Monday, February 14, 2011

Comment on “modern monetary theory”

Inspired by Lincoln’s printing of fiat money to finance the Civil War, “modern monetary theory” posits that deficits don’t matter, that money is as money does, and that we should just print more money to get out of our present debt hole.  I haven’t addressed MMT before (except to dismiss it once, as I recall, as just another ruse to inflate our way out of our debt) because I considered it beneath the level of serious discourse, but Jesse has a nice demolition of it here, that I would like to add to.

Indeed, MMT is just another ruse to inflate our way out of our debt, which in the context of a fiat money world, Bretton Woods II, requires that our currency depreciate against others, but not so much that people refuse to accept it any more.  Money is what people accept as money, and if folks stop accepting the dollar—whether as reserve currency or not—then the U.S. is hosed.  Our banana republic status becomes official.

What I would like to add to Jesse’s analysis is the hidden truculent aspect of MMT.  In the context of a declining, bankrupt empire whose denarius is still widely accepted, an empire threatened by “barbarians” at its borders and dissent within, the best way to keep your denarius viable is to sow chaos across the rest of the world.

The Bretton Woods II super-nova, as I have called it, is just beginning to flame out.  The world-wide housing bubble was not created by Wall Street but by Washington forty years ago when the world went on Bretton Woods II.  Sure, Wall Street piled on and sold the rest of the world a bunch of toxic assets, to do their part to support the empire.

But should democratic reform spread—should the Europeans work out their problems, should China successfully reign in its bubble—should there become a viable alternative to the dollar, and the oil price rise sharply in dollars—there will continue to be strong incentive for the U.S. empire to defend its currency by sowing chaos throughout the world.

Wars have always been the best way to stimulate inflation.  And “modern monetary theory,” which disingenuously offers the old ruse of inflating one’s way out of debt, implicitly invites inflation and war.


  1. Obvious that you know next to nothing about Modern Monetary Theory. How about attacking specifics with references. This is just a rude screed reminiscing about "how great is was under the gold standard." NOT.

  2. Tom,

    As a child of Bretton Woods I persist in dreaming that there *could be* (in some alternative universe) effective central banking--good regulation, no credit bubbles, no monetization of fiscal obligations, more or less stable value of the currency.

    I'm not really in favor of a gold standard--yet--although the world seems to be establishing it de facto before my eyes.

    Question to you: why wouldn't printing money to fund deficits debase the currency (short answer), which is what I understand MMT to advocate?

    Thanks in advance for your comments.

  3. MMT recognizes that, for a currency issuer in a floating exchange rate regime, there is no functional difference between currency and debt - they are just two different forms of government "credit". So "printing money to fund deficits" just means "funding them" by issuing non-interest bearing obligations instead of interest bearing ones. It is no more inflationary (and indeed due to the lack of interest payments is actually less inflationary) than funding them with "debt".

    All government deficits, however funded, are inflationary - in the sense that they add net financial assets to the private sector. If the deficits exceed the private desire for financial assets, inflation will result. We are a long way from that, though...

  4. Jim,

    Thanks for laying it out like that. A fiat currency is indeed debt, repayable with nothing (and not even paying interest under MMT!). I agree. But being a fiat currency--as we ought to know by now--it is fraught with moral hazard. So it will be inflationary, human nature being what it is. Also, I just can't believe, given recent events, that those given the power to print money won't use it to help their friends (i.e., their class) disproportionately. Look at the Bernank and Wall Street. The bailouts were the greatest transfer of wealth from working people to the rich in world history, and it all took place in lower Manhattan.

    That's my QED. MMT is only wishful thinking applied to fiat currencies, IMHO.

    My solution? Forget macroeconomics and focus on our people. I believe that business cycles, even somewhat volatile ones, are good things, as they keep us on our toes. Necessary economic adjustments can be painful. My preference is for a government-provided poverty level dole with education and health care for those displaced by a downturn. I don't know if the linkages in the American conservative mind could ever buy into that, but under those conditions even a gold standard might be acceptable.

    Thanks for your comment.

  5. Dear Benign,

    I think we are mostly on the same page, which is why I read your posts. However, dismissing MMT without a careful analysis would be a great mistake. I stumbled on MMT in a comment and my reaction was similar. But the comment contained some references and I checked them out. To my surprise I found a well-worked out theory, the goal of which is full employment with price stability.

    MMT combines a number of antecedents in an original way, e.g., Abba Lerner's functional finance, Wynne Godley's national accounting, sectoral balance and stock-flow consistent macro modeling, and Minsky's financial instability. MMT economists like Mathew Forstater, Scott Fullwiler, Bill Mitchell, Warren Mosler, and Randy Wray have written extensively on MMT for decades and are frequent blog posters. I suggest you take a look at this some of this professional literature and informal explanation on the web.

    Regarding "debt monetization," MMT does not countenance QE so this is a non-issue regarding MMT as far as I am concerned. Moreover, many MMT'ers hold that central banking should not be "politically independent" in that this gives a small group of unelected and unaccountable technocrats control over monetary policy, which is anti-capitalistic and anti-democratic, as well as ineffective and inefficient.

    All QE2 does is shift the term structure of government liabilities. It does not increase nongovernment net financial assets as "printing money" suggests. In fact, when the Fed purchases tsys it decreases nongovernment NFA by transferring future interest payments from nongovernment to government. QE2 increases reserves in the FRS but there is no transmission of reserves to loans through a so-called money multiplier. The "money multiplier" is is an ex post accounting phenomenon rather than an ex ante cause. Banks are not reserve-constrained, they are capital constrained, and they make loans based on demand, not on excess reserves.

    As far as funding government goes, in a fiat system such as ours, this is accomplished though currency issuance per appropriation bills. A monetarily sovereign government that is the monopoly provider of its currency funds itself directly with issuance and not through taxation or borrowing.

    According to MMT, the appropriate size of the budgetary deficit is determined by sectoral balances. The targeting of expenditure, which injects financial assets, and taxation, which withdraws financial assets, is based on meeting public purpose. The constraint on issuance is availability of real resources and inflation.

    All of the desirables that you mention — "good regulation, no credit bubbles, no monetization of fiscal obligations, more or less stable value of the currency" — have been addressed by MMT'ers. I will post some introductory links in a subsequent comment since this is getting long.

  6. Tom, thanks, but a short answer would have been more compelling.

  7. Ok, I'll give it another try.

    Progressives need to understand that the progressive agenda is being attacked as unaffordable and many progressives are buying into this specious argument. Against this, MMT holds that what is technologically possible is financially affordable, provided that real resources are available in sufficient quantity. When there is unemployment, there are human resources available, going to waste. The foregone opportunity cost of unemployment is huge, feeds on itself through deterioration and degradation, and cannot be recaptured.

    According to MMT, given the operational reality of the present nonconvertible floating rate system monetary, it is possible to achieve full employment with price stability through adopting the key elements of MMT, including functional finance, the sectoral balance approach, and setting a price anchor through an employer of last resort program. How this is accomplished is explained in the literature. Simple explanations accessible to non-economists are cited above.

    Furthermore, it is claimed that MMT is inflationary. Generally, this criticism is based on perceptions regarding the weakness of fiat currencies rather than a specific critique of MMT. A principle focus of MMT is showing how full employment (excepting ~2% frictional) is achievable along with price stability.

    A monetarily sovereign government as monopoly currency issuer has the sole prerogative and corresponding sole responsibility to provide the correct amount of currency to balance spending power (nominal aggregate demand) and goods for sale (real output capacity). If the government issues currency as nongovernment net financial assets in an amount that results in effective demand in excess of capacity, demand will rise relative to the goods and services that the economy can supply, and inflation will occur due to excess demand relative to supply. If the government falls short in maintaining this balance, recession and unemployment result, due to insufficient demand relative to supply. Fiscal policy can be targeted to achieve the desired balance.

  8. Tom - sorry - the reading list arrived before your written response.

  9. Benign, your contention is that 1) "... 'modern monetary theory,' which disingenuously offers the old ruse of inflating one’s way out of debt, implicitly invites inflation and war," and 2) "My solution? Forget macroeconomics and focus on our people."

    1 is a mischaracterization of MMT, and 2 seems to me to be naive. Please consider Bill Mitchell on sectoral balances. (This is not theory based on assumptions. It is based on accounting identities):

    The sectoral balances are:

    (T – G) = budget balance, where T is tax revenue and G is government spending. A budget deficit would be a negative number.

    (S – I) = private domestic balance, where S is total private saving and I is total private investment.

    (X – M) = external (trade) balance, where X is total exports and M is total imports.

    If (T – G) > 0 then there is a drain on aggregate demand via the public sector. If (S – I) > 0, then the private domestic sector is saving overall and this creates a drain on aggregate demand. If (X – M) > 0, then net exports are positive and this would add to aggregate demand via the foreign sector. Further, by implication, external deficits drain aggregate demand from the economy and budget deficits add aggregate demand.

    These balances are linked via a strict accounting relationship which is derived from the National Accounting framework such that:

    (S – I) + (T – G) – (X – M) = 0

    You can then manipulate these balances in many ways to tell stories about what is going on in a country.

    One way of writing the balances to show the relationship between the government and the non-government sectors:

    (G – T) = (S – I) – (X – M)

    That is a government deficit (G – T > 0) has to be associated with a non-government surplus, which can be distributed between the private domestic balance and the trade balance. The causality of that association depends on the context.

    Another way to “view” the sectoral balances is to express the external position against the domestic position:

    (X – M) = (S – I) – (G – T)

    So if there is an external surplus (X – M > 0), then the right hand side also has to be in surplus. So if the budget was balanced (G – T = 0) then the private domestic sector would carry that surplus (S – I > 0).

    You can then imagine what might happen if the private domestic sector increased their overall saving. In the first instance either consumption or investment would fall and the decline in aggregate demand (spending) would lead to a contraction of national income for a given fiscal and external position.

    The only way the economy can continue to grow in these circumstances is if net exports increases and/or the government deficit increases.

  10. Benign,

    I second Tom's recommendation to do a little reading (from the thoughtfully provided reading list) before you dismiss MMT. While it's not complicated in the same way that, say, multivariable calculus is, it does take a lot of "unlearning" to fully grasp it. Once you start looking at things in the right way, it just seems obvious.

  11. also provides a nice overview.

    "Chartalism is a monetary standard in which government-issued tokens are used as the unit of money. In such a system, fiat money is created by government spending. Taxation is employed to reclaim the money and control the total amount of fiat money in existence[1][2]. Reclaiming most of this issued money via taxation is essential to maintaining its value in exchange."

    Sounds good in theory, but...

    The moral hazard with MMT is that it's more fun to spend and lower taxes than to stop spending or raise taxes, and we will *always* live in a *political economy.* MMT would be inflationary--in America--no doubt.

    Fuggedabout macroeconomics! Demand social justice! Make it happen! We are on the verge of generations of Plantation Nation, a neo-feudal economy! Demand *results*!

    a total apostate from academic economics

  12. growth theory says an increase in saving rate matched by increase in investment rate is not contractionary, but will increase long term growth potential.

    another side of moral hazard relates to government spending. it's a corrupt process. friends of the regime get the dough. why would I want to make *that* the basis of monetary policy too? combined with the tax/spend moral hazard, it virtually guarantees that those in favored positions will have first access to funds in the inevitable inflation, and will lever up accordingly. been there, done that, Goldman Sachs.

    there are enough pigs at the trough as it is. the monetary "stimulus" would wind up mostly in corporate profits and with the rich, not in employment, as with the recent "stimulus."

    I appreciate your adding to the blog, and providing references for others to follow up on, but MMT seems flawed to me.

  13. "I appreciate your adding to the blog, and providing references for others to follow up on, but MMT seems flawed to me."

    MMT explains exactly how a fiat currency works. it leaves policymakers with a set of options that are not inheritantly political. so you pick among these options, or you start lobbying for an end to fiat currencies...

  14. Benign, I don't think you are taking into consideration MMT's focus on public purpose, as well as the Minskian aspect of MMT regarding addressing financial instability, e.g., by taxing away economic rent — land rent, monopoly rent, and economic rent — as recommended by Michael Hudson for example.

    An advantage of fiscal policy over monetary policy is that it can be tightly targeted to achieving specific results. BTW, Michael Hudson, Bill Black, and Randy Wray, a student of Minsky and a founder of MMT, are colleagues at UMKC, and they refer to their collective work as "The Kansas City School."

    Is cogent fiscal policy a political problem in the US today? Of course. But political problems need to be addressed politically. That doesn't mean that we should put economics on hold in the meanwhile, however. Moreover, a good political solution has to incorporate a good economic one, too. MMT shows a progressive agenda can be funded, and how both the deficit hawks and doves are misguided about the need for fiscal austerity as they understand it.

    In addition, many people confuse the whole of MMT with its description of the operations of a modern monetary system in general and the idiosyncrasies of various systems — US, UK, Canadian, Australian, Japanese, etc., and conclude that it doesn't address problems that it actually does.

    People may not care to take the time to research the MMT literature, I can understand that. But they should not jump to conclusions about MMT or dismiss it summarily without doing so. MMT has been a around for several decades, and a great many of the objections have already been raised and addressed in the professional literature and blogs. There are ongoing lively discussions continually going on at Warren Mosler's, for example.

    Thanks for your consideration.

  15. studentee -

    that sounds like an ultimatum! oh dear!

    all policy choices are inherently political....


  16. I've been reading the work of Prof. Wray and other scholars who share his persuasion for many years and I am very pleased to see the amount attention given to their work recently. It certainly deserves careful consideration. However, I find it very difficult to discuss their ideas and policy recommendations without first discussing some of the settled ideas informed by years of research and analysis from within the larger post-keynesian tradition. All that to say that in my view it is probably quite difficult to arrive at a short answer.

  17. You write: A fiat currency is indeed debt, repayable with nothing (and not even paying interest under MMT!). I agree. But being a fiat currency--as we ought to know by now-it is fraught with moral hazard. So it will be inflationary, human nature being what it is.

    One of the claims by Chartalism (not to be confused with charlatanism ;-)) is that basically all monetary systems are fiat in some form or another - and that includes the gold standard. The difference being so called 'self imposed constraints' that are of legal, political or ideological nature but not inherent to the monetary system. (This separation is often used in MMT talk. It is also occasionally misused imo, to disburden the analysis from pesky political reality, as you rightly noticed above).

    MMT builds up from a pristine base case from where it analyzes and criticizes many of those constraints, which will differ from case to case. The important insight is that the base case is not, as it claims other schools are, a normative, ideological construct that describes how its authors would like the world to be (and its agents to behave), but in fact a philosophically coherent analysis of what is already in place, a description of the current operating system at root level, so to speak. So, from an MMT perspective, what you are implying with your statement above, is not an abandonment of fiat as such, but much rather a wish to further constrain the current system to look more like it did before 1971. That may not make much of a difference functionally - we all understand what you're getting at - but it makes all the difference analytically for understanding where MMT comes from and what can be derived from it.

    Does that make sense? Regards, Oliver

  18. I have done my homework on MMT and remain unconvinced that it offers a solution better than Bretton Woods II. When people make statements implying MMT has a monopoly on Truth and Beauty, I cringe.

    "Chartalism is a monetary standard in which government-issued tokens are used as the unit of money. In such a system, fiat money is created by government spending. Taxation is employed to reclaim the money and control the total amount of fiat money in existence[1][2]. Reclaiming most of this issued money via taxation is essential to maintaining its value in exchange." (Ibid.)

    I get that. If there's something wrong with that summary, let me know. But if that's the basic idea, I find it flawed--beautiful in a way, as it has a definite ring of "something for nothing" that appeals when you're staggering under a mountain of debt. It's subject to the same types of moral hazard that any fiat money is. And it scares me that the only way to get money into an economy just to keep up with natural growth of output is by government spending (no quibbles with that, please).

    BTW, I am a great fan of the KC school and Bill Black in particular. He tells it like it is--just how depraved our political economy has become in just the past twenty years. It is truly rotten, and I sometimes think that the only way truly rotten societies get reformed is through a punishing depression.

    I want to thank you all for your comments.

    1. "Chartalism is a monetary standard"

      Chartalism/MMT is NOT a monetary standard.

      It is an operation description of how ALL monetary systems operate, in theory and in practice.

  19. Benign, it seems that your principal concern with MMT lies in its adoption of the state theory of money aka chartalism, which holds that state money gains its value from the state's ability to require payment of liabilities to the state — taxes, fees, fines, etc. — in liabilities of the states, i.e., state money as legal tender. It is often mistakenly asserted that Chartalism is based on fiat currency. That is not the case. The state theory of money applies to both convertible and non-convertible monetary systems, and fixed and floating rate. It is theory that applies to all state money. See Randy Wray's recent paper, Money, and his book, Understanding Modern Money.

    MMT illuminates the differences between convertible fixed rate and non-convertible floating rate systems, as well as the implications of these differences. MMTers focus on a non-convertible floating rate monetary system, because that is the one prevailing in the world today, since Nixon shut the gold window in 1971.

    The principal contention of MMT is that the economics profession has not adequately appreciated the significance of finance, in that money is neither neutral nor a veil over what is essentially a barter system. Money is integral to the system, so it is necessary to understand how money functions in economics and finance.

    MMT is chiefly an elaboration of the functioning of money both vertically (exogenously) and horizontally (endogenously). It understands both convertible fixed rate and non-convertible floating rate systems. If focuses on the present nonconvertible floating rate system in general and also in particular, e.g., US, UK, Canada, Australia, Japan, etc., because this is the operative system. It also treats the EZ, which is a special case, complicated by the forfeiting of monetary sovereignty by EZ nations. It also deals with countries like China that peg or run currency boards.

    The understanding that MMT provides involves a new macroeconomic paradigm as an antidote to the failed Neoliberal and New Keynesian theories, which are based on flawed assumptions and ignore how the monetary system actually operates. This new paradigm has policy implications, for example, based on sectoral balances. MMT shows what the policy options are and what their likely outcome will be.

    Since most MMTers hold that the chief economic challenge is achieving full employment with price stability, they favor the flexibility of a non-convertible floating rate system, which allows formulation of an economic policy that can achieve full employment with price stability. Under a convertible fixed rate system, the trade-off is between controlling inflation using unemployment as a tool and vice versa, which is the approach presently being undertaken in the US with undesirable results.

    BTW, you say, "Inspired by Lincoln’s printing of fiat money to finance the Civil War, “modern monetary theory” posits that deficits don’t matter, that money is as money does, and that we should just print more money to get out of our present debt hole." I don't recognize that coming from MMT, and it is not what professional MMT economists with whom I am familiar with say. Source?

  20. The part I struggle with is how to enforce the collection of taxes (in order to control inflation once inflationary pressures have taken hold near full capacity) when people are aware that taxation is not required for public spending. How do you get people to pay taxes? What taxes are best (land, customs duties, income, profit taxes)? How do you enforce it in an effective and orderly fashion?

    I'm the same, I really dig the KC school and all post-keynesian economics. But that problem is key in my view. Not sure if qualifies as a moral hazard, but I share the concerns above.

    1. The most efficient form of taxation, recognized as such for hundreds of years, is a tax on Economic Rents.
      Unlike other forms of taxation which add to prices, a tax or economic rents not only doesn't add to prices, it actually helps to keep prices down & in line with the cost of production.

  21. Consider an economy in which the top 1% of the people own 99% of the businesses, land, other property--and hence reap a lot of rents of various types. They also prevent labor from organizing, by law or intimidation. If a nominal democracy, they control the elected officials by "buying" elections and lobbying elected "representatives." As such, the presence of persistent unemployment provides a convenient backdrop to their preferred labor market conditions (and may provide cannon fodder for imperialist military adventures as well).

    How does MMT solve this problem? My larger point being that we are facing a renegotiation of the basic fabric of society, the social contract, and that the easiest and best way to gauge our progress is by looking at indicators of social justice, and not getting carried away with abstruse theories that don't seem amenable to common sense explanations.

    Like I say, I am a total apostate from academic economics. Sorry!

  22. Anon 8:58 - that is exactly the moral hazard issue as I see (one of them).

  23. anon and bengin...why would taxes be difficult to enforce in an orderly and efficient fashion if fiscal policy simply reflected MMT?

    I don't understand your concern. Taxes are enforced in an orderly and efficient way now...why would that change if MMT policy options were executed?

    Please explain further and thank you.


  24. come on, Mario... are you kidding?

    I don't see congress rushing to raise taxes to cover our deficits. since Reagan, taxes on net have only been cut. it's more popular than raising taxes. makes it easier to get reelected.

  25. I don't have any math or figures for you but considering where our taxes are at this point in time, I really doubt that we'd need to increase them EVEN WITH MMT-type fiscal policies that support the public.

    Remember it's NOT about "funding" government's about minimizing aggregate inflation in the nongoverment sector. It's the aggregate that matters. It is just as possible in MMT (in fact more likely I think) that at this time in our economy we'd be LOWERING taxes AND increasing government spending. Aka you can get the best of both worlds!!! I think it's only a matter of time before the public realizes how this economy of our really works and then we're really in for some GOOD long as we watch the AGGREGATE LEVELS of inflation/deflation in relation to the output gap.

    I think MMT is rather simple to understand and quite obvious. Of course Tom is like a PhD or something in it and I am not there yet so it can be complex but also definitely accessible to the layman too.

    Does that make sense?


  26. Being an economic paradigm, MMT does not address strictly political issues, such as correcting the defects of a liberal democracy that has been hijacked by a plutocratic oligarchy. This has to be accomplished politically by getting the money out of politics, closing the revolving door, and ending endemic corruption. However, economic theory can expose the bogus economic claims upon which this hijacking is based and in terms of which it is being justified to a gullible public.

    Neoliberalism and its cousin New Keynesianism are based on a view of capitalism that is rooted in economic error and political misrepresentation. That unfortunate situation needs to be corrected by an economic paradigm that can reasonably replace those failed ideologies that are based on flawed assumptions.

    The present problem arises in part from the fact that mainstream economists are entrenched. They have the megaphone and they proclaim that anything that is not neoliberal (laissez-faire) capitalism is "socialism." Thus the masses are directed toward opposing any government intervention as the road to serfdom, when the road to serfdom today lies through neoliberalism's ideological championing of corporate statism.

    The antidote to this is through educating enough people to reach critical mass for paradigm shift. In my view, MMT is one piece in that endeavor. Another piece is understanding economic rent — land rent, monopoly rent, and financial rent — which are unproductive and parasitical on the system. A third is exploitative "control fraud," as elaborated by Bill Black.

    The Kansas City School is bringing this together under one roof and focusing it on political change based on progressive economic principles, against the now ruling Chicago School. Of course, there are a lot of others involved, too, in a loose alliance.

    I don't see this as being an exclusively MMT endeavor, and I don't think that MMT professionals see it this way either. MMTers are making a valuable contribution along with others to remedying a broken social, political and economic system, as well as trying to head off the global take-over by neoliberalism that is now underway.

  27. Tom, Mario,
    Thanks for your thoughts. First I wish to emphasize that I am post-keynesian to the core. As such, I kneel to the gods of effective demand and ex nihilo money. Also, I am one of those people who finds Prof. Wray et al (Auerback, Mitchell, Pareanteau, etc...) to be some of the most exciting economic commentators out there at the moment. Their take on past economic issues has been prescient and their current views continue to be relevant and critical to understanding the current economic challenges facing us today. I find myself in agreement with their views almost always. That being said, I must admit at finding it difficult to understand how tax collection can be viable under a chartalist system in which citizens know that taxes do not fund government spending. In my view, this creates a serious collective action problem: why would one person give up something that is the fruit of their labor when the authorities don't even need it in the first place? Under such a scenario, I could foresee taxpayers saying "no thanks, I'll shred my money myself". Maybe I'm wrong but this is not simply an operational or political issue. It relates to imnportant economic incentives at the core of the proposed monetary regime. Perhaps this issue is addressed somewhere in the literature. If so, I would be pleased to read up on it.

    Anyways, I just thought I would get that out there. All of you, keep up the good work.

  28. Anonymous, that's a good question. Libertarians never tire of telling us why people will continue to pay taxes (even if they realize that taxation does not fund government). Governments have the power to coerce, as many, many people have discovered the hard way when they avoid taxation. Tax avoidance is a crime. Could there be a tax revolt? At the expense of anarchy.

    In addition, federal taxation is unnecessary if state and local taxes are collected, which serves to give the currency value in the Chartalist view. Since states and municipalities are currency users rather than issuers, they have to tax or borrow to spend.

    BTW, I neglected a great MMT link in the list above.

    Peter Cooper at Heteconomics

    Peter is an Australian professional writer for film and TV, novelist, and musician who also happens to have a PhD in economics. His explanations are extremely clear, and he is very generous with his time responding to comments and answering questions.

  29. Hey Benign and all else,

    It's a great point to bring up for sure. But honestly...I still don't think that much will other words...people WILL pay their taxes even under an MMT system.

    And the reason why I say that is b/c JAIL and LARGE FINES for not paying your taxes will be a solid deterrent...just like it is now. People don't "have to" pay their taxes now either I hope you realize....but they DO...and most religiously too generally speaking.

    I mean do you honestly think people willingly pay their taxes now b/c they think to themselves, "Well we do need to do our government to be able to fund projects x, y, & z this here you go Uncle Sam take my money...again. Ugh." haha!! No of course not!! They pay their taxes b/c they are told to and they know that they do NOT want to get audited or have to deal with the IRS and jail time, etc. Period end of statement. None of that will change under MMT or any other economic system. The power of the state and of punishment will not go away when MMT comes in. The same question can be applied to why the poor don't raid the rich every night, or why do people follow traffic signals, or why do they continue to pay their credit cards. They don't HAVE TO do those things but they still behave according to society's rules. They CHOSE TO b/c they are "told to" and if they don't they will get punished with either a ticket, jail, or a bad credit score. It's just that simple...create a points system that people value and you have a controlled society. MMT will work and people will still pay their can bet on that one.

    It's a great point/counter-point and, I'm glad you brought it up.

    Really GREAT DISCUSSION here guys!!!


  30. The problem with taxes lies with the politicians, not the taxpayers. Politicians don't like to raise taxes for any reason.

  31. Well yes I agree with you there and I do think this is one concern with MMT.

    MMT says that fiscal policy is a more direct way to effect the economy versus monetary policy HOWEVER the reality of actually getting fiscal policy to be PURELY an economic decision I think is almost ludicrous.

    The only way a politician will ever support to raise taxes (or lower spending as they are the same thing) will be when it is in his best interest to do so...NOT b/c there is to much inflation for our own good. haha!!!

    Tom what do you think about this point?


    MT :)

  32. Of course the force of law always plays a role in getting people to pay their share of taxes. I'm just saying that under a chartalist system the incentive is somewhat diminished given that money may no longer be regarded by the populus as being limited in quantity. Personally, I think the fact that people actually pay taxes, given the low number of enforcement officers assigned to tax duties per capita rather than to good law-enforcement.

    As for whether the problem lies with politicians or taxpayers, my understanding of all this is that under chartalism, real inflation (demand-pull) increases mainly at full or near-full capacity. In this sense, we could expect budget surpluses at that point. If that is the case, all the authorities need to do is shred (destroy) the funds levied via the surplus. In my view, all of this could be done without politicians having to raise taxes at all. That's why I think the problems lies with the taxpayer, really.

    Thanks very much for this post. Very good discussion indeed.

  33. My apologies. The last sentence of the first paragraph should read:

    "Personally, I think the fact that people actually pay taxes, given the low number of enforcement officers assigned to tax duties per capita, has more to do with our collective sense of duty rather than to good law-enforcement."

  34. Two things:

    1. I think it's strange to suggest that in a democracy the people can't be trusted with the truth. The fact that they aren't provided with the truth in regard to many other policy issues (due largely to the poor level of public discourse on these issues) is a big part of the problems.

    2. Taxes do finance the federal government's spending in real terms (that is, in terms of its utilization of productive capacity), just not in nominal terms.

    Scott Fullwiler

  35. The key to understanding the promotion of taxation necessity under MMT is two-fold. Firstly, to have a system of taxation that is progressively just, automatic and rapidly adjustable in timing. Secondly, that such a system is promoted as an Inflation Control Tax. Modern technology now allows such a taxation system to be implemented.