Missing Link in Tax Overhaul

By J. D. Alt

In Tuesday’s Wall Street Journal (Capital Journal, Looking Past Fiscal Cliff to a Genuine Tax Overhaul) Gerald Seib lays out a very sensible argument about why the U.S. tax code needs to be rewritten “for the 21st century.” He points out that the tax code we are using was created in 1913 (before the Great Depression and the New Deal, I might add) and was last revised in any meaningful way in 1986—“before the Internet had any commercial use, before most of us had cellphones, before the U.S. began running $1 trillion annual deficits, before the oldest baby boomers retired, before income inequality had become a global phenomenon, before the advent of the euro, and before China, rather than Japan, became America’s main economic competitor.”

Mr. Seib left out, however, one very important “before”: The existing tax code was written before Richard Nixon took the U.S. off the gold standard, with the rest of the world soon following suit. In many ways, this “before” is way bigger than any of the others—and it’s also telling that it wasn’t on Mr. Seib’s list.

Why is it so important? In 1913 a freshly printed U.S. Dollar came with the solemn promise that the Federal Government would exchange that Dollar, on demand, for a fixed amount of gold. The ramifications of this promise were profound. First, the promise meant that the number of Dollars in circulation had to be carefully limited. If too many dollars were issued and people began to sense there was not enough gold to back them up, there could be a run on the Dollar, the U.S. Treasury would lose its gold, and the remaining Dollars would be worthless.

Second (and specifically relating the issue of taxes) the promise meant that in order to spend Dollars, the Federal Government needed to collect (in the form of taxes) Dollars it had already issued. If, instead, it simply issued new Dollars for its spending, it would threaten to increase the Dollars circulating beyond what could be backed with gold.

Third (and specifically relating to the issue of the federal deficit) the promise meant that if, for whatever reason, the Federal Government was required to spend more Dollars than it could collect in taxes, it then had to borrow Dollars it had already issued in order to make up the difference. If, instead, it simply issued new Dollars to make up its spending shortfall, it would (once again) threaten confidence in the Dollar’s gold-backing.

While the Federal Government was the only entity that could legally issue U.S. Dollars, the number of Dollars it could safely issue was limited by the amount of gold in the Treasury. The gold standard, then, by limiting the number of Dollars available to both the Public and Private sectors, had the affect of directly linking federal spending with federal tax collection and borrowing. This linkage still exists, very powerfully, in the minds of mainstream economists, politicians, and op-ed columnists: Federal Governments HAVE to collect taxes—or borrow—in order to have Dollars to spend. Where else could the Dollars come from?

Enter an expanding group of economic thinkers, known as “Modern Monetary Theorists,” who are focusing attention on an underlying truth everyone else seems to insist on ignoring: The need for the direct linkage between federal spending and federal taxing and borrowing was eliminated, in one fell swoop, by Richard Nixon! Today, without the gold standard, the linkage is only imaginary—a left-over system of checks and balances that is no longer even logical in the real world of “fiat” currency we now use. And if we remove this now imaginary linkage from the debate about taxes and deficits, the conversation changes rather dramatically.

Today, a U.S. Dollar comes with a very different promise than it did in 1913: What the Federal Government promises today is that it will accept a Dollar as payment for taxes, fines, or fees payable to the U.S. government. That’s it. That’s the only thing a “today” U.S. Dollar stands for. Once again, this promise has profound implications. The first is that while the number of Dollars in circulation still has to be limited, the ONLY issue that informs and creates that limit is inflation. As long as Dollars being issued into the Private sector are being used to create new goods and services (rather than simply increasing the price of existing goods and services) there is nothing (except the whims of Congress) limiting the number of Dollars the Federal Government can issue.

Second, as long as there is excess capacity in the economy—unemployed people looking for work, factories and businesses working below capacity—the Federal Government does not need to collect taxes in order to spend Dollars. It can simply create new Dollars and spend them instead. As long as the real resources are available (e.g. raw materials and under-employed labor), and as long as the new Dollars are actually used to employ these under-utilized resources, there is no reason to expect the new Dollars will create inflationary pressure on the currency.

Federal spending, then, is a flow of new U.S. Dollars into the Private sector, and federal taxes are a flow of issued Dollars OUT of the Private sector. There is no direct linkage between the two. The issued Dollars flowing out as taxes are not recirculated back in the form of spending—they are simply “destroyed.” Federal spending is always with new Dollars. It is easy to see why this is true: Since the Dollars are not convertible to anything other than themselves, there is, literally, no difference between, on the one hand, the Federal Government collecting a tax Dollar, depositing it in the Treasury, and then spending it—or, on the other hand, collecting a tax Dollar, destroying it, and then creating a new Dollar to spend in its place. The end result is exactly the same. And since the vast majority of both Federal Government spending and tax collecting is done electronically, the “destruction” of Tax Dollars coming out of the Private sector, and the “creation” of New Dollars being paid into the Private sector occurs automatically. (Yes, if you happen to send cash Dollars to the IRS, they electronically note the tax payment and shred the cash.)

If what the new economic thinkers are saying is true, then what today we are calling the federal “deficit “is something quite different than what we believe it to be. The famous national debt clock that tallies up the federal “deficit” in real time ($16 Trillion and counting) convincing anyone watching that the flickering numbers represent a number that can never—ever—possibly be repaid are, in fact, adding up something quite different instead. The math is very simple; you can do it in your head:

The Federal Government spends 100 new Dollars into the private sector. (Let’s say it pays for a Medicare check-up.) Those 100 new Dollars get issued into the bank account of the Medicare doctor. The Federal Government then collects 20 of those issued Dollars from the doctor in taxes. The Federal Government has “spent” 100 Dollars and “collected” 20 Dollars. The government therefore has what we are telling ourselves is a “deficit” of 80 Dollars (and the national debt clock flips a few digits.) But what we are calling the government’s 80 Dollar “deficit” is actually the 80 Dollars remaining in the Medicare doctor’s bank account. In other words, what the flickering debt clock is actually measuring is NOT a debt the Federal Government has to repay anyone; instead it is simply measuring the U.S. Dollars remaining in the bank accounts of businesses and households after taxes have been collected.

If the above paragraph is true, then what could “reducing the deficit” possibly mean? Any effort to modernize the U.S. tax code would do well to take into account the answer to that question.

 

41 Responses to Missing Link in Tax Overhaul

  1. Slime Pickens'

    You are fogetting the bond holders.

    If they stop buying…its lights.

    • And why is that exactly? The Fed will “buy it” . As for dollars, soon as more tax is imposed, people will want some dollars I think. Now if the Us becomes so politically weak it cannot tax the people holding the dollar surplus, then its lights off.

    • The issue of bond holders is unimportant; why that is so is the underlying premise of the article. You have obviously missed that point if you are uttering any concerns about bondholders (of U. S Treasuries) and whether they purchase or not.

    • Slime Pickens:- Do you think that people and institutions who hold US dollars will prefer to have them sitting around doing nothing in a mattress, rather than put them in a government bond “savings account” to get a positive interest rate? They don’t have any choice. Somebody, some bank is going to end up with the dollars from US government spending. When financiers are faced with the choice of $X or $X +teensy bit of interest, they always choose the second.

      “Bond holders” “stop buying” (more bonds) only means anything if you correctly consider dollar bills as bonds, and mean that ordinary people have refused to accept dollars from the government in return for their real goods and services and labor – i. e. a situation where nothing is for sale in US dollars. When US dollars are like Confederate dollars. Treasury bonds being worthless means dollars are worthless. That means there is already hyperinflation &/or collapse of the US government. So it just says a collapse is a collapse.

  2. ‘The issued Dollars flowing out as taxes are not recirculated back in the form of spending—they are simply “destroyed.” ‘

    I was under the impression that the Treasury has an account with the Fed, so when you debit bank reserves to pay taxes, you are crediting the Treasury’s “revenue account” at the Fed at the same time. When Congress authorizes this money to be spent for whatever, it then comes out of that same account. If there is no money in that account, the US would then issue debt to raise the needed money. I understand that there is no difference in the two methods you mentioned (taxing and then using the money to spend as opposed to destroying the dollar and issuing a new one), but the former is currently the way it is done, right?

    • Jeff, Not sure what you mean by “simultaneously.” Seems to me your account must be debited before Treasury’s can be credited, so that literally the electronic credit is first destroyed and then created again in another account.

      Also, the credits are not created in the Treasury’s spending account. They’re created in the Treasury Tax and Loan (TT & L) accounts. The spending account is the Treasury General Account (TGA). When the Treasury needs more credits in the TGA, it destroys credits in the TT&L accounts and creates credits in the TGA. Ten when it spends, it debits its own accounts and credits non-Government sector accounts.

      Right now the size of the Government’s TGA account is limited by the credits available in the TT&L accounts, any coin seigniorage profits available in the US Mint’s Public Enterprise Fund account, and any Fed profits rebated to the TGA. However, that is not a practical limit at all since the Mint can create one oz. proof platinum coins of arbitrary face value, deposit them at the Fed, and receive electronic credits in return. See here.

  3. Hey Slime Pickens Alan Greenspan had you for wrong way back in 1997:-

    “a government cannot become insolvent with respect to obligations in its own currency”

    and, of course, a bond is just a form of government savings account denominated in its own currency.

    http://www.kc.frb.org/publicat/sympos/1997/pdf/s97green.pdf

  4. Interesting read, which for me begs 3 questions…

    1. It sounds like this theory supports what conservative alarmists deem a “takeover” of the U.S. economy by the government into a socialist dystopia. Once the deficit reaches 100% of GDP, then, according to MMT, the government, by fiat, is paying everyone with the government’s own newly created dollars (and “collecting” a percentage back in taxes) – essentially funding everything. Is this the logical end result of operating with fiat currency?

    2. What happens if foreign investment (a large portion of lienholders to U.S. fiat currency) decide to not accept more U.S. dollars, or tie their currency in large part to another instrument besides the dollar?

    3. It seems as though the only reason our fiat currency works is that most of the world agrees it is the standard by which to measure other currencies. If (when) that changes, what are our consequences?

    • The deficit is not anywhere near 100% of GDP.

    • 1. Government spending adds to GDP so for the deficit to = GDP all other contributions to GDP would have to drop to zero. i.e. You have cause and effect around the wrong way. The deficit can’t reach 100% of GDP unless the government first takes over all spending. A fiat currency doesn’t lead to this any more than gold does.

      2. If foreign investors decide not to accept more dollars then the exchange rate will change and foreign goods will become more expensive. As imports get more expensive demand should drop decreasing the current account deficit and raising the value of the dollar again until either foreigners start accepting it again or the US stops importing things. In reality as long as 1 person wants to buy US exports (Hollywood movies for example) then they will want dollars to pay for it. The more demand then the higher the price of dollars internationally.

      3. This is one reason the US can continue to run massive trade deficits but not necessary for the currency to work. If the $US is dropped as the worlds reserve then the exchange rate will react more to the trade balance. See 2.

  5. Thank you JD for that most succinct analysis of the whole ludicrous and deceitful approach to the mainstream thinking on taxes and the so-called “deficit”. As you point out, the “deficit’ is really the measure of the “money’ left in the hands of the private sector and there is absolutely no way that current level of “public debt” can ever be repaid by the “public”.
    The area that does need a more detailed explanation is to do with your correct statement, “while the number of Dollars in circulation still has to be limited, the ONLY issue that informs and creates that limit is inflation.” What is important here is the mechanism that can be imposed on Government and make them conform to this limitation. This mechanism would have to deny the government/Federal Reserve from manipulating interest rates, getting involved in non-productive toxic financial products and deliberately encouraging “bubble” economies by falsifying inflationary factors to create artificial demand. In a democracy, this really has to be a Constitutional restriction that is firmly, and consistently, upheld by the Judiciary. If those two factors aren’t involved, it is hard to see how any controls could be imposed.
    In essence, this comes back to C. H. Douglas’s contention that the money supply has to be a function of the productive/consumption capacity of the society. The basic cause of inflation is too much money chasing too few products, hence, if the money supply is tied to the growing productive capacity of a nation, and there is an effective means of distributing the purchasing power of the population, inflation will not be a problem.
    It is these practical mechanism issues that MMT does need to address in order to convert the soundness of the theory into a policy that can then be translated into a practical program for application.

    • Graham, “the number of Dollars in circulation still has to be limited, the ONLY issue that informs and creates that limit is inflation.”
      Justaluckyfool, “The amount of currency that could be issued is UNLIMITED, but sould have a SELF-Imposed restriction; that would enable the issuer to control the quality and quantity of its own currency.
      Inflation must be controlled, moral hazard must be controlled so as not to harm the quality of the currency.

    • Graham,

      Robert Latham Owen, former Chairman, Committee on Banking and Currency, United States Senate, wrote a lengthy document in 1939 explaining the to Congress how fiat money worked after 1934.

      It was called: “National Economy and the Banking System of the United States — An Exposition
      of the Principles of Modern Monetary Science in Their Relation to the National Economy and the Banking System of the United States.” Available at archive. org

      It’s an historic document. It doesn’t agree with all of MMT’s principles, but it has some interesting parts, and it discusses why the gold-standard was hurting the USA. It was presented to the 76th Congress, 1st Session, as Senate Document 23, Sent to Government Printing Office, January 24, 1939, and probably released just a few months before WWII began (so who read it?).

      Chapter XVI is called The Inflation Bogey (page 65)
      Here is the first part of it. Sounds like today, doesn’t it?

      It would be a grave error for students of modem monetary science
      to ignore, or to overlook, the fact that the establishment of the
      principles of modem monetary science is skillfully opposed by the
      advocates of the old system under which we have suffered. We have
      not all suffered. Some of our people have become enormously wealthy
      under the old system, during which monopoly has flourished and
      bull movements and bear movements have been caused in security
      exchanges by skillful propaganda.

      It would be unintelligent to ignore the fact that there are some
      people who know how to make money on a large scale, through bull
      markets and bear markets, and that this money is made not by creating
      wealth, but by acquiring wealth under operations in the security
      exchanges where the sagacious few know how to make money at the
      expense of others. The general public, through propaganda, is
      induced in bull markets to make the attempt to acquire wealth by
      speculation without creating it by labor and services.

      In depressions, which follow inflations, the sagacious few who have
      acquired available credit can profit by buying property below its
      normal value.

      The old system is vigorously defended. Its advocates and defenders
      fill the American press with articles dealing with the question of our
      economic life in which they attribute the evils arising under the
      existing system to many other causes than the real fundamental
      cause. Modern monetary science exposes the real cause beyond the
      possibilitv of doubt or successful contradiction. But the advocates
      of the old order, minimize or denounce monetary causes as being
      rcsponsible for our national distress. The purport of these various
      articles seems to be to warn the Members of the Senate and House of
      Representatives and the people against “tinkering with the currency, ”
      against “fiat” money, against “printing press money,” and against
      the dangers of “inflation
      .” The experience of Germany following
      the World War is pointed out as a terrifying example, in which
      inflation resulted in the destruction of the value of bank deposits,
      bonds, insurance policies, mortgages, and other evidences of debt,
      by reducing the German mark to zero value through the inflation
      of the German mark billions of times.

      The term “inflation” has thus been built up as a bogey warning
      the people against any necessary expansion by using the term as
      equivalent to a defensible and necessary expansion of the money
      supply
      .

      These advocates of the old system (which has continuously repro-
      duced one depression after another) seem to rely upon the lack of an
      informed public opinion. They frighten the people by the bogey of
      “inflation” as if the advocates of modern monetary science proposed
      “inflation.”
      Modern monetary science vigorously opposes “infla-
      tion.” It vigorously opposes the “inflation” which has been employed
      by the sagacious few to profit and to acquire the wealth of the ignorant
      many
      .

      Modern monetary science proposes an adequate plan by which to
      prevent inflation for all time.

    • Derryl Hermanutz

      Graham,
      It is a mistake to focus all our attention on money created by government borrowing to fund deficit spending. A far larger portion of “deficit spending” is done by private sector borrowers. When the government sells a new Treasury security, one of the Primary Dealer banks buys that new bond and pays for it by creating a deposit in Treasury’s bank account. The bank, not the government, is the party who directly “creates” the money. Treasury issues a promissory note (e.g. a “bond”), and the bank purchases that interest bearing “asset” with newly created bank deposit money. The bond is the government’s “debt” to the bank. The new bank deposit is the new “money” that the government can now spend.

      Private debt works the same. When a homebuyer gets a mortgage loan from a bank, the bank does not lend him money that the bank already has. The banks creates the mortgage money as a new bank deposit. On the bank balance sheet the new deposit in the customer’s account (deposits are in the bank’s “liability” column) is offset by a new charge in the borrower’s loan account (our interest bearing loans are banks’ “assets”). The “money” (bank deposit) equals the “debt” (loan account balance), so the bank’s balance sheet balances to zero. The bank has purchased an asset (the borrower’s promise to pay interest and to repay the loan principal when payment comes due) by creating a liability against itself (the new deposit balance in the customer’s bank account). That’s what banks “do”: they create our financial credit and manage the issuance and repayment of that credit money.

      No “net” money is created in this process. The borrower spends his loan into the economy where it adds to the money supply. Eventually the borrower taxes or earns the money back out of the economy to repay his debt and at that time both the deposit balance and the loan account balance are reduced to $zero. The loan created the money. Repayment of the loan uncreates that money. Over the full cycle of borrowing then repaying, no “permanent” money is created. But in the meantime, while borrowers have “outstanding” debts, their borrowed money continues to circulate as the economy’s money supply.

      Bank deposit money, that is issued by banks every time they buy a government security or make a loan, comprises at least 95% of the total US$ money supply, with “cash” plus banks’ deposit balances in their reserve accounts at the Fed (which balances are instantly convertible to cash by the Fed) comprising somewhat less than 5%. Money supply in most currencies is closer to 98% bank deposits and 2% cash. US dollars are “international” money so people all over the world increase the demand for US$ cash (including druggies and other ‘covert’ cash industries) because they use US$ money in their economies.

      It was not “the government” who inflated the tech bubble or the real estate bubble. It was bankers creating mortgage money that provided the monetary ammunition that allowed private sector tech stock and real estate buyers to bid up the prices of those assets or goods. Both MMT and its opponents focus on the government’s total outstanding debt of $16 trillion US dollars and ignore the private sector’s much larger total of outstanding bank debt. All of that “debt” was created as a bank deposit and spent into the economy where it became the economy’s money supply. At any given time the recipients of all that public and private sector “deficit spending” are holding that money in cash, and in banks as current account balances, and as savings.

      Because a bank loan creates a deposit which adds to the economy’s money supply, and conversely removal of that money from the economy to repay the bank loan destroys the deposit (when a loan is repaid or a government bond is redeemed the bank deposit “money” and the loan account “debt” simply cancel each other out on the customer’s personal balance sheet at the bank), then by straight arithmetic necessity any net paydown of total US$ debt means there will be less US dollars out in the economy. Which means less money for savers to save, among other direct implications.

      In our bank-debt money system one party’s outstanding debt is some other party’s financial wealth, their “money”. Our money does not originate in some big pile of 100 dollar bills that the government printed up and squirreled away in a vault. Our money originates as a bank loan that creates a bank deposit. Bank deposits are by far our principal form of money. Mainstream economics does not know this, which is why mainstream economics does not understand how our economy works.

      • Derryl: one of the Primary Dealer banks buys that new bond and pays for it by creating a deposit in Treasury’s bank account. The bank, not the government, is the party who directly “creates” the money.

        Quite wrong. No bank can create a deposit in the Treasury’s bank account. A bank that could would be the real sovereign, the mayor of the palace pulling the strings of the puppet King.

        Banks have to pay for bonds with reserves, which can only be created by the government. Never by private banks acting all by their lonesome. And where do these reserves come from? The government spending that bond issuance supposedly “pays for”!

        no “permanent” money is created. No “permanent” money is, or ever has been, or ever can be created. The value of money comes from its impermanence! Money is credit. Money is a promise. The value of a promise derives from its being fulfillable, being redeemable, from the promise ceasing to exist. Permanent money = permanent promise, that is never more than a promise = worthless “money” = not money at all!

        Both MMT and its opponents focus on the government’s total outstanding debt of $16 trillion US dollars and ignore the private sector’s much larger total of outstanding bank debt. No, MMT knows & understands this very well, and writes about it ad infinitum, rather than ignoring it. That’s why most MMTers recommend less bank debt because it is financially fragile, unlike government debt.

        A far larger portion of “deficit spending” is done by private sector borrowers. This was a favorite point of Minsky. He called it the private deficit or something like that. Somewhere in the middle of Stabilizing an Unstable Economy. Too lazy to find it. You’re on the right road, but MMT says what you are saying precisely and correctly.

  6. Great, even more than great article.
    Would it be safe to say as Soddy stated, “Money (US Dollar) is the NOTHING you get for the SOMETHING before you can get ANYTHING.”
    Please can anyone explain to me , “Why not eliminate federal taxaction on income, almost all agree it is unfair ? Why not replace it with a fair means of taxaction, namely Interest on money when it is issued.
    How can anyone not agree that would be “fair and equal”. It would be a set percentage on a fixed wealth,
    regardless of who individually or what owns it.
    Every US Dollar that is issued must be issued with a guarantee that it is redeemable by “goods and services” of the people of the Sovereignty.
    PERHAPS the flaw that: ,”while the number of Dollars in circulation still has to be limited, the ONLY issue that informs and creates that limit is inflation. As long as Dollars being issued into the Private sector are being used to create new goods and services (rather than simply increasing the price of existing goods and services) there is nothing (except the whims of Congress) limiting the number of Dollars the Federal Government can issue.”
    IS THAT the Federal Government is not the sole entity that ISSUES the US Dollar. Banks via “Credit expantion” dwarf the amount the government prints, to an uncomprehensible amount.
    Google: “Justaluckyfool” “QE 4 War”
    then read this article again.

    • Justaluckyfool said “Banks via “Credit expantion” dwarf the amount the government prints, to an uncomprehensible amount.”

      The problem with your math on the ‘money’ created by banks is the same one I used to make. As loans are repaid, the net result is zero. That’s because when a bank creates a loan, it does so by double entry bookeeping. The money (technically credit) is both an asset and a liability at the same time, resulting in a zero increase in the money supply.

      • RobertM, Please explain to me , Why do we need FDIC if all is a zero sum game?
        And why,why OMG the Fed needed to pump trillions to the “private for profit banks” because they are “TBTF” and surely The Fed should have no reason to be concerned about DELEVERAGING (as Bernanke stated 30X and even more) for the simple reason that money need not be issued, they would balance out to ZERO.
        OMG, Bank of America, go ahead put your $68 trillion of derivatives on the books, FDIC will not have to pay (print) $2.72 trillion if B of A has a slight loss of 4%. Yes, it would be a zero sum game for all if
        they were allowed to default.
        America must regain its control of its own money. As Frederick Soddy stated banks are counterfeiting
        our currency.”We the people” have allowed them by legislation to not only do this but also we stupidly guarantee to honor that which they conterfeit “with the full faith and credit of this nation.
        PLUS, “we the people” allow them to charge us interest on that “issuance”.
        Is there any wonder why there is INEQUALITY ?

  7. Re: “If what the new economic thinkers are saying is true, then what today we are calling the federal “deficit “is something quite different than what we believe it to be.”

    What the new economic thinkers are saying is true, so what today we are calling the federal “deficit “is something quite different than what we believe it to be.

    There! Fixed it…..no charge. :)

  8. This is a good article saying exactly what MMT and MS have been saying for years. But there is something missing. Something very important: Emotion

    MMT and MS have been fighting the battle on the basis of facts, logic and education. Our approach has been: “Because people don’t understand, we have to teach them.”

    So we continually write articles trying to make the idea simpler and simpler, to the point where any high school freshman could understand it while simultaneously playing an iPhone game.

    Think about it. Is it really possible that the President of the United States, the Treasurer of the United States, the Chairman of the Federal Reserve, 500 Congressmen and all the the President’s brilliant advisers truly do not understand the simple proposition explained in the article?

    Answer: No, it isn’t possible. These highly educated people understand the concept quite well. In fact both Greenspan and Bernanke have made direct allusions to it.

    So, what is going on? Answer: These people do not want the public to realize that the federal government easily can provide Medicare for every man, woman and child in America, and can prove Social Security that pays a living benefit, and can do all this while totally eliminating FICA.

    Our leaders do not want Americans to realize that cutting the deficit punishes the lower 99% income groups, while barely laying a glove on the upper 1%. In short: Deficit cutting increases the income gap.

    And who wants that kept secret? Answer: The 1%.

    So why do our leaders do what the 1% want? Answer: You must be kidding. It’s money. Money is the motivator for silence.

    Until MMT and MS talk about motivation and not merely rehash, again and again and again, the same simple, logical factual idea, nothing will happen. Revealing the ulterior motives of the 1% will lead to emotion, and it is emotion, not cold logic, that will stir the populace to action.

    Only when the populace shows up with lanterns and pitchforks — or at least angry votes — will the politicians take notice and change this cozy system.

    Rodger Malcolm Mitchell

  9. While I’m not disagreeing with the gist and overall thrust of the blog post, I think it truly needs complete and total overhaul because so much of the tax code was written specifically for robbing the tax base, such as the “Louis B. Mayer” clause, endless such clauses, and IRS rule 401 (a) (5) which essentially says “screw the workers.”

    http://whatwouldjackdo.net/2012/02/america-the-best-democracy-and-tax-policy-money-can-corrupter-buy.html

  10. Mark Robertson

    I second Roger Malcolm Mitchell’s point above. Some members of the UMKC crowd (not all) imply that politicians are good people who “just don’t get it.” These MMT proponents labor under the delusion that all would be rosy “if only politicians understood.” Theirs is an annoying form of denial that is as strong as the denial that leads people to reject MMT.

    OF COURSE politicians “get it”! Politicians know EXACTLY what they are doing. If you could legally print money in your basement, and everyone had to use your money, then imagine the power you would have if you told everyone, “Sorry, we’re broke.” Imagine how everyone would beg you to run your printing press. You only run your press for your personal cronies, while you tell the public, “Sorry, but we have a debt and deficit crisis. If you want money, you must grovel more.”

    Congress and the President have a money printer, so to speak, that gives them godlike powers. To assume that they “just don’t get it” is pernicious nonsense. There is nothing “innocent” about their frauds.

    It is not enough to say, “Everyone assumes X, but the truth is Y.” The correct message is, “Everyone assumes X, but the truth is Y, and politicians don’t want the public to know it.”

    I have heard it said, “Never attribute to evil what can more easily be explained as stupidity.” I say the reverse. “Never attribute to stupidity what is more easily explained as evil.” (That is, craving for power and privilege.)

    The blog posts here repeat the same thing over and over, which is fine. (I enjoy reading them all.) What I don’t see is blog posts that expose the conniving greed of politicians and their shills. Incredibly, I even see Paul Krugman listed in the blog-roll! Krugman is a deceiver, a “deficit dove,” an elitist who poses as a populist. He says yes, we have a debt and deficit crisis, but let’s not have a radical deficit reduction just yet.” Huh? Pete Peterson says the same thing! Even Peterson says the “grand bargain” is too extreme for right now.

    MMT-ers, I think you should start attacking the liars. At the minimum, please dump the “they just don’t get it” nonsense.

    • If you really believe this, you’re in pretty much the same position as the Tea Party participants – I mean, the ones in 1775 not 2005. What alternative do you have besides getting some more people on your side and starting a revolution? The evil ones will not give up without a fight, I mean literally a violent and bloody fight. Saddam didn’t. Hitler didn’t. No powerful despot as evil as you say our current office-holders are has ever changed without the use of force, unless he died before anyone challenged him. Elections? They scoff at elections, if the result is to remove them from power. If what you say is true, then if 435 MMT believers were elected to the next Congress, they would never be allowed to take office. It would be far easier for them to evade the Constitution than what they are now doing, concealing their crimes from the people.

      I hope you’re wrong, and you should hope so, too.

  11. Do Paul Krugman and Dean Baker concur?

  12. The need for tax reform is perhaps the hopping off point for MMT into the dominant political conversation. This conclusion is obvious considering polarization surrounding the fiscal cliff over this single issue. It’s apparent in MMT theory that taxes are not in direct conflict with any fiscal position on account of the economic flexibility MMT promotes. It seems to say, Taxes are not an enemy but one of a number of options two equalize economic curves by promoting a sustainable monetary system at close to maximum capacity, and therefore taxes are friendly,and a useful tool to that end. Your point is well taken, nice post. :) Bebob

  13. Of course, the monetary sovereign could spend a LOT more without much price inflation risk IF it didn’t have to compete with credit from the government-backed banking cartel which, as it sees the economy recovering, is apt to finance a lot of price inflation with its own form of “money from thin-air.”

    It seems the MMT folks should be against the government-backed credit cartel since it limits the amount of fiat that csan be spent into existence without price inflation.

      • The banks lend money (“credit”) into existence. That can easily cause price inflation, at least during the boom. And because they charge interest, that interest adds to the cost of goods and, in the absence of sufficent defict spending by the monetary sovereign, requires even more credit creation to create that interest or at least some debt defaults are gauranteed.

        So, if the credit cartel did not exist, or at least did not enjoy government priviledges such as deposit insurance and a legal tender lender of last resort then the monetary sovereign could spend far more without price inflation risk. Assuming no credit debt to repay and a 5% real growth rate, the US could create about $750 Billion/yr without price inflation risk and that amount would increase 5% per year. But we do have huge amounts of credit debt in the US so that amount can be much larger till that debt is repaid since the repayment of credit destroys it.

        • “So, if the credit cartel did not exist, or at least did not enjoy government priviledges such as deposit insurance and a legal tender lender of last resort then the monetary sovereign could spend far more without price inflation risk. … But we do have huge amounts of credit debt in the US ”
          WHAT IF, what if we were to take away “special priveledges” and put the “private for profit banks”
          on a 100% reserve basis while at the same time made loans available to them to cover “their huge credit expansion” so as not to fail or not to create a currency crisis. WHAT IF $200 trillion is required ??
          Justaluckyfool says that would create $11 trillion in new revenue (at 2% for 36 years) so that at the same time “We could lower federal income taxes to zero , increase spending, and lower the debt.
          Google:” QE 4 the people ” Start collecting interest instead of federal income taxes.
          Maybe , just maybe Frederick Soddy wasn’t just right some of the time, maybe his “The Role Of Money”
          is right most of the time.
          May God continue to bless America and “social media” such as here.

  14. Money is real, or should be. Like a tree or a rock or a chicken or your aunt Gwen is real. Government, the church, the Boy Scouts and the state are abstractions, they’re real only in the sense that they can affect realities. The state can issue permits to cut trees or dig up rocks or enpixelate imaginary money that exists only as an electronic blip on a hard drive somewhere. Rather than simplifying a monetary system that has run amok to the advantage of the few at the expense of the many, MMT theory proposes making the process even more abstract, making the medium of exchange even more complicated and more in thrall to the machinations of financial pirates. Why would that be “good” for the average Joe? Why do we need a coterie of flawed humans deciding how much money to print and whose picture to put on it? And how does a so-called democracy manage to successfully put into power those capable of directing processes and events to the supposed advantage of all? The very idea that the state should have a monopoly on the medium of exchange is as abhorrent as any other monopoly.

    • Chuck, MMT doesn’t propose anything at the level you are talking about. It just describes how the human race has always handled money and debt, of which money is merely a type.

      There is no such thing as money that is not enpixelated and imaginary, and never was and never will be. And these “imaginary”, “financial” “nominal” things, these promises, these human relationships we call “money” are very, very real to humans, because every human is, well, a human being. They’re realler than what we call “real”. As Mitchell-Innes said “A first class credit is the most valuable kind of property.”

      The closest you come in your list of “real things” that money “should be” is your Aunt Gwen. Money is not like your Aunt, but it IS like the aunt-nephew relationship. Money is not a thing, but a relationship. A monetary transaction, commodity for a credit, is formally like a nice doting Aunt Gwen saying to somebody: “Well, if you give me that chicken, you can be my nephew. ” Viewed correctly, saying that money should be real like a rock is a really, really weird LSD hallucination – like saying “nephewhood should be a rock”.

      MMT does propose simplifying our monetary systems. “Making” things more abstract is a synonym for making them simpler, not an antonym. All MMT thinkers emphatically want to make our economic system LESS “in thrall to the machinations of financial pirates.” and have carefully thought out plans to do this.

      Why do we need a coterie of flawed humans deciding how much money to print and whose picture to put on it? Because there is no other conceivable way to do it. It’s the only way it has ever been done. What would be the human use of money that had nothing to do with human beings?

      The very idea that the state should have a monopoly on the medium of exchange is as abhorrent as any other monopoly. Nobody proposes that the state have a monopoly on “the medium of exchange”. Get rid of meaningless legal tender laws, sayeth MMT. All MMT observes is that the state is a monopolist of its own liabilities, its own debts, its own money. And that in a modern (or ancient) economy, the state is by far the biggest economic agent, and therefore these liabilities will naturally become the top dog on the pyramid of liablities, with everybody else’s liabilities measured in terms of the state’s.

      You can print your own Martelbucks. Nothing to prevent you. That’s all that bank money, bank liabilities are. Their printed bankbux. They happen to be backed by the government, which is why government regulation of banks is necessary. Shadow bank liabilities, with no government backing, are exactly Martelbucks. As Minsky said: Everyone can create money. The problem is getting someone to accept it.

      And how does a so-called democracy manage to successfully put into power those capable of directing processes and events to the supposed advantage of all? Anybody, any child is capable of directing processes and events to the “advantage of all” (according to any reasonable understanding). It’s really, really easy. All they have to do is use their natural common sense, and discard the nonsense of neoclassical “economics”. In particular, forcing millions of people to not work, as we do now, is always insane. Maybe only God could understand what the perfect way to employ the unemployed would be, or what “perfect” would mean here, but giving people jobs to do sensible things is a lot better than what we do now. And this is obvious to anyone who has deprogrammed themselves.

    • Why do we need a coterie of flawed humans ???
      The answer is simple. Because we humans are flawed and there is no other way than to use humans.
      Look at the bright side as Churchill noted that at least the Americans seem to correct what they first get wrong.
      So let me ask, Who would you rather have control of the distribution system, which group of “flawed humans” ? One, the private for profit banks or two, a governing group that is the choice of the majority
      of the governing.
      Please bear in mind before answering that a “private for profit financial institution must, yes, must
      do what is in its power to maximise profit for its owners. Also, perhaps, just perhaps, the American people could actually begin ” to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity,…”” at the same time reduce personal income taxes to zero , while maintaining controll of the quality and quantity of its currency?
      Why not start with a proven method, “Lower Federal Income Taxes while at the same time
      Increase Revenues.”
      No New Ligislation needed.
      Read how: Google “justaluckyfool”
      Here is an example. “QE 4 Disaster Relief” by justaluckyfool explains how $1 trillion could help millions of Americans, whilh at the same time raise $2 trillion in revenue over the next 36 years, whilh at the same time help those same American be in a position to overcome an even greater “super storm” should nature deal one, while at the same time rebuild in such a manner that such an occurance may not even happen.
      Please challenge or join as a flawed human “the flawed group which at the same time will only help to solve todays problems with todays money that at the same time will demand servitude in order to pay it back.”

  15. Just wondering what an in depth study on the persistence of ignorance would show? Is economic ignorance a function of the authoritarian mind; are those minds like newly hatched chicks, imprinted with the first images they encounter? There are some commentators whose comments here that would provide a rich resource for such a study. Just sayin’.

    Whatever happened to the understanding that the Federal Reserve system was set up in the way it was for the purpose of keeping total control of the national monetary system out of the hands of politicians for political purposes? Seems it worked well, all in all, until it fell into the hands of rabid ideologues of reactionary economic orthodoxy.

    • “Whatever happened to the understanding that the Federal Reserve system was set up in the way it was for the purpose of keeping total control of the national monetary system out of the hands of politicians for political purposes? Seems it worked well…”
      EXCEPT FOR THE FACT THAT IT HAS TAKEN ITS POWER AWAY FROM THE PEOPLE AND HAS GIVEN THAT POWER TO THE “PRIVATE FOR PROFIT BANKS”.
      How well is that working for you ? How well would that be if we were to project just “if”, the amount of “credit expansion” is just a mere $200 trillion out there at a rate of 2% for 36 years.
      How well would paying the “private for profit banks” over $11 trillion a year for the next 36 years,work for you?
      OR WOULD IT BE BETTER IF THE FED WORKED WELL “for the people”.
      Is it just only a fool who would ask for it to do just that ?
      A bank created by the people, of the people, for the people.
      Now that would work well for me and my children.

      • Considering the known levels of economic competence on public display, would you seriously consider such competence control or even have a say in monetary management? If so, your opinion is itself suspicious.

        Those factors you so vehemently deride are of quite recent vintage, reflection has no such divergence until the hapless Fed Chairman Burns (IIRC) used interest rate escalation to counter price inflation ignited by actions of the oil cartel OPEC in the late 70′s. The real victim of those policies became labour income setting the stage creating massive private debt to replace income in the economic dynamics. Private banks did enjoy the benefits of the policy no doubt, at least until those debts could no longer be serviced (at which time another, more agricultural form of servicing began). Your ideological factors belong in the verbiage of demagoguery and if examined are speciously empty.

        As for working, in a complex system, only the naïve would make such a remark “for the people” and the assembled rubbish accompanying your remarks. From the advent of economic man, elites have maintained the ability to conduct economic intercourse. What you attempt is wresting political control of the economic system for some agenda of your own devising. Sorry, no sale.

        • T-BEAR writes, “Sorry , No Sale”
          As for my agenda, “justaluckyfool” :
          ***** “Believe nothing merely because you have been told it…But whatsoever, after due examination and analysis,you find to be kind, conducive to the good, the benefit,the welfare of all beings – that doctrine believe and cling to,and take it as your guide.”- Buddha[Gautama Siddharta] (563 – 483 BC), Hindu Prince, founder of Buddhism.
          As I have no original thought and merelycomment on what someone else has written, it should be noted that a “no sale” should be sent to William Black for what he says about banks, to Michael Hudson for what he says about compound interest, and Frederick Soddy for what he wrote in “The Role Of Money”.

  16. It all come down to one question.
    Who would YOU want to redistribute the wealth of this great nation?
    “The answer is simple. Because we humans are flawed and there is no other way than to use humans.
    Look at the bright side as Churchill noted that at least the Americans seem to correct what they first get wrong.
    So let me ask, Who would you rather have control of the distribution system, which group of “flawed humans” ? One, the private for profit banks , or two, a governing group that is the choice of the majority
    of the governing.
    Please bear in mind before answering ; a “private for profit financial institution must, yes, must
    do what is in its power to maximise profit for its owners. Or perhaps, just perhaps, the American people could actually begin ” to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity,…”” at the same time reduce personal income taxes to zero , while maintaining controll of the quality and quantity of its currency?
    What if “the most powerful force in the universe were to be used for the benefit of mankind, no longer as a system for servitude rather as a system “for the pursuit of happiness”. This thought may be my only contribution , albeit Keynes, Minsky, von Misses, Soddy, and many others have called for “free banking”. What a term, “free banking”. Would you believe it means setting “the people free”?
    TAKE AWAY THE RIGHTS OF BANKS TO TAX OUR OWN MONEY TO RAISE REVENUE (PROFIT)
    FOR THEMSELVES.
    May God continue to bless America and guide “social media”.

  17. @ justanignoranttool

    Brilliant display of how dangerous a little knowledge can be. Your bugbear and confusion may stem from both investment and commercial being used with the word BANK. One of the two forms would have met your criteria, until they were destroyed by the Clinton administration, not so much the other form operating under strict regulation of their banking abilities. Missing also is any indication of economic history or the development of banking institutions which conveniently expose your thesis as false, not that it would penetrate your consciousness and swamp of preconceived garbage. Your comments are those of a troll, bent upon disrupting discourse and sowing seeds of disinformation. No more time will be wasted in responding to your demagoguery. Now you can have the last word, if you will. (and quit screaming with the all capitals, please)

    • Yes, perhaps “justanignorantfool” as well. But the I must add that surely Keynes, Minsky, Desoto, Soddy, and many others who call for “seperation of banks” (by banks it is also meant financial institutions-OMG that could even be an Insurance Co as any institution that does “fictitious lending”,
      or is allowed to leverage currency.)
      In summation:
      Excerpt from http://en.wikipedia.org/wiki/Frederick_Soddy
      “In four books written from 1921 to 1934, Soddy carried on a “quixotic campaign for a radical restructuring of global monetary relationships”[this quote needs a citation], offering a perspective on economics rooted in physics—the laws of thermodynamics, in particular—and was “roundly dismissed as a crank”[this quote needs a citation]. While most of his proposals – “to abandon the gold standard, let international exchange rates float, use federal surpluses and deficits as macroeconomic policy tools that could counter cyclical trends, and establish bureaus of economic statistics (including a consumer price index) in order to facilitate this effort” – are now conventional practice, his critique of fractional-reserve banking still “remains outside the bounds of conventional wisdom”[this quote needs a citation]. Soddy wrote that financial debts grew exponentially at compound interest…”

      http://archive.org/stream/roleofmoney032861mbp/roleofmoney032861mbp_djvu.txt
      THE
      ROLE OF MONEY
      WHAT IT SHOULD BE, CONTRASTED WITH WHAT IT HAS BECOME By
      FREDERICK SODDY
      M.A. (Oxon) ; LL.D. (Glasgow) ; F.R.S. ; Nobel Laureate in Chemistry, 1921 ; Author of ” Science and Life ” ; ” Wealth, Virtual Wealth , and Debt ” ; ” Money versus Man ” ; etc.
      PREFACE …
      …It was recognized in Athens and Sparta ten centuries before the birth of Christ that one
      of the most vital prerogatives of the State was the sole right to issue money. How curious that
      the unique quality of this prerogative is only now being re-discovered. The” money-power ” which
      has been able to overshadow ostensibly responsible government, is not the power of the merely ultra-
      rich, but is nothing more nor less than a new technique designed to create and destroy money
      by adding and withdrawing figures in bank ledgers, without the slightest concern for the interests of
      the community or the real role that money ought to perform therein.
      … It is concerned less with the details of particular schemes of monetary reform that have been advocated than with the general principles to which, in the author’s opinion, every monetary system must at long last conform, if it is to fulfil its proper role as the distributive mechanism of society. To allow it to become a source of revenue to private issuers is to create, first, a secret and illicit arm of the
      government and, last, a rival power strong enough ultimately to overthrow all other forms of
      government. ”
      Please, show your wisdom.
      Please show how compound interest on our own money can be repaid without servitude ?
      Please show the “justanignorantfool” Michael Hudson were he is to be corrected when he says,
      “How the Banks Broke the Social Compact, Promoting their Own Special Interests ”
      Please show your wisdom.
      How can you prove false the statement that “The Feds have proven that QE can be used to purchase unlimited amounts of assets for an unlimited period of time.?
      Please show your wisdom.
      Explain why if true it should not be done “for the people” instead of the “private for profit banks (of course banks in this case could even be an AIG).
      Please show your wisdom.
      If QE 5 were to be for $200 trillion, why would you not wish zero federal income taxes not only for the 1% but also for all 100%. Or would you prefer that the $11 trillion per annum be given as profit to the “private for profit banks”
      PLEASE, turn this “justanignorantfool” into “justawisefool” since of course as humans we are all fools
      and only by chance “justa………..?….fool”.

  18. P.S.
    The Financial Stability Board, an international financial-standards advisory group, formally describes the shadow banking system as “credit intermediation involving entities and activities outside the regular banking system.” Translated into English, this means the act of borrowing, lending, or otherwise shifting of money around by financial institutions that aren’t subject to regulation, like hedge funds. It can also refer to traditional banks operating in largely unregulated arenas such as credit-default swaps.
    Banks that do conventional banking and or shadow banking are still banks.
    I am beginning to wonder if $200 trillion Qe would be enought, but the good news would be if $300 trillion that would mean $16.5 revenue per annum.”justaluckyfool”