I have been tied up courtesy of a major power failure, Easter, and other family obligations. Over the weekend, there was a blow up on Twitter between Richard J. Murphy and what appeared to be dozens of Modern Monetary Theory (MMT) proponents. (I ignore any Twitter thread involving lots of people and lasts more than a day, so I cannot fill in more details.) The dispute was about the role of taxes (although it devolved into whining about attitudes). Since many of my readers will have found me via Twitter, I just want to explain why this is largely a non-issue.
For a fiat currency without any external pegs, the central government is a monopoly issue of the base currency. (Private sector entities layer their obligations on top of this base, with banks acting as somewhat regulated utilities with special privileges.) Government currency is not tied to any real resources (the meaning of “fiat currency without any external pegs”). It can theoretically create currency in any amount and spend it. The problem is getting that currency accepted to buy things.
To give the currency value in exchange, the government needs to create a “sink” that is matched against the “source” of government spending. (I am using the source/sink terminology that shows up applied science courses, which I have not seen in the MMT literature itself.) Since the private sector is willing to stockpile government liabilities, the magnitudes of the source and sink do not have to be the same. In fact, if the economy is growing in nominal terms, government liabilities will also tend to grow in line with nominal incomes, and so the source of government liabilities needs to be larger the sink on average. (Government bonds are used to drain currency and create a yield curve, and the net creation of government bonds (or currency) can be decoupled from the net creation of government liabilities (within limits)).
For the developed countries, the main sink for government liabilities are taxes, and that is how the MMT literature normally describes the sink. This also aligns with standard mainstream and heterodox models. One can imagine alternatives — the government may control some form of production (normally, natural resources) and sell that production to eliminate liabilities.
At the macro level — the usual way of discussing MMT — the exact composition of taxation (“T”) is not worried about. At most, there is a concern about who pays the tax, and thus the “multiplier” on the tax, but that is all an aggregated macro approach can deal with. In the real world, governments can use taxes to try to achieve policy objectives (like lowering inequality, taxing cigarettes as a way to reduce consumption). However, such objectives are generally not a macro phenomenon, and it is rather obvious that one will not see discussions of such objectives in macro-focussed literature.
Why Do People Want to Earn Government Money?
We then get to what I think was the issue: why do people want to earn government money (or private liabilities that are pegged to government money)? There are two answers to this question.
When introducing money to a non-monetary economy, a government needs some kind of sink to force adoption of the currency. This is literally what happened in colonial regimes in Africa. (See the discussion in Understanding Modern Money: The Key to Full Employment and Price Stability by L. Randall Wray.) The simplest possible “MMT model” models such a situation (as discussed in my book Modern Monetary Theory and the Recovery - affiliate link).
In an existing monetary economy, the government just needs to maintain a sink to help the currency keep value in exchange. The exact determination of the domestic price level — the inverse of the value of the currency in domestic exchange — is a complicated process. For the inhabitants of a monetary economy, they want “money” so that they can buy stuff and pay off pre-existing monetary obligations (as per the definition of monetary economy).
Given that the globe is pretty much covered in monetary economies at this point, the first point is no longer of great importance for policy. As for the second, most sensible writers do not waste gallons of ink discussing “Why do people want money?” for the same reason medical textbooks do not have sections discussing “Why do people like breathing?”
Richard Murphy’s Complaints
As far as I can tell, the previous discussion answers all the relevant points raised by Richard Murphy.
Over the years, I have seen some of Richard Murphy’s “MMT critiques” and I viewed them to have no merit, and not worth discussing. This latest blow up seems to be no exception — the meat of his argument is based on tortured textual analysis of some out-of-context quotes by some MMT proponents (I believe mainly Warren Mosler). This is not a “MMT critique” — it is a waste of time. When doing a critique, you need to deal with the substantive arguments in a text, and you also need to figure out that not every MMT proponent agree with every offhand remark made by another MMT proponent.
Murphy was also unhappy with his treatment — which parallels some of the carping made on my blogger blog by a long-time commenter (now ex-commenter). However, one needs to learn how to read a room. The MMTers Murphy was interacting with on Twitter were annoyed by his previous behaviour (and in my case, I was previously annoyed by the commenter). You are never going to have useful interactions on social media with people annoyed with you. At that point, all you can do is write a long form piece and if your arguments have merit, they will be responded to.Email subscription: Go to https://bondeconomics.substack.com/