Defining the Tax Reform Battleground

Yves here. Although J.D. Alt is correct to criticize Republicans for passing a tax “reform” bill that shamelessly enriches the already wealthy, it’s disingenuous for him to depict the balanced budget/deficit hawk obsession as a Republican scheme foisted on Democrats. The Clinton Administration was in thrall to the bond gods, and fetishized not only balancing the Federal budget but  even saw paying down the Federal debt as desirable, when Modern Monetary Theory stresses that what should drive the decision as to how much deficit spending a currency issuer should engage in depends on how far the economy is from full employment and how much other resource slack it has.

As a reminder, Randy Wray discussed how Federal deficits are misunderstood:

For most people, the greatest challenge to near-and-dear convictions is MMT’s claim that a sovereign government’s finances are nothing like those of households and firms. While we hear all the time the statement that “if I ran my household budget the way that the Federal Government runs its budget, I’d go broke”, followed by the claim “therefore, we need to get the government deficit under control”, MMT argues this is a false analogy. A sovereign, currency-issuing government is NOTHING like a currency-using household or firm. The sovereign government cannot become insolvent in its own currency; it can always make all payments as they come due in its own currency.

Indeed, if government spends currency into existence, it clearly does not need tax revenue before it can spend. Further, if taxpayers pay their taxes using currency, then government must first spend before taxes can be paid. Again, all of this was obvious two hundred years ago when kings literally stamped coins in order to spend, and then received their own coins in tax payment.

Another shocking truth is that a sovereign government does not need to “borrow” its own currency in order to spend. Indeed, it cannot borrow currency that it has not already spent! This is why MMT sees the sale of government bonds as something quite different from borrowing.

When government sells bonds, banks buy them by offering reserves they hold at the central bank. The central bank debits the buying bank’s reserve deposits and credits the bank’s account with treasury securities. Rather than seeing this as borrowing by treasury, it is more akin to shifting deposits out of a checking account and into a saving account in order to earn more interest. And, indeed, treasury securities really are nothing more than a saving account at the Fed that pay more interest than do reserve deposits (bank “checking accounts”) at the Fed.

MMT recognizes that bond sales by sovereign government are really part of monetary policy operations. While this gets a bit technical, the operational purpose of such bond sales is to help the central bank hit its overnight interest rate target (called the fed funds rate in the US). Sales of treasury bonds reduce bank reserves and are used to remove excess reserves that would place downward pressure on overnight rates. Purchases of bonds (called an open market purchase) by the Fed add reserves to the banking system, prevent overnight rates from rising. Hence, the Fed and Treasury cooperate using bond sales/bond purchases to enable the Fed to keep the fed funds rate on target.

You don’t need to understand all of that to get the main point: sovereign governments don’t need to borrow their own currency in order to spend! They offer interest-paying treasury securities as an instrument on which banks, firms, households, and foreigners can earn interest. This is a policy choice, not a necessity. Government never needs to sell bonds before spending, and indeed cannot sell bonds unless it has first provided the currency and reserves that banks need to buy the bonds.

By J. D. Alt, author of The Architect Who Couldn’t Sing, available at or iBooks. Originally published at New Economic Perspectives

The Republican tax reform will be criticized on many fronts. It is a battle of criticisms that will likely become as chaotic, ill-informed, and counter-productive as the tax reform process itself has been. This is because it will surely ignore the only strategic battle-front that ultimately matters: the basic premise of what taxes are for and why they’re necessary.

Before the Republican tax reformers even said a word, their arguments and proposals were packaged in the tired and tiresome macro-economic assumptions that misguidingly underpin our entire political discourse. Namely: (a) The federal government collects taxes in order to pay for federal spending; and (b) it cannot collect enough taxes to meet the spending needs of the budget it annually produces. To solve this conundrum some combination of reducing the budget and increasing taxes is therefore required. The magic Republican formula to simultaneously accomplish both of these goals is to dramatically reduce taxes on the wealthiest class of corporate operatives—which is made palatable to the voting masses by attaching to the corporate coat-tails some colorful snippets of tax-relief for lower and middle-class working families.

These mental gymnastics result in a strange form of double-speak: From one corner of the Republican mouth comes the logic that allowing the wealthy corporate operatives to keep more of their dollars will result in BUSINESS EXPANSION—creating new working-class jobs with taxable wages that will subsequently increase federal tax collections. Out of the other corner of the mouth comes the logic that because the necessary tax reductions will increase the budget deficit, it can only be fiscally responsible to subsequently reduce the budget itself which, alas, will require cuts to the nation’s retirement, food, and medical safety nets (since everything else in the budget is essential for national security, public safety, and the profitable functioning of the corporate economy.)

If these hyperbolic, self-enriching, and mean-spirited pronouncements cause you to want to rush out with your musket to one of the street barricades now manned by the Republican guard—stop! These are feigned battle-fronts where ultimately you cannot win for the simple reason that you will have bought into the false premise that underpins the whole battle scene the Republicans have laid out. (This is what Barack Obama proved when he agreed to parley over a “grand bargain” to cut the federal budget deficit.) This smoke-screen front is where the corporate operatives and their Republican guards want you to come to fight. Where they don’t want to do battle is on the field of macro-economic reality where their arguments cannot withstand the simplest of truths and facts. That’s the battlefield you want to rush to. But you don’t need a musket (hopefully). What you need to arm yourself with is just a few of those simple truths and facts. Here’s a start:

  1. The federal government issues and spends fiat-dollars first―then it collects some of those dollars back This is like Time: it can only go in one direction. Or football: a wide receiver cannot catch a pass until after the quarter back throws the ball. Republican tax reformers want you to believe the pass is caught first, and then it’s handed back to the quarterback to throw!
  2. The federal government has to collect tax dollars for two simple reasons:
    1. First a U.S. sovereign fiat-dollar (what the federal government issues and spends as “money”) is, in fact, a tax credit: its purpose is to make available to citizens the one and only thing they can use to pay their taxes It is called a “Federal Reserve Note.” It is called that because it is, legally, a “promissory note”―and what it “promises” is that the U.S. government will accept it back as a tax payment. That’s the only promise a “Federal Reserve Note” makes.
    2. For the fiat-money system to work, the federal government has to continuously drain dollars out of the economy because new fiat-dollars are continuously being created and spent into the economy. If dollars were not consistently drained out in taxes, we’d soon be swamped in so much money the price of everything would begin to spiral out of control.
  3. If the federal government collects back fewer dollars than it has issued and spent, we call that a “deficit” because it appears to our everyday thinking that—like an undisciplined household—the government has spent more than it earned. This seems reasonable until you confront the fact that the sovereign government doesn’t “earn” Federal Reserve Notes, it “issues” them. Each Note is the government’s promise to accept the Note back as a tax payment. When the tax payment is made, the promise is fulfilled and the Federal Reserve (promissory) Note is cancelled. The Note is not something the government has “earned.” When it needs to spend again, it simply issues another Federal Reserve Note.
  4. Tax-paying citizens want the federal government to collect back fewer Federal Reserve Notes than it has issued and spent! If it collects back more of the Notes than it has spent, we—the citizens—will have to dip into our savings (or even borrow) Federal Reserve Notes in order to pay our taxes.
  5. The currency-issuing sovereign government doesn’t need our tax dollars to buy public goods and services for the simple reason that it has already bought them—which is why we, the citizens, have the Federal Reserve Notes in the first place to pay our taxes with. The federal government buys public goods and services first, then it collects back some of the Notes it paid to citizens to provide those goods and services.

These basic macro-economic facts ought to be defining the real questions in our tax-reform debate: What are the collective goods and services American families and American commerce are most in need of? How many Federal Reserve Notes will the sovereign government need to issue to pay American citizens and businesses to create and provide those collective goods and services? Given that level of federal spending, how many Federal Reserve Notes will need to be drained to maintain price stability? What is the fairest, most effective way to drain those Federal Reserve Notes out of the system? Where do excess Notes—the ones that aren’t being used to feed, clothe, and house families, that aren’t being used to invest in productive and useful products and services, that are being used instead to simply make bets in a speculative gambling casino—where do those excess Federal Reserve Notes tend to accumulate? These are the questions, I think, that should be establishing the real battleground of America’s tax reform debate.

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  1. Disturbed Voter

    Micromanagement. Except for liquidity, currency provides no functional asset, other than delayed purchase. People wanting to decide what savers do … given that savers should be the ones controlling the bank’s ability to make loans … is micromanagement. Saving should be encouraged over spending, and deposited currency should be lent out. We need to go back to the original decentralized model.

    But people love to micromanage their neighbors. And the current ahistorical model, enables an out of control centralization, police state, and imperialism. I don’t see those as good things. If a modest Federal government were to return things, economically, to where we were in 1964, I wouldn’t mind that at all. And we don’t even need to use gold or silver to do it. People are used to fiat currency and token coins now. But we are also unfortunately used to excessive centralization, police state, and imperialism.

    The government being all powerful, while being aware of and controlling every purchase of chewing gum, and considering keeping some money back in a cookie jar as a criminal act … isn’t a good government.

    1. Allegorio

      Look up the Paradox of Thrift and you will realize how retrograde the thinking you’ve presented is. The “people” need housing, food, clothing, education, infrastructure. They need these things whether some billionaire can turn a profit on them or not. Resources both human and material need to be marshaled to meet these needs.
      The sovereign needs to issue enough currency to meet those needs. It is not about some macho rat race determining who are the haves and the have nots. It is time to get real and forget the shibboleths the “haves” obfuscate reality with so they can have and you cannot.

      1. Disturbed Voter

        The sovereign isn’t there to serve The People. Read Plato’s Republic. The public exists to serve the needs of the Guardians.

  2. JBird

    Okay, I understand.

    I also know that it doesn’t matter because our society tends to measure a person’s worth as a human being, as well as their personal virtuousness was because (emotionally) it’s believe that God bestowes wealth to signify that. It is a reflex that’s in our cultural bones. To get MMT the acceptance needed for it to be used, we will need to get around, not through, the mooches-lucky duckies-job creators-deplorables-Bernie Bro-Stalin is Communism forest. And Weimar! The anti-MMT ads and memes are already written.

    Most Americans either realize, or are starting to, that it’s heads they win and tails you lose and are looking for why. That means that over beer I could get several people to understand MMT and its needed use. Maybe a couple of meetings. It almost has to be done over beer because of all the emotional traps and responses that have been inserted into our collective heads. So beer and coffee klatches for 300 million Americans or something else?

  3. Expat

    This argument is too reductionist. Federal currency was not always simply a means of paying taxes. It was also money (specie) issued against gold and silver reserves. Granted, the US has gone off the gold system since 1973 but that was a slight of hand since few transactions were taking place with gold anyway. Dollars remain money for most people and represent the value of goods and services; taxes represent, in their minds, foregone goods and services.

    An argument that is not put forward by Democrats, at least those who support government, is that government spending is not a black hole. There might be an argument that private industry is more efficient (debatable for a variety of reasons, not the least of which is profit motive), but there is often the assumption that government spending does not lead to economic growth (or real economic growth). $100 spent by the military has as much effect on GDP as $100 spent by Google. It is the same Federal reserve note.

    Arguing with fiscal and social conservatives about the cause and effect sequence of taxation and spending is unlikely, in my view, to get you very far in Bodunk, Arkansas or Washington, D.C.

    1. Quanka

      I hear what you are saying. Its more a problem when someone doesnt want to understand what is being put forward. Both of my parents are CPAs and only moderately conservative (i.e. open to welfare spending). They both look at me with blank stares when I try to explain MMT. This is a problem whether someone is educated or not.

      I like the positioning of this 5 point sequence above. The football analogy is helpful to our over-entertained culture. The President and the Congress are the Coach/Coordinator, calling the shots. The Quarterback represents the federal/state/local + nongovernmental agencies spending the money (throwing the ball). The people in the economy catch the ball. But which players get the ball thrown their way?

      Right now, the president is calling for hail mary after hail mary to the 80 year old fat white guy who hasn’t bothered to get back on the right side of scrimmage and just bribes the coaching staff to keep lobbing him touchdown passes until he hauls one in. This is our intrepid, job creating entrepreneur. We could be throwing little slants and screens to the fast newcomers, but this tax plan is the effect of a hail mary.

      How is that fair compared to the scrappy young guy working his tail off to get a tryout? And what stupid economy is flushing downs on hail marys when you can put together a real offensive scheme?

      This is how you connect with ‘Mericans from Little Rock to the Shitty City on a Hill.

    2. Barry Fay

      Randy Wray speaks of a circumstance in which the indigenous people of a colony were simply not interested in working – which of course very much limited the economic potential of the colony for the colonizers. Their solution was to introduce a broad taxation plan that required all the people to pay a certain amount of taxes. The only way, of course, to pay those taxes was with the currency used by the colonizers – which could only be acquired by WORKING at least enough to pay the taxes and thereby avoid being jailed. Voila.

  4. scott 2

    Is a $2M 800 sq ft bungalow in Palo Alto a productive asset? Is it a coincidence that the most inflated things in our economy are those that “fiat-dollars” (e.g. debt) flow into first? Health care, education, housing, defense?

    1. Grumpy Engineer

      Indeed. The federal government has ensured that Medicare has unlimited money with which to pay claims, and our medical providers have (ahem) adjusted their practices to take advantage. The government has also ensured that the Department of Education has unlimited money with which to issue student loans, and our colleges and universities have also taken advantage. And it’s the same with the Department of Defense and our various defense contractors. Prices in all three categories? Up and up and up, much more quickly than general inflation.

      And the Federal Reserve’s suppression of interest rates in the private sector has encouraged excess borrowing (and the accompanying money creation) there as well. People can borrow more for housing, and housing prices go up. People can borrow more for investment purposes, and stock prices go up. Companies can borrow more for leveraged buyouts, and monopoly formation and “vulture equity extraction” rates go up.

      And in the midst all of this, did the lives of ordinary Americans get better? I honestly don’t think they have. Spending lots of newly-printed fiat dollars only improves the paychecks of the people who are directly paid with the new dollars first. For everybody else, it’s “trickle down” only.

  5. Barnaby

    The reasons the govt needs to or doesn’t need to do something are irrelevant. The govt does collect taxes. Those taxes are a subset of the amount of economic output; put more directly skin off my ass. Your argument leaves aside some pretty important factors such as the fluctuating value of the aforementioned notes and that the current system is setup to reward those with first access to their emission.

    Advocates of getting rid of, or heavily modifying, that system are often directly or indirectly really complaining about how the current emission system allows arbitrary picking of the winners and those winners are the banks and Wall St. The main reason being in my view is that the system keeps emitting more notes into a real world already laden with debt and rampant over capacity. From the perspective of store of value the mechanism is completely broken as the number of notes never decreases regardless of economic circumstances. From the mechanism of medium of exchange the system still works by inertia and threat of force. Is that really how you want to base your currency?

    So if we are talking about the tax theft bill, it just does more of the same, sigh. I suppose it all comes down to whose ox is being gored.

    1. Allegorio

      “From the perspective of store of value the mechanism is completely broken as the number of notes never decreases regardless of economic circumstances.” @ Barnaby

      Our economic system is based on debt/credit. When a bank loans money, money is created. When the loan is paid back, money is destroyed. If the federal debt is paid off, there will be no money and we can go back to barter.

      The sovereign does not need to borrow money. This is the basis of MMT. The constitutional obligation of the the government to create money has been usurped and privatized by those who you rightly say front run the money creation. Instead of distributing reserves to banking cartels, every citizen should have an account at the Federal Reserve, into which his share of the resources of this country and equity created by the Federal Government, namely the internet, electronics, pharmaceuticals, satellite communications transportation infrastructure, are deposited which have heretofore simply been turned over to the politically connected and used to extract rent.

      This money will be spent on goods and services and not speculation and bubble blowing. The digital revolution has made this possible. It is time to transform our economic system from one based on debt to one based on productive capacity and meeting the needs of its people not its elites.

  6. Grumpy Engineer

    Item #3 in J.D. Alt’s synopsis is incorrect. The federal government does not issue Federal Reserve notes. The Federal Reserve does. It does so when it lends money out to the major banks. This is how the money supply in the US increases. When the US government is spending money, it is either spending tax revenues (existing money that was already circulating) or funds that it borrowed (which are a mix of people’s savings or newly-printed dollars from the Federal Reserve).

    And yes, even though the Federal Reserve is willing to ensure that there is always money available for the federal government to borrow and spend, is unlimited money-creation and government spending really such a good idea? After all, this is the approach that Japan has taken, and their “lost decade” that started in 1991 is entering its 27th year. And the government of Venezuela is directly printing money to cover all sorts of spending (and a 30% deficit), and their economy is actively circling the drain.

    Too many people seem to think that unlimited government spending will be a great panacea that will solve all of our woes, but I see far too many opportunities for things to go wrong. What happens if we follow the footsteps of Japan or Venezuela? What if a new president decides that a federal jobs program is for “losers” and redirects the unlimited dollars into military spending instead? Or if a new president decides to spend unlimited dollars on “urban revitalization” while completely neglecting rural areas? Do we really trust our political leadership to get this right? It’s too much power for a collection of people who are clearly incompetent. All I see is corruption, cronyism, and the consequences of political favoritism reaching all new heights.

    1. Mel

      Alt and the theorists regard the U.S. Treasury and the Federal Reserve as a kind of tag-team working together in issuing and spending money. Prof. Mitchell does have a historical essay examining the internal policy split that happened when the FED concentrated only on controlling inflation while the Treasury was still interested in funding concrete actions.

    2. Larry

      The article doesn’t advocate unlimited government spending, rather realizing that tax cuts need not be a reason for reducing spending items that help alleviate suffering. Political leaders are nearly unified in trying to destroy social safety nets around the world. MMT says that you can pay for the things you need as a sovereign, you are not constrained by tax revenues. The big question is, can we generally trust governments to use the spending power wisely? On that count I believe you are correct in that the answer is no without a major change in the political class. Unconstrained spending is more likely to be dumped into endless war and bank bailouts than on providing first rate education, healthcare, and housing options for the citizens of the sovereign. Hell, it already is. When was the last time you heard any politician seriously say we need to stop fighting so many wars because we can’t afford them? We can afford them, up to the limit of our physical and human capital constraints will allow.

      1. Jim


        You have nicely identified what I see as the continuing key issue/big question with MMT:

        “…MMT says that you can pay for the things you need as a sovereign, you are not constrained by tax revenues. The big question is, can we generally trust governments to use the spending power wisely. On that count…the answer is no without a major change in the political class. Unconstrained spending is more likely to be dumped into endless war and bank bailouts…”

        For all supporters of MMT on this blog:

        How do you view our ruling political class?

        If Bernie wins in 2020 do you trust his political appointees at the Treasury and Federal Reserve to work in the best interests of the average U.S. citizen?

        If you do think they will work in our interest, what is the origin of such confidence?

        And what is the leverage we will have against this present political class if based on an “inside/outside strategy” there is no outside that is brought into existence to constrain them from eventually becoming simply another authoritarian government operating for its own self-preservation–like the present ruling neo-liberal political class?

        1. cnchal

          MMT is a description of the way the system is, from the currency issuer’s perspective.

          From the peasant’s perspective, MMT is defined as (Material Meet’s Tool X sales) – expenses = profit or loss.

          Enough profit, and you are no longer a peasant.

          You are the tool. What’s your material?

      2. Grumpy Engineer

        @Larry: If “you are not constrained by tax revenues” when it comes to spending by the federal government, why do we pay federal taxes at all? I ask that question in all seriousness. A substantial chunk of the country lives paycheck-to-paycheck (, and yet paycheck after paycheck, we have payroll and income taxes taken out. It makes our lives harder, and if what you say is true, it’s completely unnecessary.

        I feel like the only thing that MMT proponents advocate is increased government spending. Why do they not support a “complete and permanent income and payroll tax holiday for the 99%”, or something like that? It would surely improve the ability of most Americans to make ends meet. Or is there is there a hidden catch that isn’t being explained?

        1. Oregoncharles

          That’s a good question, but it has been explained:

          Taxes are used to support the value of money (because you have to have it to pay your taxes), to regulate the money supply, and to regulate commercial activity. For instance, you might need to spend enough on, say, social welfare, to cause inflation if the funds weren’t sucked back by taxation. (Did I forget something?)

          Issue one: would those justifications be adequate to get people to pay their taxes? I have doubts.

          Issue two: is there a better way? Probably. One appealing proposal is to substitute extraction taxes, levied where resources come from or off the ground or wastes are released, for the income tax. This maximizes the 3rd purpose of taxes and minimizes the impact on ordinary people. Prices would higher, but would be avoidable by using less resources, the ultimate purpose. However, it might not support purpose one. Personally, I think that’s just a special case of the basic “fiat,” which requires sellers to accept money in payment. It flows from the government’s role as enforcer of contracts. Taxes are a debt.

          However, regulating the money supply might be more difficult in that system.

          IOW, I think it’s still a good question, even given the explanations.

          1. Grumpy Engineer


            If taxes are being used to regulate the supply of money, it effectively means that the size of the deficit matters. After all, if the government ramped up a major new federal spending program (like free college or universal health care) without new taxes to pay for it, it would be injecting lots more newly-printed dollars into the economy than it had before. This would mean more inflation unless steps were taken to pull some of those dollars back out of circulation. Those “steps” would be tax hikes.

            The net result… If we want to properly manage the money supply and avoid inflation, then new spending would have to be accompanied by new taxes. Somehow this sounds an awful lot like the standard “deficit hawk” advice that new taxes be levied to pay for any new programs. And likewise, if taxes are cut, should not federal spending be reduced to avoid unwanted inflation?

            Or have I misinterpreted things?

            1. Yves Smith Post author

              Yes you have. No one ever said you could deficit spend on an unlimited basis. MMT advocates have always said one of the purposes of taxes is to drain excessive demand.

              But you are promoting the bogus line that, as one tax expert puts it, “The numbers by the window have to match the numbers by the door,” that the budget needs to balance. IF you look at US history, the US has overwhelmingly run deficits, and the few times it hasn’t happened, one of two things have occurred: 1. A recession follows or 2. In the 1990s, when consumers have access to credit like they never had in the prior history of man, they go on a borrowing binge to make up for insufficient public spending.

              As Abba Lerner said in Functional Finance and the Federal Debt:

              The central idea is that government fiscal policy, its spending and taxing, its borrowing and repayment of loans, its issue of new money and its withdrawal of money, shall all be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine about what is sound or unsound. This principle of judging only by effects has been applied in many other fields of human activity, where it is known as the method of science opposed to scholasticism. The principle of judging fiscal measures by the way they work or function in the economy we may call Functional Finance …

              Government should adjust its rates of expenditure and taxation such that total spending in the economy is neither more nor less than that which is sufficient to purchase the full employment level of output at current prices. If this means there is a deficit, greater borrowing, “printing money,” etc., then these things in themselves are neither good nor bad, they are simply the means to the desired ends of full employment and price stability …

              We have plenty of slack in the economy, as is evident from high rates of under-employment, weak wage growth, and employers engaging in abusive work practices (Amazon warehouses). The places in the economy where you see prices rising rapidly are due to monopoly and oligopoly pricing power or other distortions (student debt fueling an explosion in higher ed costs).

    3. Mel

      I’ve been wondering whether following Japan might not be so bad. For all I know, Japan could be the first model of a zero-growth economy. And we’ve seen since the Club of Rome report that it’s zero-growth that’s in our future. I don’t have the Economics training to dig very deep into this question alone.

      1. Joel

        Isn’t it possible Japan has zero growth because of declining population, not monetary policy? Has this ever been addressed?

    4. Yves Smith Post author

      The Federal Reserve’s board is a governmental body. The Board approves the issuance of notes.

      And on top of that, in its capacity as issuer of currency, it is (at worst) operating as an agent of the Federal government. The Fed doesn’t deficit spend on its own. The government net spends by telling the Fed to debit the Treasury’s account at the Fed. The Fed can no more go around spending on its own than your bank can go pay its tellers by taking money from your bank account.

      And please do not mention QE. We’ve discussed this at length. QE did not create more currency or spending in the economy. It was an asset swap. See here for details:

    5. Summer

      “What happens if we follow the footsteps of Japan or Venezuela?”

      What happens if we follow in the footsteps of Indonesia?

  7. DJG

    Thanks, Yves Smith, for the primers.

    The most valuable “takeaway” message is that we simply have to step into the discussion when people start bloviating about the government overspending like a household full of drunken sailors, etcetera etcetera. The federal government isn’t on a checkbook. As Michael Moore noted long ago, there is plenty of money for social programs. I see this at the local level with the Chicago Is Not Broke movement and Tom Tesser, who keeps pointing out that at the municipal level, it is about politicians’ slush funds and misappropriated monies, not a checkbook with red numerals in it.

    So this post is a rectification of names, to invoke Confucius. Let’s stop talking about things in the wrong way, even if we don’t know every detail of macroeconomics.

    This discussion also applies to the state level. Yes, Illinois has problems. But starving the populace and attempting to destroy the pensions of civil servants because politicians didn’t make contributions has to be ruled out. People should not have to suffer for bad government fiscal policy at the state or local level either.

    And a reminder: Social Security isn’t going bankrupt. Let’s turn around and get ourselves out of this intellectual and political dead end.

    1. cnchal

      Every currency user below the currency issuer can consider themselves on a gold or hard money standard.

      The state of Illinois does not issue dollars. It has to “earn” them by taxing the remaining “profit generating” businesses enough to cover the state’s expenses. That corrupt Illinois politicians (is there any other kind of politician?) sluice those dollars into their own or their cronies pockets and add to the growing wealth inequality is beside the point.

  8. LifelongLib

    I am the sovereign issuer of the Libby. If I give you 1 billion Libbys, there are now 1 billion more Libbys in existence than there were before. The Libby debt has gone up by 1 billion, but that’s not something I owe to anyone else, just a record showing how many Libbys I’ve given out.

    Same with the Federal government and the dollar.

    1. Joel

      But what if the Libby debt equals three times GDP? Won’t people start to think it’s not worth much anymore?

      1. LifelongLib

        If there are so many Libbys that there’s nothing left to buy, I can tax them back. But I don’t need to tax just to pay the Libby debt. I create Libbys, i don’t borrow them. The Libby debt is not something I owe to anyone else.

  9. Fool

    Yves — this might be a dumb question but what do you mean when you say “The Clinton Administration was in thrall to the bond gods”?

  10. dk

    I think I understand this analysis pretty well (actually one of the best MMT walkthoughs I’ve read), but I think it misses the point of the strategy behind it this particular tax bill.

    Out of the other corner of the mouth comes the logic that because the necessary tax reductions will increase the budget deficit, it can only be fiscally responsible to subsequently reduce the budget itself which, alas, will require cuts to the nation’s retirement, food, and medical safety nets (since everything else in the budget is essential for national security, public safety, and the profitable functioning of the corporate economy.)

    Forget the safety nets, this is a much bigger rollback. Practically ALL regulation (with the exception of immigration and marijuana, and a few other ideological selections) is being weakened (by de-funding, undermining in press) or reversed (by legislation or in newly-seated courts), sometimes abruptly, sometimes gradually.

    This tax bill works in conjunction with a regulation vacuum. The windfall, modest or generous, that taxpayers will realize in the next few years, may help some in dire straits, but there are also many who are stable and just want more. And many of them will invest in enterprises of all sizes (ready players on Main Street can partake as well) that will be allowed and encouraged to further “disrupt” markets/industries (as in, skirt/flout laws/regulations), both regional and global. “Business expansion” will happen, at least enough to excite some sectors of the electorate for a couple of years. It just won’t be stable with sustainable long-term goals (see also, cryptocurrencies, tanking right now). It will be quick profit and run before the conceptual bubble bursts.

    Now’s the time to buy talc in bulk, bottle it in water, and sell it as Grade AAA Milk. Nobody will stop you, you’re part of the Economic Resurgence!

    Next up, an infrastructure bill that will essentially sell off federal assets (highway system, parkland, buildings, you name it) to private hands, which can then refurbish/re-purpose them and charge fees for use (tolls, service charges, etc).

    One doesn’t have to follow any kind of monetary policy during a fire sale of resources previously held in trust. One just has to whip up a little excitement at the immediate opportunities (literally once in a lifetime, later it’s deadly), and Dem hopes to advance in Congress are diminished, and Trump Again in 2020. Those last two are THE ONLY ACTUAL GOALS of this parade of “bold legislation”. At the end of that second term it’s IBGYBG for the fearless leaders, and devil take the hindmost, literally.

    The only question left in my mind is when exactly Trump’s War(s?) will start, and where. It seems to me that setting off a gruesome nuclear holocaust or two would be better left to the second term, purely from an election PR perspective. But Trump seems to be stirring the geopolitical pot a little too hard for the ideal timing.

    The real battleground in 2018 is in the state legislatures. States can still set, and have a fair chance of defending, rational regulation and standards. Look and listen to your neighbors, talk about immediate issues.

  11. Oregoncharles

    ” all of this was obvious two hundred years ago when kings literally stamped coins in order to spend, and then received their own coins in tax payment.”
    Doesn’t that depend on what the coins were made of? If they were gold or silver, the king had to have that metal in order to make the coins; he collected taxes in order to obtain the metal – unless he had a mine available. Even then, he had to pay the miners or round up slaves. I read years ago that the flood of New World gold and silver inflated and destroyed the Spanish economy.

    Wray’s analogy submerges the point of MMT, which is that a currency with no independent use value, like paper or for that matter nickel (originally), can be created BEFORE taxes are received. It’s electronic currency that makes it entirely true – even paper has a cost, and alternative uses; it’s just that they’re disproportionate to its value as currency. Precious metals, OTOH, had universal value and were relatively hard to get. That’s why the gold standard was deflationary, barring huge new supplies. Hmm – what was the effect of the California gold rush on the US economy?

    1. JBird

      One is assuming that precious whatever( gold, silver, copper, cowrie shells, gigantic carved stones, cows, etc) was required to pay people to work. And that an over supply automatically

      Often workers would be paid in housing, good food, and lots of beer as the Egyptians building the various Pharaonic vanity projects were. Sometimes it was the labor itself that was the money people used to pay their taxes( show at Lord Bigmouth at such a time for two weeks and do whatever he wants). Also means of exchange were created ad hoc as when the Chinese Empire way back would give merchants supplying it receipts to give to an office at the capital in exchange for gold/silver. That meant a trader sometimes had to travel hundreds of miles to get paid and maybe travel the same only now burdened with that year’s receipts in heavy metals. Some bright people realize it was the paper itself that had value so they would pay or exchange them with others and even asked for their government issued receipts be broken into smaller amounts. Paper money by accident. Eventually the government started issuing actual official paper money.

      Anyways what got my attention was the statement that the New World gold and silver caused problems because there was too much of it. While true what really destroyed the Spanish Empire’s economy, and its nascent manufacturing and trading, was the foolish decision to make the entire economy depended on the single yearly trade fleet from the New World (and from the Asia via the Philippines through Mexico) and then using that money to pay for the endless wars needed to maintain its empire and spread democra…excuse me, the Catholic Faith rather than anything productive like schools and roads. All the money that did not go to military, went to the nobility to support their art and farm buying binge with some bling to go with it. Spain itself stopped being an exporter to being an importer with everyone except the small class of merchants and courtiers supplying the 0.001% what ever they wanted. If you want a newer example, look at Latin America and to a lesser extent us.

      My apologies. As a political economy/history/anthropology nerd I do go on and on and on.

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