if what your employer spends on you equals your income. If the two are not the same, what accounts for the difference? Why did Krugman not notice this rather obvious elephant in the room and write something so obviously false? Why did Peter not catch it? What bearing (if any) does this have on thinking about aggregate demand in our current economic state? Does understanding MMT have anything to offer in this context?

So many questions!


Blogger Tom Hickey said...

Bill Mitchell calls "spending equals income" an "obvious fact."

"basic macroeconomic principle – spending equals income"


5:49 PM  
Blogger winterspeak said...

Tom: Forget what anyone else says. I assume you have a job -- look at your paycheck and see what your own lying eyes tell you. Is the amount your employer spends on you really what you end up earning?

8:00 PM  
Blogger Tom Hickey said...

Less withholding, of course. But is that what is meant?

I am not an economist, so I may have this wrong, but I thought that what is meant by the statement that spending = income is fundamental to Macro 101:

Y = C + I + G + (X-M) (sources)

Y + C + S + T (uses)

(I-S) + (G-T) + (X-M) = 0

where Y represent both national income and GDP

Am I not understanding this correctly?

8:38 PM  
Blogger winterspeak said...

Tom: Yes, I mean FICA. And you'll pay federal income taxes in a few months as well.

At the state level, taxes do fund spending, so in that case "spending equals income" -- except the income is split between the worker and the state.

But at the Federal level taxes do not fund spending, they just destroy net financial assets. So spending no longer equals income because of the vig.

9:24 PM  
Blogger Stephan said...

It is not clear to me what the problem is? The basic proposition spending is income holds for each period. And each period there's a leakage from the spending stream which are private saving decision, import expenditures and taxation. This is not exactly rocket science.

So if governments worldwide aspire to have balanced budgets - stupid as they are - there is at least no leakage due to taxation. The governments create as much new financial assets as they destroy via taxation. Imports are the exports of some other nation. The only remaining leakage to the spending which is someones income are the saving decisions of the private sector in general. If the worldwide saving rate is positive then due to the desire to balance the governments balance sheets income will fall.

4:35 AM  
Blogger JKH said...

Absolutely nothing wrong with that Krugman quote. It’s an accounting identity.

And it’s quite separate from the idea that “taxes don’t fund anything”.

That said, the notion that taxes “don’t fund anything” is one of the more dangerous siren calls of MMT. It’s basically the idea that a “currency issuer” can issue new liabilities (“currency” or debt) anytime - that’s all - without necessarily relying on “currency income” or “currency borrowing” to match inflows and outflows. This is fine as a matter of occasional observation, but it shouldn’t be treated as the holy grail of government balance sheet management.

In fact, the Krugman quote reflects the GDP identity that is essential to the derivation of the MMT sector financial balances model, and all the rest of MMT that follows. So don’t punish him for that.

Tom has correctly has correctly identified the potential contradiction when you carry this sort of thing about taxes not funding anything a step too far. You don’t have to look far to find it. Bill Mitchell’s latest blog:

“Yd ≡ Y – T

T is total tax revenue net of transfers (pensions etc). This is the government’s share of national income. So Y is pre-tax income and Yd is after tax income.”

So taxes are income (a “share of national income”) - according to Bill Mitchell, anyway.

That means taxes are part of the aggregate income that by identity balances with aggregate spending.

Perhaps you don’t consider Mitchell as MMT.

That would be news to him.

Taxes don’t fund anything” is a simplistic aphorism adopted by MMT as a characterization of what in fact is government balance sheet management.

It supposedly means that a currency issuer doesn’t have to “borrow” its own currency, and that it can issue its currency without operational limit.

At the same time, it implies, by dint of overkill, some level of contempt for internal management accounting, which is the discipline of keeping track of things.

Being a “currency issuer” is not a license for abandonment of accountability.

Given the widespread misinterpretation of fiat currency balance sheet mechanics, MMT views the totality of the government balance sheet as the critical focus, avoiding unnecessary constituent detail in the process.

E.g. this approach carries over to “inter-generational fallacy”. But some who understand a thing or two about both MMT and actuarial accounting might prefer refinement beyond the mantra that “taxes don’t fund anything”.

So please, all, just a little more finesse around “taxes don’t fund anything”. The income statement isn’t the enemy of the balance sheet – not even for a fiat currency issuer. Substituting some considered accounting relationships for rote repetition of the holy phrase would be refreshing. Otherwise, mass audience MEGO and lack of credibility will mostly be the continuing result, I’m afraid.

BTW, this incessant Krugman bashing by you and the MMT’ers is a loser. He really doesn’t need to cry uncle on “taxes don’t fund anything” in order to get a lot of things right. If you broke his fingers on this, it wouldn’t change much of what he has to say about deficit spending. Even MMT doesn’t sponsor the unwashed idea of unlimited deficits.

5:50 AM  
Blogger PEMPO said...

The state needs taxing to make its currency valuable. In that sense , taxes fund governments.

7:27 AM  
Blogger Tom Hickey said...

The MMT notion that taxation and borrowing are unnecessary to fund a monetarily sovereign government that is the monopoly provider of a nonconvertible floating rate currency is operational. Being the currency issuer, it simply provides the necessary funding without the necessity for raising revenue or borrowing. While political restraints may be imposed to mimic funding or borrowing, that does not alter the operational reality of the monetary system.

Why do MMT'ers harp on this? It is because a lot of pseudo-problems arise from the erroneous analogy of government finance being the same as household and firm finance when it is in fact the reverse — currency issuer v. currency users.

This misapprehension is used to justify theories, ideas, and proposals that are at odds with fact and often lead to untoward outcomes that are unnecessary, given the powers of government based on operational reality. When the president himself says that the country is running out of money, what to say other than this is a ridiculous claim on the face of it and one that betrays abject ignorance or over the top disingenuousness.

That said, according to the Chartalist view to which MMT'ers subscribe, taxes are necessary to give the currency value. But that does not translate into taxes are necessary for funding government in an operational/accounting sense.

The conclusion that I have come to regarding all this is that problems arise when ordinary language is used to express technical meaning. MMT approaches macro from the vantage of monetary operations and national accounts. "Income = spending" has a precise meaning in terms of accounting. It is the statement of an accounting identity — a tautology — as economists point out, not just MMT'ers.

Most of MMT involves accounting identities such as this, and stating them in ordinary language can be confusing to people who are not understanding the operational context, or who take them out of context. Then it can seem as though MMT'ers are overlooking the obvious, or saying stupid things when they are just stating tautologies.

But why are such tautologies significant at all, since they are truisms that add nothing substantive since they only articulate the notation? It is because appreciating them operationally is a requirement for understanding macro in terms of stock-flow consistent models based on national accounting, which is what MMT is about as a macroeconomic "theory." The thesis is that macro can be approached optimally in terms of SFC models based on national accounting that reflects operational reality, and this understanding reveals various policy options and their consequences, such as government and nongovernment cannot be simultaneously in surplus or in deficit, e.g., demonstrating that a balanced budget amendment is counterproductive and will not produce the intended effect of greater private sector growth.

Similarly with balancing the budget over the business cycle. Here is where MMT'ers go after Krugman as a deficit dove because he is lending support to the neoliberal idea that eventually social programs like SS and Medicare, being "unfunded obligations" beyond the ability of taxation and borrowing to fund, must be cut. This is already affecting expectations. A recent poll shows that many boomers expect that SS/Medicare will fail in their old age. MMT shows why there is operation necessity for this based on the bogus "unfunded obligations" argument when the federal government can always "afford" to purchase real resources that are available and this will not result in inflation as long as government manages aggregate demand relative to the capacity to produce real resources. But this involves real resources and political decisions about their distribution, not future "affordability" based on funding.

9:57 AM  
Blogger Greg said...

Well stated Tom

JKH: I would disagree with this;

"Given the widespread misinterpretation of fiat currency balance sheet mechanics, MMT views the totality of the government balance sheet as the critical focus, avoiding unnecessary constituent detail in the process."

I would say MMT views that real economic metrics like output gap and unemployment levels as the critical focus and not balance sheets. I agree that they emphasize understanding the totality of the balance sheet but in the end emphasize we should only be concerned about real economic factors. The balance sheet will simply reflect the private sectors desire to save or the foreign sectors desire to sell us stuff.

11:07 AM  
Blogger JKH said...


I agree with most of what you say.

However, I would not use the language of “operational reality” in the same way.

The current “operational reality” in my view is the system as it actually operates – with the “self imposed constraints” of bonds, no overdrafts, debt limits, etc.

“Operational alternative” is the language I would use to describe the potential for lifting these constraints.

I know MMT uses it as you do.

Has Krugman actually said that entitlements must be cut? I’d be interested to know. I’m less interested in how people misinterpret him otherwise.


I agree also.

My point was regarding macro as opposed to micro balance sheet analysis, not balance sheet analysis at the expense of the real economy considerations.

12:14 PM  
Blogger winterspeak said...

Tom/JKH: I'm not disputing the accounting identities, I'm calling attention to their interpretation. Krugman brought up the identity to argue "If one group of people — those with excessive debts — is forced to cut spending to pay down its debts, one of two things must happen: either someone else must spend more, or world income will fall." This just isn't true. There is also a rather clear option 3.

But Krugman is more of a politician than an economist these days and option 3 will never pass his lips as it is contrary to his agenda. I don't read him that often, maybe one of you can tell me how excited he is over the Obama tax plan?

Income to a currency issuer is not the same thing as income to a currency user.

9:21 PM  
Blogger STF said...


I prefer "general case" and "specific case." MMT isn't talking about an alternative as much as what is possible for all sovereign currencies--the general case--and then comparing it to how individual nations actually choose to function given a sovereign currency (or without one, as the case may be in Euroland, for instance). I think general/specific is really the essence of what MMT'ers at least believe they are getting at.

I do agree that the definition of "operational," as MMT'ers have used it, is completely of their/our own making, made more complicated by the fact that it was not made clear what it actually meant. That's why I attempted to do this a few months back at Naked Capitalism, and it also fit my own research focus on a consistent methodological approach (so I guess that's why the responsibility out of default seemed to fall to me). I would have preferred to begin with general/specific, rather than operational/self-imposed constraint, but it had already taken on a life of its own, unfortunately.

Scott Fullwiler

7:25 AM  
Blogger Tom Hickey said...

Krugman's NYT column today, The New Voodoo, is on tax cuts v. spending. I'ts a screed against what he sees as the hypocrisy of the GOP in asserting fiscal discipline to suppress spending while claiming that deficits don't matter when they result from cutting taxes. It's fun politically but economic it's a bit of a mess.

Shockingly, at the end of the column Krugman equates finances at the county level with federal. I was really surprised at that, unless he was just using it for rhetorical effect. I find it hard to believe he doesn't see the difference, especially when this has been pointed out so many times in the comments on his blog.

Krugman also neglects to say in his column that cutting taxes is equivalent to a comparable increase in spending with respect to the budgetary balance at the macro level, and that how to taxation and spending in formulating fiscal policy is both a political and economic issue. He takes a pretty consistent liberal position. But this column is not about economics, but rather hypocrisy.

Krugman doesn't mention it here but in other places he says that tax cuts for the wealthy are mostly saved and that there is a higher multiplier for spending than tax cuts at the top. Therefore, the preferable policy in the face of lagging demand and high unemployment would be the one which most quickly and effectively increases to effective demand. For him, tax cuts that will go mostly to the top tier are inefficient, "costing" much more than needed, whereas spending at the bottom is most efficient, i.e., more bang for the buck.

However, he says frequently that even though large deficits are needed at some points, like now, when the US is caught in a liquidity trap, eventually they have to be brought under control. He's pretty clear that serious people need to be "serious" about finances, and he seemingly buys in to the false federal finances are the same as household, firm, and US non-federal government finances. This places him among the deficit doves.

JKH asked about Krugman's position on cutting entitlements. He is a New Dealer and totally committed to preserving SS and Medicare. But like budget deficits from tax cuts or stimulus spending, he seems to think that they have eventually to be paid for. His beef is against what he calls "entitlements" for the rich, and he thinks that these are the "entitlements" that need to be addressed instead, and doing so would fix the New Deal programs.

In his view, draining the Clinton surplus that would have "paid for" SS was an example of entitlement for the rich. It was all down from there in his view. He even recommended that the Dems vote down the tax compromise if it contained an extension of the tax cuts for the top, apparently to recoup the surplus that he thinks W gave away to his cronies.

2:09 PM  
Blogger JKH said...


I much prefer “general case” to “operational reality”.


“Income to a currency issuer is not the same thing as income to a currency user.”

It’s the same.

The pertinent difference between the two lies in balance sheet capacity, not the definition of income.

At the end of the day, the balance sheet capacity of the “currency issuer” comes from its ability to run negative equity – which means to run cumulative deficits. The MMT core idea insofar as finance is concerned, I believe, is that this capacity is enhanced considerably by the ability to backstop the government’s bond issuance with central bank reserve issuance, as appropriate. It only takes a fiscal authority to authorize that type of reserve issuance capacity (by central bank charter, or by “emergency” legislation as is often implied but not stated directly on the blogs). Interestingly, the “no bonds” idea effectively transfers negative equity from the government’s balance sheet over to that of the central bank. The Eurozone problem is a variation on flexibility in engineering such a relationship from the original untenable architecture.

(The MMT notion of “currency issuer” is unnecessarily vague in itself from an operational perspective, in light of the persistent confusion that characterizes discussions of institutional arrangements – actual and potential – or general and specific as Scott might say. The currency issuer in current arrangements is the central bank; it is the consolidated state in consolidated arrangements.)

Meanwhile, income statement dynamics are the same between currency “issuers” and “users”. The fact that a currency issuer directly redeems its liabilities (e.g. reserves) as the accounting result from an event of cash inflow is neither here nor there. I do the same thing as a currency user when I use my income to reduce my credit card balance. It’s just that my credit card liability isn’t the medium of exchange. So what? That’s got nothing to do with any difference in the logic of income statement accounting. It does highlight a difference in the management of balance sheet assets and liabilities. Taxes are income (revenue really) to governments just as my pay cheque is to me. The differences are in the way balance sheets are managed – not income statements. The government’s capacity for liability issuance is related to balance sheet issues – not income statement ones. So let’s lose the idea that government income is different in any relevant way.


Krugman says:

“Now the federal government has a lot more flexibility than a county government.”

This isn’t wrong. The man shouldn’t have to lecture on net financial assets in order to note the contrast.

I’ll give you that he likes the word “control” applied to deficits.

But guess what? Randall Wray absolutely INSISTS on budget discipline. Check out those videos.

So I think there’s room to bring thinking of such people closer together, rather than drive them further apart, which sometimes appears to me to be a unilateral MMT “strategy”.

Krugman is very distribution oriented, and probably uses the idea of “limit” partly to get traction on the distribution issue.

But I repeat – MMT’ers do NOT advocate unlimited deficits. I know this.

So there’s room for ideological negotiation here, in my view.

(And I don’t think Galbraith bested Krugman in any significant way – certainly not in the sense of the Mosler “new dawn” interpretation.)

2:56 PM  
Blogger Tom Hickey said...

JKH, I agree that there should be no dispute about MMT'ers position on budgetary discipline. Everyone I have come across writing about this agrees that just because the federal government can create unlimited NFA doesn't mean that it should do so willy-nilly as critics seem to think. This got somewhat confused in the repartie between Krugman and Galbraith, I think. I don't think that Krugman really responded, but that was only my impression. Others may have seen something I didn't. I agree that Warren was premature in declaring a new dawn for Krugman at that time. Subsequent events show that he was not "converted" and did not back down, although he did qualify himself.

MMT'ers are clear that budgetary items need to be justified in terms of public purpose, and that accounting identities are far from all there is to it. MMT'ers as all Minskians, too. They are well aware of financial instability. So I think that to get involved in a pissing match over "fiscal discipline" is ill-advised. Everyone wants "fiscal discipline." The different parties just disagree over what this means. Really, that was the point of Krugman's screed today. There are some strange views of "fiscal discipline" out there.

But I think that Krugman and MMT'ers are pretty close. They just talk differently, and the objection of MMT'ers to Krugman's talk is that it is not correct operationally. But I think Krugman would probably respond that he is just operating in terms of the current political restraints. Here again, the need for MMT'ers to spell out the general and specific. I doubt Krugman would disagree. I think he might say that he is making enough waves publicly without getting all wonky on monetary economics, which is not his field anyway.

The way I see the kerfuffle between the MMT'ers (and I see it in myself) is with Krugman's apparent intransigeance in monetary economics. For whatever reason, he does not want to go there. He is well aware of it after Warren spent some time discussing it with him in St. Croix.

So, from the MMT perspective, a lot of what Krugman says gives aid to the enemy. For example, while he did mildly qualify his Nassau County example in The New Voodoo, the impression it leaves is that non-federal government finance is like government finance and "fiscal discipline" is essentially the same for both. Well, it is and it isn't. Of course, everyone has to be disciplined in spending, which is what opportunity cost is about. But the currency issuer and currency users operate with very different constraints. Krugman never really acknowledges this, let alone what it implies (if he has figured that out).

On the positive side, as a good liberal Krugman is definitely interested in distributional matters, and it goes beyond his politics to his Keynesianism. He sees things through the lens of effective demand, hence, distributed wealth and income. National prosperity is necessarily shared prosperity. In his view, extreme inequality is bad morally, politically, and economically, too. He has surely thought deeply on this.

Where Krugman perhaps differs most day to day from MMT'ers is in his preference for monetary policy over fiscal. He looks to the Fed instead of functional finance. But that's OK. There are a lot of things that Krugman and MMT'ers can agree about both economically and policy-wise, if only in taking on the extremes of neoliberalism.

6:42 PM  
Blogger STF said...

My problems with Krugman come down mostly to two things.

First, he's a political hack, even when I agree with him. He was warning of the dangers of deficits under Bush II, now changes his mind even when the deficits are 3x as big. He wrote a lot on what can be done by the cb during a liquidity trap back in the late 1990s regarding Japan largely based on New Consensus views of inflation expectations and real rates, but now says that won't work without admitting his mistake back then (which Jan Kregel pointed out very carefully at the time).

Second, he was very disingenuous in his debate with Jamie. Jamie was very careful to say that inflation was the cost of a deficit, and Paul responded as if Jamie had said the opposite. It's so tiring to have to defend MMT against that one, it was all the more exasperating to have someone of Krugman's stature and intelligence seemingly willfully misrepresent us.

That said, there is a lot of common ground, for sure, and some real differences on the edges. I would just suggest that those arguing for a less combative stance from MMT recognize that this sort of thing is a two-way street, and when he had the chance in his Jamie debate it was Krugman who didn't want to recognize the common ground and indeed essentially fabricated an enormous difference for his own purposes.

10:53 PM  
Blogger winterspeak said...

JKH: I understand what you are saying, but I would maintain that it is the very balance sheet capacity you focus on that makes "income" mean very different things to a currency issuer vs a currency user.

A glass of water means one thing to a thirsty man with no where else to go, and quite another thing to a thirsty man who also has his own well. But the glass of water, in and of itself, is the same.

Or, inventory in preparation for Christmas is very different from inventory left unsold after the holiday is over. But both are the same "inventory" sitting on the shelf.

You are free to differ, of course. This is a matter of perspectives, not facts (where we are agreed).

STF: I agree that Krugman is now a politician more than an economist. His view on the economy depends entirely on which party is in office. There is no reason why he, or any top tier academic economist, should stoop to humour MMT.

11:31 PM  
Blogger Ralph Musgrave said...

Winter, Re your final question (i.e. is MMT relevant?), I agree with JKH who says it is not. At least he said “it’s quite separate from the idea that “taxes don’t fund anything””.

My reason for agreeing with JKH is that Krugman is just referring to the process where a commercial bank makes a loan, which raises AD (in my view temporarily); then when the loan is repaid, AD dips temporarily. That process works regardless of whether the relevant government accepts or rejects MMT. So the latter is not relevant.

12:17 AM  
Blogger Peter Drubetskoy said...

Wait a second, winterspeak. Am I being stupid or isn't Krugman saying in his piece that at the time of lack of aggregate demand like now the government should step in and spend to fill the gap? In fact, in the very next paragraph he says:
So what should we be doing? First, governments should be spending while the private sector won’t, so that debtors can pay down their debts without perpetuating a global slump. Second, governments should be promoting widespread debt relief: reducing obligations to levels the debtors can handle is the fastest way to eliminate that debt overhang.
This sounds to me like it came from the mouth of an MMTer. Bill Mitchell could have wrote that (in fact, Bill has been quoting from this very same column).

6:24 PM  
Blogger winterspeak said...

Peter: I don't read Bill Mitchell any more, but it does not surprise me that he quotes from Krugman.

Krugman does say Govt should help fill the gap, but he keeps leaving out one major mechanism they have to do this (as detailed in this thread)

9:34 PM  
Blogger Greg said...


Why dont you read Mitchell anymore?

As an aside, there was a reference to a site in the comment section of one of Bills posts this week "Employment guarantees are better than income guarantees" that is run by a guy named AdamP who is a regular commenter at Nick Rowes site. The guy (Adam) has taken to calling Bill and YOU out in a couple of his posts recently. Calling MMTers misguided and ignorant of macro economics.

I'd like to see you comment at his site in his post which calls you out. He is mocking your reasoning in your recent post about inflations expectations. Maybe you could help to set him straight and reinforce your point on this, quite relevant and important, topic.

MMT is roundly criticized for not addressing inflation with its theories (wrongly so in my view) and maybe this is an opportunity to address this.

8:33 AM  
Blogger winterspeak said...


I'd rather not go into why I don't read Mitchell any more. If people find his writing worthwhile, more power to them.

In general, macroeconomists think MMT is wrong. MMT has not represented inside Academia in any meaningful way and is very much a fringe idea. The group it threatens most is Austrians, actually.

Nick Rowe was very generous in coming to winterspeak and saying that orthodox macro models have people buying luxury items when their nest eggs are about to evaporate. Andy Harless has a similar comment where he blames people who save money for our overleveraged economy -- presumably working from the assumption that the more in debt you are, the less you need money.

I have no idea how to make inroads in the academy, but I can take positions like these straight from the orthodox horses mouth and let people make up their own minds.

Finally, the inflation issue is kind of interesting because I have not seen a robust discussion of what optimal tax policy would like look from an MMT perspective. We may be trying to maximize dead weight loss. Weird, huh?

10:14 AM  
Blogger Peter Drubetskoy said...

Re: optimal tax policy, but I was wondering whether it would be correct to state that MMT sees a certain duality between taxation and inflation. They are almost a mirror image of one another, with inflation just a tax on everybody caused by taxation not being big enough relative to the size of government (spending). I guess another big difference (besides indiscriminate nature of inflation) is that inflations have a tendency of reinforcing themselves. I guess you, winterspeak, loath taxation and prefer to downsize government if inflation occurs, which might be where you part ways (at least to some extent) with Bill Mitchell. I also guess the fact that taxation can be a social engineering tool is what bothers you the most (hence your annoyance with Krugman; it's not that he doesn't understand MMT, but he'd like to use the knowledge to achieve a social agenda that you oppose.)

8:02 PM  
Blogger Peter Drubetskoy said...

Just to correct myself, to say that inflation is "indiscriminate" is wrong, since there will be always be people who net-benefit from it too.

8:33 PM  
Blogger winterspeak said...

Peter: Taxation is a reduction of private sector net financial assets. Inflation is when desire to hold net financial assets exceeds the production of real goods and services. Not sure I would call this a "duality".

And I do not loathe taxation, nor would I necessarily prefer to downsize government if inflation occurs.

I am annoyed with Krugman for many reasons. And he most assuredly *doesn't* understand MMT, no matter how much some MMTers may want to claim him as their own.

9:21 PM  
Blogger Peter Drubetskoy said...

The way I am trying to think about this is this:
Taxes fund spending in the sense that they create demand for currency that later allows government to spend and find takers for its bids for labor (which is why I think saying "taxes don't fund spending" is misleading). Without taxes the demand for currency could theoretically be zero, so, the currency would have no value. This is the same as saying you'd have an infinite inflation.
In other words, the government would not be able to spend if it did not tax. This way inflation is a backdoor tax: "you can run but you can't hide". At least from MMT perspective, since there are people who believe there could be demand for currency even without taxes.
The question is: could we eliminate taxes and still not lose the value of currency? It seems to me that MMT says "no". Some taxes have to remain, even if only on rents and not on productive income. In fact, MMT seems to postulate that you can achieve an equilibrium where you tax only rents (see your back and forth with Tom Hickey on another thread) and increase spending with GDP.
Just putting some thoughts down, not really expecting any particular reaction here...

9:53 PM  
Blogger winterspeak said...


I guess you and I have different definitions for the word "funding".

Fundamentally, fiat currency is a manifestation of sovereign power, and the ability to tax is at the core of that. A currency can keep going without taxation creating ultimate demand just as wile e coyote can make it fairly far off a cliff. At the end of the day, you do what you have to do to stay out of jail.

I don't agree with Tom Hickey on what he (or his numerous links) term "rents" nor have I made up my mind on what optimal tax policy under MMT might look like. This is actually a very interesting question, as standard tax policy is based on raising maximum revenue with lowest distortion. One or both of these is relaxed or reversed in an MMT world.

10:42 PM  
Blogger Warren Mosler said...

I think I still favor a federal real estate tax replacing most all other federal taxes, as I first mentioned in 'Soft Currency Economics' in the early 90's. Compliance costs are minimal, and it doesn't tax transactions as most other federal taxes do.

And don't forget, with the currency a simple public monopoly, the 'value' of a currency is necessarily a function of prices paid by govt. when it spends (and/or collateral demanded when it lends).

The govt. first levies a tax, and then tells us what we have to do to get the funds needed to pay the tax.

8:15 PM  
Blogger winterspeak said...



Were you aware that your tax plan is the same as standard econ's second best? Econ looks to maximize revenue raised with minimum impact on activity. First best is a "head tax"

Doesn't it seem weird that MMT, which is not looking to maximize revenue, would come up with the same thing? Is targeting balance sheets really the best way to control inflation? (ie focusing on budget constraints)? In an MMT world wouldn't you want to target inflation/transactions more directly?

8:36 AM  
Blogger Peter Drubetskoy said...

In general, macroeconomists think MMT is wrong. MMT has not represented inside Academia in any meaningful way and is very much a fringe idea. The group it threatens most is Austrians, actually.

I wonder, if for the benefit of dilettantes like me, you could maybe explain in plain language which particular assumptions and conclusions of MMT they find wrong and on what grounds. I guess the inflation expectations you covered already. What other? In therms of operations, it looks like MMT is on firm ground (as vimothy admits on the other thread). Would be very helpful, but if it is too much trouble and not the level you aspire to have on your blog - no problem!

8:01 PM  
Blogger winterspeak said...

Peter: I'm not sure what all the differences are. The role of reserves, the money multiplier, monetary operations, role of taxes, role of Govt spending, accounting for debt, real vs nominal are the big ones I think.

9:54 PM  
Anonymous Anonymous said...

In this discussion, I'm sensing a belief that controlling inflation is the Primary reason for taxation. This isn't accurate i think. The purpose of taxation is to fund activities that are in Public Interest -- while keeping inflation within control. So a combination of fiscal deficit and taxes funds these Public Interest activities. The key thing is to reach some sort of consensus on WHAT these activities are -- is Education in, are roads and bridges, is Unemployment and Retraining support in, what about Corporate welfare (Gov purchases to support a company's the hope they will hire more: tho' fact of the matter is companies recruit when they HAVE TO in order to have more soldiers to win more Revenue, not when they are assured of Gov support).

In the process of funding Public Interest activities (partially) via taxes, inflation is regulated as well. Redundant to add: if you and I have $100 each that we want to spend on say, liquor, the price of this commodity will be different depending upon how much of these $200 the Gov taxes away and utilizes towards say, Kids Education.

12:13 AM  
Anonymous Anonymous said...

RE: "Is targeting balance sheets really the best way to control inflation?"

As I wrote in my preceding comment, taxation's primary purpose isn't controlling inflation. Rather, it is to fund Public Interest activities, while keeping inflation risk within control. Size of the Gov activities (once they are all Truely consensus public interest activities) being constant, It's bit difficult (politically) to fluctuate (especially raise) the tax rates based on inflation outlook, compared to the ease with which interest rates can be changed (but interest rate changes don't always help). If the 'transactional inflation' regulation (secondary) function of taxes be simply ignored, then a net worth tax to replace most of the taxes isn't such a bad idea. But still one problem will be that a person's assets might not be liquid and Gov cld end up forcing the guy into liquidating these to pay his taxes! Income and Transaction taxes do not have that problem.

In any case, all Property Taxes (property is illiquid asset) cld be replaced with a single Net Worth tax. Will be good encouragement to genuine home ownership with it's many benefits, without enticing people into a home valuation speculation bubble. In this approach, a man still paying off his debt on his home (especially when underwater) is not paying taxes just for a shot at building ownership into his residence.

12:39 AM  

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