Taxes In The MMT Perspective

This is a side remark, but after some helpful discussions with Steve Randy Waldman I think I know have a better grasp on the “Modern Monetary Theory” point that Paul Krugman dismisses here:

Well, the feds have the Fed, which can print money. But there are constraints on that, too — they’re not as sharp as the constraints on governments that can’t print money, but too much reliance on the printing press leads to unacceptable inflation. (Cue the MMT people — but after repeated discussions, I still don’t get how they sidestep the issue of limits on seignorage.)

So taxes are, first and foremost, about paying for what the government buys (duh). It’s true that they can also affect aggregate demand, and that may be something you want to do. But that really is a secondary issue.

That’s the standard view. Taxes are about paying for government spending. And it’s also true that tax and spending decisions impact aggregate demand. And it’s sort of true that the government needs tax revenue to buy things, but also true that the government could just print the money. But it’s ability to print money is limited by demand issues. So you have two multiple government funding sources—taxes and the printing press—both of which independently impact aggregate demand.

I think the MMT view would say that they have a more parsimonious account of this. The US government buys things with dollars. It also has a monopoly on the production of new dollars. So the way the US governments buys things is with the dollars it produces. But this of course raises the question of why anyone would want to have dollars. And the reason is that the US government also throws people in jail for failing to pay their taxes, and it demands payment of taxes in dollars. So you have a single loop. The government funds purchases by creating financial assets and it manipulates aggregate demand by threatening to throw people in jail unless they turn financial assets over to the government.

I can see some serious lacuna in this model. It ignores, for one thing, the actual institutional set-up of our government. Though I suppose the MMT reply would be that this shows that our set-up is misguided. It also ignores the fact that you see money in, for example, prisoner of war camps so it’s not clear that the emergence of social conventions around mediums of exchange is really all that dependent on coercive tax power. Last, I suspect there’s a case to be made that the entire operation of the financial system depends on people having the view that the people running the government don’t see things this way. So even if the MMT view is correct, it may be important in a Straussian way for people not to believe in it. That said, all models have flaws and I think this one illustrates some important points about the artificiality of our functional separation of the “borrowing money” function from the “manage the money supply” function.