A (Very) Brief Thought on MMT

If I have any MMT readers, I’d appreciate it if they could answer this brief query:

MMT suggests that governments are not revenue constrained; they are only constrained by inflation, and until that becomes a problem they can print however much money they want to fund expenditures. Once inflation does become a problem, they can tax away the excess income. This is correct, no?

So here is my problem: if governments are inflation constrained, and they reduce inflation via taxation, isn’t this ultimately the same thing as if they were revenue constrained? Why not eliminate the middle man and simply raise taxation to fund expenditures?


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  1. #1 by JMRJ on April 16, 2012 - 4:00 pm

    Well, the government has to deceive the public, and perhaps itself as well, by taking the easy way out at first and putting off the payment until later. This may be economically immaterial, as you suggest, but it is hardly politically insignificant.

    Sorry if this is not the type of answer you were looking for, having little to do with MMT as such, but it may be the most accurate in describing the reason you get inflation first, taxation later.

  2. #2 by StephanEwald (@StephanEwald) on April 16, 2012 - 4:13 pm

    I wouldn’t say government spending is constrained by inflation. It is constrained by the capacity of the real economy. Once spending (either by the private sector and/or the government sector) exceeds the capacity of the real economy inflation increases. In this case MMT is mute whether spending capacity should be taxed away from the private sector to make room for government spending or government spending must be decreased to make room for private sector spending. This is basically a political and not an economical question. The other point MMT makes is that the desire of the private sector to save in the currency should be accommodated by government sector deficits. Finally: taxes fund nothing! The money goes where it comes from. Thin air ;~)

    • #3 by Unlearningecon on April 16, 2012 - 5:15 pm

      In the first part of the comment you are saying the same thing as me, just in different terms.

      But my point is that you can do one of two things:

      (a) Tax, and spend the same money on stuff.

      (b) Print the money, then have to increase taxes to quell inflation.

      Aren’t they effectively the same thing except one is more belaboured?

      • #4 by rf on April 16, 2012 - 6:00 pm

        Only if there are no idle resources, which is the whole reason why MMT frames things the way it does. Put the real production constraint up front so nobody can claim that taxes must always finance expenditure.

      • #5 by psyquark on April 16, 2012 - 6:53 pm

        “Funding” implies that “the amount to tax to quell inflation” is balanced around a net budget of 0 whether it be at every point in time, every budget, or over some “business cycle”. Inside this is the unstated assumption that the financial positions of all entities (or sub-classes) are in equilibrium or tend to average (over time or class) to equilibrium. That is, on average, there will be no change in the desired net (total!) position of the non-governmental actors. Or more succinctly, it denies the existence of the Paradox of Thrift.

        The MMT position is that the net budget that fulfills governmental duties (in a non inflationary manner) in any of those situations can be any number (though usually in deficit because of desires to save).

      • #6 by Stephan Ewald on April 16, 2012 - 7:27 pm

        I don’t think I said in the first part the same thing as you. But maybe this is more a semantic problem? Your argument links inflation to excessive government spending. But inflation happens regardless whether too much nominal demand comes from the private or the government sector. Inflation isn’t choosy. That is why MMT tries to carefully distinguish on that matter.

      • #7 by StephanEwald (@StephanEwald) on April 16, 2012 - 8:12 pm

        No. I don’t think I said the the same thing as you in the first part. But the difference might be more of semantic nature? You link inflation with excessive government spending. But inflation happens whether spending comes from the private sector or the government sector. Inflation isn’t choosy. Thus MMT tries to avoid this confusion and concentrates on the real capacity of the economy in regard to inflation.

        Again: if you tax, the money is GONE. You can’t spend it on stuff. There’s no secret vault where the government deposits your tax dollar. Actually if you pay your tax in cash the FED has a facility to burn your cash.

      • #8 by paulie46 on April 16, 2012 - 11:30 pm

        If the government doesn’t print new dollars, the non-government can’t save in the net. Meaning, anyone that is able to save can only do so at the expense of someone else dis-saving.

        Pension funds don’t fund themselves, the money has to come from somewhere.

        I assume you are talking about a balanced budget situation where the government does not net-spend over the budget cycle.

        Otherwise, we already tax and spend.

      • #9 by paulie46 on April 16, 2012 - 11:40 pm

        If you tax, and spend the same money on stuff how will people save in the aggregate (net save)?

        In order for people in the non-government to save the government must net-spend to provide those dollars, otherwise any saving will be at the expense of others dis-saving.

        Plus, if the government doesn’t print money, the economy can’t grow (in nominal dollars).

        BTW I assume you mean that by “printing money” the government is selling bonds and spending an equal amount into the non-government.

      • #10 by paulie46 on April 17, 2012 - 2:49 pm

        Sorry for the double post – I thought the first one got eaten by the system so I wrote a new one.

  3. #11 by Michael Hoexter on April 16, 2012 - 4:35 pm

    I am not an “MMTer” but I am sympathetic to its goals and interested in its analysis.

    It is more than just inflation that constrains currency issue/fiscal policy in MMT. The exchange rate of the currency (I guess you could file this under “inflation”), the (real rather than imagined) crowding out of the private sector, and the monopolization/exhaustion of real resources are all restraints on the issue of currency via government spending.

    Via MMT, there are no affordability constraints on currency-issuing governments buying goods and services available in their own currency, though there are the above risks in issuing too much currency via spending.

    Within these constraints, MMT is about laying out the potential policy space available to government in order to fulfill the public purpose (John Kenneth Galbraith is the immediate source for the notion of the public purpose). Taxation and the fiscal operations of government are tools to achieving the public purpose and not the other way around. In times like these in the US and much of Europe, aggregate demand is constrained by excessive private debt so there needs to be spending now by governments, according to an MMT view, but also not necessarily compensatory taxation later on to “pay for” the spending now. MMT sees the monetization of budget deficits as a relic of a pre-fiat money era and so public debt need not be issued to “pay for” spending above taxation levels.

    So I guess the difference between the scenario you lay out and MMTer’s view is that there is no one-to-one linkage between the aggregate demand suppressed by taxation and the spending needs of government.

    If you are really interested in MMT, Randall Wray has a “Modern Money Primer” which goes into detail on this. http://neweconomicperspectives.org/p/modern-monetary-theory-primer.html I also have found these posts by Bill Mitchell worthwhile:



  4. #12 by rf on April 16, 2012 - 4:54 pm

    It’s more an issue of framing rather than anything. MMT likes to treat the federal government and central bank as one entity for accounting purposes and say that all government spending is money creation and all taxation is money destruction (with bonds issued to regulate the interest rate, a la endogenous money).

    So, given this framing, taxation doesn’t “fund” expenditure. Rather it outright destroys private sector income. This reduces aggregate demand allowing the consolidated government-bank to spend without causing demand-pull inflation. Spending is only ever through money creation (again, framing.)

    Inflation, then, is a policy choice rather than a hard constraint on spending. The government is capable of spending any amount to acquire anything for sale in their currency. Whether it should do so or not is a different matter (hence the concept of a price rule rather than a quantity rule for spending.)

    The point of framing it like this, I find, is to avoid the inevitable misinterpretation that will occur when people start treating the de facto constraint of demand-pull inflation that appears under the limited circumstance of full capacity as an actual constraint that the government should balance its budget.

  5. #13 by jedharris on April 16, 2012 - 6:46 pm

    I know nothing about MMT as such, but the answer to this question seems obvious to me. So here’s what I think MMT should say, whether it does or not:

    Spending and taxation are loosely coupled, and the coupling is some complex function of production and consumption practices, which change for lots of reasons including technology, demographics, norms, styles, widely practiced criminal financial practices, etc. In general we can’t predict this coupling very well.

    Furthermore how we spend and how we tax are motivated by controlling economic behavior in complex ways — e.g. compensating for externalities (which may require taxing and/or spending).

    Combining policies designed to control economic behavior with some kind of bookkeeping to make revenues equal expenditures complicates both the practical and political problems of managing government policy.

    Furthermore there’s no guarantee that the bookkeeping will be compatible with the optimal policy — optimal taxation and spending could be consistently out of balance. In that case trying to satisfy the bookkeeping constraints will drive us to implement bad policy. (This seems pretty clear right now.)

    So if the position you have described is correct — that government doesn’t *have* to generate revenue equal to its expenditure — then we should avoid doing the bookkeping, because it will almost certainly interfere with good management of the economy.

  6. #14 by jedharris on April 16, 2012 - 6:54 pm

    I guess my the first sentence of my argument should read “Optimal spending and taxation are loosely coupled, …”

  7. #15 by FranklinD on April 16, 2012 - 8:30 pm

    You don’t really have to understand MMT in order to understand this. The fact is, the US government doesn’t need to collect money to make more money. When they want to create money they change numbers in a computer system. They don’t take it from John to give it to Jane. They can and do just change numbers in a computer and give it to Jane.

    MMT is a macro theory of the economy and encompasses an approach to reaching full employment and price stability. They promote this approach through a national job guarantee which would provide employment for anyone who wants it.

    But you don’t have to understand MMT to understand that a country with a printing press can never go insolvent in a currency it can print.

  8. #16 by Jim Whitman on April 16, 2012 - 9:50 pm

    I’d say that your concept of the economy is a bit like a one legged stool. Sat on that stool are quite a few other institutional bottoms other than simply a spending/taxing government. Questions include private banking, employment, production, consumption etc. and the relationship these have with the economies and politics of other countries. Not least to take into account are the democratic politics and government policy of one’s own country. As an example of MMT thinking Bill Mitchell says that government shouldn’t treat deficits as their policy target. I think this is both a simple and a complex statement and one I’d agree with. I don’t pretend yet to fully understand its ramifications. But one underlying question it raises for me is the Keynesian question of uncertainty. As you see, I don’t think taxation is a simple lever acting on a static system. What we have is a matter of complexity. I think the MMTers capture what they can of the economic picture. Others like Steve Keen similarly. I don’t think either simplify in the way that you imply is possible with your question.

  9. #17 by AmirS2 on April 17, 2012 - 5:42 am

    If the private sector always desired to utilise 100% of the economy’s productive capacity (and save no money as a whole), then govt revenues would indeed need to match govt expenditures to avoid inflation. However, the private sector is never in such a steady state equilibrium, so govt expenditure is never expected to match govt revenues.

    Further, there is no guarantee that the private sector will be in equilibrium over the business cycle, so there is no long run constraint on govt revenues matching expenditure.

  10. #18 by Unlearningecon on April 17, 2012 - 1:09 pm

    Thanks for all the responses, I think I get it – the disagreement is part semantics, and part to do with the need for expanding money to accommodate private sector savings.

  11. #19 by ruggedegalitarianism on April 19, 2012 - 3:18 am

    So here is my problem: if governments are inflation constrained, and they reduce inflation via taxation, isn’t this ultimately the same thing as if they were revenue constrained? Why not eliminate the middle man and simply raise taxation to fund expenditures?

    Because when you are in an economy like ours with mass unemployment and underperformace, and a large aggregate demand shortfall, you won’t hit the inflation barrier for some time. You may have to tax eventually to put on the brakes, but you will never have to tax as much out as you spent in.

    The point is that to plug the demand leakage, and restore the economy to full employment and healthy growth, you want to run a healthy deficit for an extended period of time so that you are net spending: injecting more money into the economy than you are taking out. If you want to raise taxes, fine. But make sure you raise spending even more so that you are accomplishing a net injection of financial assets.

    What you don’t want to do is match the spending dollar for dollar with new tax revenues. That might help a little just my reallocating spending power, but you will not be increasing the net flow of financial assets into the economy, so it is somewhat self-defeating.

  12. #20 by Neil Wilson (@neilwilson) on April 19, 2012 - 6:09 am

    “But my point is that you can do one of two things:

    (a) Tax, and spend the same money on stuff.

    (b) Print the money, then have to increase taxes to quell inflation.

    Aren’t they effectively the same thing except one is more belaboured?”

    Try thinking about the temporal relationship and the effect on real production and the psychology of the population.

    The problem is excess non-government sector savings and what to do about them. Excess non-government savings brought about by feelings of uncertainty generate the paradox of thrift. They cause a depression by eliminating spending.

    A credit system can have this condition because banks buffer, so you end up with a value that MMT calls ‘net-savings’ which is more properly called ‘non-government savings net of investment’.

    As uncertainty increases investment goes down and savings goes up, increasing the excess savings value.

    The choice then for government is to confiscate those excess savings (saving without corresponding investment spending is essentially banned in some way), let the economy shrink naturally (causing massive unemployment and destruction of capital – bad and good), or accommodate those excess savings by running a deficit (essentially offer the non-government sector a savings account with government – whether national savings, bank reserves, government bonds or even cash for storing under a mattress).

    It’s very difficult to determine whose savings are excess – because we have intermediary facilities called banks. So taxing the excess savings away is problematic. Taxation is just as likely to destroy actual private sector spending, and in itself seems to generate further uncertainty – after all you are increasing taxation in a slump. It’s very likely to be pro-cyclical.

    The MMT approach is to accommodate those savings (eliminating the problem of whose savings are the issue), get the economy going and increase taxation/decrease government spending if necessary *during a boom* when it is more acceptable. However if you design the automatic stabilisers properly that will handle the counter-cyclical backoff more elegantly and acceptably – hence the Job Guarantee process.