The MMT view of things is perfectly simple and covers the taxation/funding side as well as the spending side.
1. When the government spends money, it is printing or creating money. It does not need to 'borrow' money to spend, either there will be more coins and notes in circulation or more Treasury Bonds (or their digital equivalents). These are just two types of the same thing. Cash is liquid and non-interest bearing, bonds are less liquid and interest bearing. But both are just numbers on bits of metal, paper or in an electronic register somewhere, issued and backed by the self-same government.
2. When the government collects taxes, it is unprinting or destroying money. The purpose of this is to create demand for the currency (primary aim) and hence avoid inflation and keep interest rates down (outcomes). It is broadly agreed that that low inflation and interest rates are A Good Thing.
Some MMT supporters look at the first part, the spending/printing side and say, "Oh well, that means that the government doesn't need to borrow money or collect taxes to be able to spend", which is to completely ignore the second part. These people are moving the debate backwards and discrediting MMT, which is not a policy recommendation, it is a simple description of how things work.
The recent Truss/Kwarteng foray into cutting taxes was a bad idea politically (it would have increased inequality) but the financial markets don't care about that, they care about the second part. Unfunded tax cuts reduce demand for a currency and hence lead to the currency weakening relative to other currencies; hence imported price inflation; as well as higher domestic inflation (more money sloshing about chasing the same amount of goods and services); and higher interest rates (to compensate for future expected inflation and general uncertainty that the government doesn't have a clue what it's doing).
Simply reversing the proposed tax cuts has reduced the damage in part, but not completely. If a car runs you over, you can't ameliorate your injuries by having the car reverse back over you again! And with Truss and Kwarteng at the controls, you can expect to be the victim of lots of hit and runs in future.
About That Closet
5 hours ago
25 comments:
Trouble with MMT is that - to me - it fails when tax rises are applied in times of 'high inflation'.
Mind you as I fundamentally have never ever trusted any government, then I can't really trust them to run a nationalised money, can I? So maybe it's just me that has the problem?
What Mises.org has to say on MMT:-
https://mises.org/power-market/mmt-not-modern-not-monetary-not-theory
L, Mises also misunderstand MMT. They are - rightly - slagging of the Lefties who say - wrongly - that governments can run huge deficits and no harm done. And then dissing MMT generally.
"Taxes function only to regulate demand and hence inflation; federal borrowing functions only to regulate interest rates."
It's not "only", this unprinting side is JUST AS IMPORTANT!
Off topic, but I saw this BBC article:
https://www.bbc.co.uk/news/business-63160377
Landlord says "I've swallowed several interest rate rises this year without increasing rents. Now I have to pass them on".
I hope they are aware that it is market forces in their area that determines the maximum rent they can charge, not the cost of their mortgage. If they are already charging the maximum their local market will stand, increasing the rent will result in an empty property, but they will still have to pay the mortgage.
RT, good spot. They can whistle for their rent increases; they gambled on ever rising rents, and this gamble doesn't always pay off..
MW.
I go back to the 'increasing taxes under high 'inflation'' issue. That is a political Hot Potato hence probably a practical impossibility.
I am also not at all sure that cutting taxes drives up demand - all other things being equal. That is in a free market with small government, strong property rights, sound money, zero 'inflation', self determination etc individuals will have a higher propensity to save. And employers will likely keep some of those payroll tax reducing tax savings (assuming PAYE still exists).
And it also seems to me that MMT is just another way to keep the lefty ship on course for world domination. (:-) )
When you look deeply into MMT, you find that some taxes cause price rises and some cause price drops. Long-term readers of this blog will doubtless be unsurprised to learn that VAT tends to cause prices to rise while LVT tends to cause them to fall. So the "founder of MMT", Warren Mosler recommends property taxation as the main form of tax. Okay, not as good as LVT but a lot better than what we currently have.
" as well as higher domestic inflation (more money sloshing about chasing the same amount of goods and services)"
I think this is universally true, it's not just more government spending that causes inflation, it's any increase in the money supply. In that we see the same effect as with land - the more money people have to spend overall, the more things cost.
I also think that, although money in the form of currency and coinage borrowed the pre-existing units of value from credit, that doesn't mean that they are one and the same thing. Currencies might collapse, but credit still goes on.
" They can whistle for their rent increases; they gambled on ever rising rents, and this gamble doesn't always pay off.."
Perhaps he's just a nice guy and hasn't been putting his rents up lately.
Bayard
"I think this is universally true, it's not just more government spending that causes inflation, it's any increase in the money supply. In that we see the same effect as with land - the more money people have to spend overall, the more things cost."
That's rather what Friedman says. It's not high taxation per se that's then problem - it is government spending.
The rent increases due to rising interest rates - I'm sure there are a fair few incompetent/generous landlords who have been running below market rates and are now waking up , but if you look at the whole of market ONS stats, rents are up 3.4% year to Aug 2022
https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/indexofprivatehousingrentalprices/august2022
And interest rates had been falling for 40 years, so if interest was a cost of production, rents would have fallen over 40 years
L, that's introducing at least three new topics, I'd probably agree with your views.
D, there is a grey area between PPT and LVT, it depends what the basis for valuation is. Let's value all sites on one street as a % of the average total value of all sites on that street incl. buildings. So they all pay the same per foot of frontage. That's based on property values but acts just like LVT.
B, agreed both comments.
L, you are circling back to MMT. Ideally, the govt spends on good stuff that helps the economy (public goods that otherwise would be underprovided) and/or pre-distributes the rental values arising (not crap like Tobacco Enforcement Officers and aid payments to nuclear armed countries or contracts for companies run by govt ministers and their mates).
And it unprints that extra money by taxation (pref. good taxes like LVT). Sorted, everybody wins.
Clearly, all government mess up.
M, there's nothing like providing hard evidence and then watching the Homeys completely ignore it.
MW yes, it would rather have to be unprinted by LVT in order to bring land prices back under control after all the a priori money printing. Would it not?
L, exactly. Mainly by LVT, which ticks several boxes:
1. Easy to assess and collect.
2. Encourages govt to spend money on things which make the UK a nicer place to live and do business. Government is just a collectively owned service provider with a profit incentive. Surplus gets paid out as UBI or used to pay off National Debt.
3. Is not a tax on individual earnings or output, so no deadweight costs.
4. Reduces inequality (i.e. eliminates and pre-distributes that element of 'wealth' that only arises because of taxes paid by and efforts made by 'everybody else'), without confiscating and redistributing earned income.
MW. It's quite serendipitous as to how everything circles back to how we deal with 'rents'. So another right way to unprint money would likely be by way of a bank asset tax. They've had all the dosh up front so now we'll have some back, please.
L, what's different about bank assets that makes them a good thing to tax compared to other assets, like personal wealth or business (non-banking) assets?
B they are generally property rents at one remove.
L, so "assets" = "loans"?
B Yes. I suspect that loans are the only 'assets' most banks have. Obvs various banks have share trading operations and they also own lots of prime high street buildings, and hold government bonds (which are de facto loans to gov't) but their main 'assets' must be the loans they make, mostly mortgages, i.e. secured on real estate - from memory, up to about 80% of their loan book. And mortgages are often described as 'asset backed securities'.
So taxing the interest income stream is analogous to taxing the location premium under LVT. In fact to be consistent it's probably necessary.
What's more when the revolution comes and 'we' scrap all corporate taxes (as they are almost universally incident on people; i.e. corporates don't pay taxes, they collect them) we will need to tax the income stream of those interest aka rent receipts.
" and they also own lots of prime high street buildings,"
Do they? I have a house next to what was a branch of the HSBC (strong contender for the title of "Ugliest Building in the Town") and I needed to contact the owners about something. Turned out HSBC were just tenants.
B. yep. Been selling off lots of stuff. But you might find they are tenants of themselves through a subsidiary.
B, see Unknown's explanation.
Unknown, ta for summarising.
The bank asset tax is ultimately on the economic value of the legal backstops provided by the UK govt, which is how banks earn their easy money. Andy Hornby, head of HBOS, doesn't come round with a baseball bat and a couple of tough looking mates, the courts and the bailiffs - or the threat thereof - do the dirty work.
In a perfect world, the tax would be on all loans and similar with
- a UK borrower, or
- loans secured on UK assets (land and buildings, mainly), or
- any loans or similar enforceable in the UK courts (whether originally drafted under UK or foreign law).
- UK govt gilts would be excluded, that would be silly. Yields on gilts are lower to account for the fact that the borrower guarantees that he'll pay back so is already net of notional bank asset tax.
- applies to all banks and similar, whether based in the UK or not.
Sure, some banks will exclude this that or the other loan. They have to inform the borrower and as a result the loan will not be enforced by UK courts, and they can send men with baseball bats themselves. It's like insurance or a protection racket.
George Osborne did introduce a bank asset tax, at a very low level, and it worked, it raised a bit of money, sadly later shelved. We can use that as a template and tweak it. It also covered non-UK loans which was silly - banks are like privateers, morally questionable, but if they are stealing foreign treasure and bringing it to the UK, fair enough. Up to other countries to have their own bank asset tax.
"The bank asset tax is ultimately on the economic value of the legal backstops provided by the UK govt, which is how banks earn their easy money. Andy Hornby, head of HBOS, doesn't come round with a baseball bat and a couple of tough looking mates, the courts and the bailiffs - or the threat thereof - do the dirty work."
Nor does any business that sells on credit. Are their outstanding balances going to be liable to an asset tax, too? Surely this is not where banks get a better deal from the Gov't than anyone else, where they get that is the Gov't preventing any Tom, Dick or Harry from setting up as a bank and the deposit guarantee.
B, let's not get bogged down in details.
The barriers to entry and deposit insurance are a different topic (don't confuse assets with liabilities, they are the same amount but opposite signs).
yes, any business can use the courts if they sell on credit, but that is not their core business, they seldom ask for debts to be secured. They really prefer good customers who just pay up and usually write off smaller amounts from non-payers. They can also call the cops or the fire brigade, those are just core government functions/services available to all and sundry.
Post a Comment