Henry George and MMT – Part 2

This is the second part in my discussion about Henry George and Modern Monetary Theory (MMT). In general, there is nothing particularly incompatible between the introduction of a broader LVT at the Federal level to replace or reduce other taxes currently levied and the insights provided by MMT. However, once you understand MMT, you realise that the discussion of the design of the tax system is quite different than just raising income from the most ‘efficient’ means. The Georgists would do well to come to terms with that and demonstrate how a land value tax (LVT) would work to free up real resources to give the real space for governments to spend. There doesn’t appear to be any analysis provided by Georgists to calibrate the impacts on non-government spending of such a tax and how this would alter the tax mix required to maintain full employment spending levels and satisfy the socio-economic spending goals of government. There are other things that might be done as well (if not prior to imposing a LVT) which would reduce the likelihood of property price bubbles. Finally, the obsession with the single LVT as a saviour is in denial of the causes of recessions and the the role that financial capital plays in destabilising economic systems. A LVT alone will do little to resolve those problems.

Henry George and Modern Monetary Theory (MMT)

Henry George clearly operated in a paradigm that believed that the role of taxation was to raise revenue for the government to facilitate its spending options. He has subsequently been associated with ‘balanced budget’ adherents, although in Progress and Poverty he does not broach that issue.

Clearly, that paradigm is rejected by MMT proponents as is the idea that a sensible policy rule is the balance ‘budgets’ always or on average over a given economic cycle.

George was also preoccupied with a single source of rent – that accruing to land ownership and ignored other sources of economic and financial rents. He clearly did not anticipate the destabilising potential of the financial sector. He was also against regulation, the absence thereof, has been a major reason for the build up of financial risk which led to the GFC. So it is hard to see how his vision provides a general model for economic policy conduct.

His explanation of the economic cycle and depression is also deeply flawed. There have been some major recessions following speculative property crashes (for example, Japan in 1991) but these ‘balance sheet’ recessions are not very often encountered. Most recessions are driven by private investment falling due to a lack of confidence or from fiscal austerity due to misplaced fears of fiscal deficits. There have also been long periods of growth at times that land values have continuously accelerated.

Further, while the GFC was the result of a major collapse in private spending following a major property market crash, which ran first through the financial system, it still remains that the governments could have largely alleviated the real economy consequences of the financial turmoil with appropriate fiscal responses.

The real economies bore the brunt of the private spending contraction because fiscal deficits were not allowed to rise sufficiently to fill the spending gap that was created.

The central banks clearly stabilised the private banking system quickly but those responsible for fiscal policy were constrained by the dominant neo-liberal ideology that eschewed the use of discretionary fiscal stimulus packages.

It is clear now, some 7 years after the crisis began, that the nations that provided the largest fiscal stimulus packages and allowed the deficits to adjust more freely to growth, have fared better than nations that cut their fiscal interventions short and pursued austerity.

The doctrine of fiscal contraction expansion promoted by the neo-liberals has been a demonstrated failure across the globe. The turmoil in Europe continues because the policy makers refuse to acknowledge their errors and hang onto the structural explanation for the on-going economic stagnation.

The question then is to examine where the idea of the Single Tax sits within this MMT understanding, rather than in the flawed theoretical view promoted by George and his followers (to this day).

MMT demonstrates categorically that monetary transactions in the currency of issue between the government and non-government sectors are the only source of net financial assets in the non-government sector. That is often misunderstood but crucial to understanding the suite of options available to a currency-issuing government. In any monetary system there are financial assets and liabilities.

These are specified in monetary terms and can take a multitude of forms. A financial asset could be a bank deposit, some money in your pocket, a government bond, or a corporate bond. A financial asset is different from a real asset, such as property holdings or an art work because it has no tangible expression.

For example, a bank deposit is a virtual statement of wealth. A financial liability is usually a bank loan or some other debt that is owed. The difference between total financial assets and total financial liabilities is called net financial assets. It is different to total net wealth or net worth in that it excludes real assets.

Financial transactions within the non-government sector cannot create new net financial assets or destroy previous net financial positions. For example, when a bank agrees to a loan it creates a deposit that the borrower can draw upon to fund spending.

The loan is an asset to the bank but an equal and offsetting liability for the borrower. There is no net gain in financial assets for the non-government sector as a whole from this transaction.

Transactions within the non-government sector, may alter who owns the financial assets and the form those assets are held in, but they do not alter the net position of that sector overall.

For example, a household might use some cash it holds in a bank deposit to purchase a corporate bond. The person’s financial asset is now a bond rather than cash and the liability shifts from the bank to the corporation who has borrowed the funds. But there is still the same quantity of assets and liabilities in the non-government sector overall.

For the non-government sector to accumulate net financial assets (financial wealth) or lose net financial assets, there has to be a source of financial assets that is ‘outside’ the non-government sector. This can only be the government sector.

In this context, the government sector is considered to be the consolidation of the treasury function (fiscal policy) and the central bank (monetary policy), despite claims that central banks are largely independent of government. Consolidating the currency-issuing arm of government (central bank) and the spending and taxing arm (treasury) allows for a better understanding of how net financial assets can enter and exit the non-government sector.

It is the transactions that are conducted between the consolidated government sector and the non-government sector which determine the level of net financial assets (denominated in the money unit) that are held by the non-government sector.

Only these transactions can create or destroy net financial assets in the non-government sector. In our simple two-person economy, the fundamental principle is that the non-government sector can only accumulate net financial assets if the government runs a fiscal deficit.

We can now more fully appreciate that result. For example, when the treasury department purchases some equipment for a school, it will instruct the central bank to put funds into the bank account of the private supplier of the equipment. The bank entry is created because the government required it to be created.

In effect, the entry was created ‘out of thin air’. The private supplier now has a higher bank account balance (an increased asset) but there is no offsetting liability within the non-government sector.

Net financial assets have increased in that sector as a result of the government spending. Conversely, when the government extracts tax revenue from the non-government sector, the taxpayer will, depending on the arrangements within the tax system, see more income extracted on pay day or an existing bank deposit reduced by the amount of the tax liability.

Either way, financial assets decline in the non-government sector without any corresponding decline in liabilities. As a result net financial assets decrease.

But note that in the intrinsic logic of a fiat monetary system is that taxes do not finance government spending, even if the government has accounting structures that make it look like they do.

While taxes reduce balances in private sector bank accounts, the government doesn’t actually get anything it needs. The reductions are accounted in the ‘books’ but do not enhance the capacity of the government to spend.

Thus the concept of a fiat-issuing government saving in its own currency is of no relevance. Governments may use its net spending to purchase stored assets (for example, Norway’s sovereign fund) but that is not the same as saying that government surpluses allow the government to spend more in the future. That concept is erroneous.

These transactions occur every day and if the government spends more than it receives by way of tax revenue (a deficit) then net financial assets in the non-government sector will rise.

The main thing to keep in mind about taxes is that they reduce liquidity in the private sector. Fiscal deficits thus increase the financial wealth of the non-government sector. Fiscal surpluses, clearly, have the opposite effect. They destroy net financial assets and financial wealth in the non-government sector.

An understanding of these matters then allow us to understand how mass unemployment arises and why government is central to its solution.

There is no unemployment in traditional non-monetary economies or in non-monetary segments of a modern economy. For example, an unpaid child carer can never be unemployed.

In monetary economies, the output of goods and services responds to spending. Firms and other organisations do not produce if they are not confident of selling their output. The production process generates a flow of income (paid to the various inputs to production). One person’s spending is another person’s income.

A basic macroeconomic rule is that total spending must equal total income (whether actual income generated in production is fully spent or not in each period) for all the goods and services produced in any period to be sold. If total spending in a period is less than the total income generated, then firms will have unsold output in the form of unwanted inventory accumulation and will reduce future production and employment.

Why would total spending fall below total income in any period? A simple reason might be that households desire to save some of their income for future use or purchase imports, which means income generated in the domestic economy is spent abroad. The result of this spending deficiency is a rise in involuntary unemployment, which is idle labour offered for sale with no buyers at current wages.

In this situation, making labour cheaper (cutting wages) will not reduce the unemployment, unless those cuts somehow increase total spending. Clearly, wages are an important component of total income and spending is dependent on income. Cutting wages is likely to worsen a spending shortfall.

In a simplified two-sector economy, if the non-government sector desires to save overall, it will spend less than its income. That shortfall in each period has to be eliminated by the government spending more than it receives in revenue to prevent a rise in mass unemployment.

There is another complication. The non-government sector may desire to save overall but it also has to pay taxes from its income, which further reduces the amount that can be recycled back into the non-government spending stream each period. The imposition of taxation thus reduces the spending power of the non-government sector.

That gap also has to be filled by government spending, which means that the overall tax take has to be smaller than the injection from government spending.

Thus, in general, deficit spending is necessary to ensure high levels of employment. Where there are high levels of unemployment, we could say that government spending is too low relative to the current tax receipts, or that taxes are too high relative to the level of government spending, after taking into account the overall saving desires by the non-government sector that have to be matched by government deficits.

The conclusion that mass unemployment is the result of the government deficit being too low also defines the limits on responsible government spending. It is clear that government spending has to be sufficient to allow taxes to be paid.

In addition, net government spending is required to meet the non-government desire to save (accumulate net financial assets). The government should aim to maintain total spending such that firms are willing to produce and employ at levels sufficient to fully employ the available labour resources. Not a penny more need be spent by government.

This highlights the role of taxation, which is to create the real resource space (which could be termed unemployment) to allow governments to spend in a non-inflationary way. Note taxation does not create financial space (that is, provide the government with revenue it needs in order to spend).

Taxation reduces the income available to the non-government sector to spend and thus leaves real resources idle, which would have been absorbed by the higher non-government spending.

It is a political decision as to how large the public sector is relative to the total economy. While economics textbooks hint that smaller government is better, there is nothing in economic theory that substantiates that proposition. The size of government is determined in the political process. Small is not necessarily better or worse than large.

The point is that if the governments wants to expand its real resource footprint and maintain full employment (where all productive resources are being deployed) without triggering an acceleration of inflation, then it has to increase its taxation take to deprive the non-government sector of access to the extra real resources it wants to absorb.

The higher taxation is not providing the government with any larger financial capacity. It is, rather, reducing the financial capacity of the non-government sector in order to free up real resources that it would otherwise deploy in private consumption and/or investment.

Thus the role of taxation is not to fund government spending but to allow it to command real resources (labour, capital, land etc) in order to facilitate its socio-economic policy mandate.

Georgists should abandon the idea that taxes fund government spending and that land ownership is the single cause of economic cycles.

But that doesn’t mean the idea of a land value tax should be dismissed given that the government has to tax in order to bring the freed real resources into productive public use through government spending. Non-government saving overall also frees up real resources as does private domestic import expenditure.

The criteria that has to be deployed by governments when designing its tax system is to ensure they can command the required amounts of real resources without triggering inflation.

Once that level is determined, then the composition of the burden that is to be imposed on the non-government sector has to be determined. What sort of tax structure will the government introduce and maintain?

There are several different types of taxes that can be levied and here is not a place (time!) to review them in detail.

1. Taxes on earned income – labour taxes

2. Taxes on profits – corporate taxes

3. Taxes on resource use – resource rental taxes

4. Taxes designed to alter resource allocation – tobacco and alcohol taxes, environmental taxes.

5. Taxes on land.

There is a long literature that claims that taxes on income whether it be labour income or profits introduce disincentives to effort. People work less when taxes are imposed on them.

The evidence is not conclusive with respect to that assertion. Studies of labour supply suggest that tax rates within normal ranges have very little impact on the willingness of labour to supply hours of work. Rigidities in the working day help to explain the invariance among other things.

The George Single Tax proposal is justified partly on the grounds of these alleged disincentives.

Housing bubbles and home affordability

One of the challenges of the modern time, especially in many advanced nations is the problem of housing affordability. In Australia, the housing problem is acute.

The housing market problem is also interesting because MMT proponents suggest that monetary policy be taken out of the game by letting policy interest rates stay at around zero.

The argument is complex but can be summarised in this way. Monetary policy is not a reliable counter-stabilisation tool to deploy. The distribution consequences of interest rate changes with respect to their impact on creditors and debtors is uncertain and could be perverse relative to the policy makers aims (which are to reduce spending with higher rates).

There is no strong empirical research to tell us about the impact on debtors and creditors and their spending patterns. It is assumed implicitly that borrowers have higher consumption propensities than lenders but that hasn’t been definitively determined.

Interest rate changes cannot be spatially targetted or demographically targetted. Interest rate rises impose penalties on regions and cohorts that may not be contributing to the housing price pressures. The Eurozone has seen the consequences of one-size-fits-all interest rates before the crisis. In Australia, we have seen that when Sydney property prices boomed in the early 2000s, all of regional Australia which was not booming was forced to bear the higher interest rates

Further, the impact of interest rate changes on total spending are subject to unknown lags as consumers and firms adjust their plans. At times, more immediate policy intervention into the spending stream are required.

The aftermath of the GFC where interest rates have been close to zero in many advanced nations demonstrates that the sensitivity of total spending to interest rates is not high.

Conversely, fiscal policy is powerful because it is direct and can create or destroy net financial assets in the non-government sector with certainty. It also does not rely on any distributional assumptions being made although it can exploit known differences in spending propensities.

For example, a tax cut to lower income earners is likely to stimulate total spending more than a similar cut to high income earners.

Further, the desired economic state for a modern monetary theorist is full employment which means that unemployment should be frictional only (that is, very low – approaching 2 per cent or so in Australia, for example), zero hidden unemployment and zero underemployment.

Deviations from full employment reflect failed fiscal policy settings. As we saw above, unemployment is caused by the fiscal deficit being too small.

The size of deficit has to be judged in terms of the desire of the non-government sector to save overall in the currency of issue. So if the deficit is inadequate and unemployment arises we know the net spending has not fully covered the spending gap.

We also know that fiscal deficits add to bank reserves and create system-wide reserve surpluses. The excess reserves then stimulate competition in the interbank market between banks who are seeking better returns than the support rate offered by the central bank. Up until recently this support rate in countries such as Japan and the USA was zero. In Australia it has been 25 basis points below the cash rate although there is no theoretical reason for that setting.

It makes much better sense not to offer a support rate at all. In that situation, net public spending will drive the overnight interest rate to zero because the interbank competition cannot eliminate the system-wide surplus (all their transactions net to zero – no net financial assets are destroyed).

So in pursuit of the desired policy goal of full employment, fiscal policy will have the side effect of driving short-term interest rates to zero in the absence of any central bank intervention to the contrary.

If the central bank wants a positive short-term interest rate for whatever reason – then it has to either offer a return on excess reserves or drain them via bond sales.

The preferred MMT position is a steady state interest rate is zero and that the government engage in no bond sales to the non-government sector.

That policy stance would allow fiscal policy to make all the spending adjustments required to offset saving desires in the non-government sector and the introduction of a Job Guarantee could automate some of that adjustment.

Please read my blog – The natural rate of interest is zero! – for more discussion on this point.

The question then arises is whether the constant low (zero) interest rate regime would fuel asset price speculation.

We have to remember that housing bubbles are not uniform in their cause. Clearly, they result from the fact that demand rises faster than supply. But the cause of the rising demand is different in different housing markets.

In Spain, before the GFC, the massive growth in credit helped along by the low interest rates, which were suited to the German economy rather than to say Spain or Ireland, spawned the demand for housing.

The high prices in central London for example has nothing to do with credit. A vast majority of it is not subject to debt instruments. The price bubble reflects the cash flowing in to the market from the Middle East, Russia, and China, for example.

But, it is hard to disagree with the notion that credit availability at low interest rates can stimulate asset price bubbles in specific sectors such as property and housing.

It is here that a Land Value Tax (LVT) drawn from the foundations that motivated George to propose his Single Tax might have a role to play and would be consistent with MMT teaching.

The basic principle of taxing the economic rent (the payment excess over what is needed to keep the resource in its current use) would help stabilise land prices.

Such a tax, would clearly reduce the inequity that arises from the ability of landowners in high demand metropolitan areas to capture unearned income.

In this way, the multiple goals of government might be achieved – to free up real resource space by reducing the incomes of land owners and reducing socio-economic inequality.

The ability to retain the unearned surpluses also stimulates further speculative behaviour, which reinforces the inequality and introduces increased risk of financial instability arising from property market crashes.

Australia already has land taxes levied at the local government level on unimproved property values. They are riddled with inequities themselves and are offset against local government service provision.

In general, there is nothing particularly incompatible between the introduction of a broader LVT at the Federal level to replace or reduce other taxes currently levied and the insights provided by MMT.

However, once you understand MMT, you realise that the discussion of the design of the tax system is quite different than just raising income from the most ‘efficient’ means.

The Georgists would do well to come to terms with that and demonstrate how a LVT would work to free up real resources to give the real space for governments to spend.

There doesn’t appear to be any analysis provided by Georgists to calibrate the impacts on non-government spending of such a tax and how this would alter the tax mix required to maintain full employment spending levels and satisfy the socio-economic spending goals of government.

There are other things that might be done as well (if not prior to imposing a LVT) which would reduce the likelihood of property price bubbles.

In Australia, the government provides tax breaks (negative gearing) to property investors who can write of any recurrent ‘losses’ against other taxable income. A smart investor can arrange these losses and wait for the capital gains on the rising value.

Recent data released by the Australian Bureau of Statistics for – Housing Finance – shows that investment housing finance growth outstripped owner-occupied finance by a considerable margin.

The other policy failure in Australia has been the First homeBuyers grant, which doesn’t particularly help the first home buyer because house prices jump by the size of the grant. There are much better ways of easing the home affordability problem for young buyers. For example, there is a deficiency of state housing in Australia as the neo-liberals have undermined the willingness of government to building public housing infrastructure to keep pace with the population.

A major re-commitment to the provision of well-equipped public housing would reduce the demand for private housing considerably.

There is also no doubt that the conduct of banks needs to change because the financial sector is so powerful that the credit creation capacities of the private banks acts to transfer real income produced by the economy into non-productive uses, which undermines the overall material welfare of the nation.

It is also clear that the financial sector provides significant funding to lobby groups to ensure that the tax laws are skewed in their favour and to further transfer real income into their coffers.

Essential reform of the financial sector and banking is clearly required. Please read the following blogs – Operational design arising from modern monetary theory and Asset bubbles and the conduct of banks for further discussion.

The aim of these reforms should be to eliminate the financial sectoral transactions which do not enhance the operations of the real economy. It will surprise some to know that the proportion of daily financial market transactions that are unproductive approach the high 90 per cent mark.

Industrial firms produce goods and service and enhance real income through productivity growth. Financial firms, which are now the dominant capitalist form, are less concerned with producing goods and services and more concerned with shuffling credit and interest in their favour.

Investment bankers use borrowed funds to engage in all sorts of transactions that look like they are building wealth but, which in fact, do nothing to build the productive capacity of the economy.

These reforms would go a long way to reducing the instability that housing and property markets introduce into modern economies.

Hudson (2010: 40) is critical of Georgists in their approach to financial capital. He wrote:

For real estate investors in today’s world, the motto is: “Rent is for paying interest.” What the tax collector relinquishes is “freed” to be pledged to banks—for loans to buy rent-yielding property. But Georgists have deemed the analysis of finance and Wall Street to be a socialist concern, and emulate George’s own conflation of physical and financial capital. There has been no attempt even to trace the incidence of land-price gains (“capital” gains), and many Georgists view such gains as legitimate returns to capital rather than as financial capitalizations of land rent bid up on credit. Not even the post-2002 real estate bubble has spurred research and publication along these lines. The failure to place land rent and other forms of economic rent in its macroeconomic setting has blocked a serious discussion of land-value taxation from academia and congressional law making, and hence from playing the popular role that it did in George’s own day.

One has to concur with that conclusion. The obsession with the single LVT as a saviour is in denial of the causes of recessions and the the role that financial capital plays in destabilising economic systems. A LVT alone will do little to resolve those problems.


There is no inherent incompatibility with the idea of levying a LVT to replace or supplement some other taxes and the insights provided by MMT.

But the idea of a Single Tax is not supportable and the alliance that Georgists have forged with libertarian movements that deny the central role of government in creating the essential conditions for full employment is also to be rejected.

Reliance on an unfettered private market will not create prosperity for all.

Modern-day followers of Henry George tend to align with these ‘free market’ movements, which Hudson (2010: 39) notes promote an “anti-tax ideology”.

Clyde Cameron Memorial Lecture – Tonight – February 18, 2015

I will be talking about these things when I present the Clyde Cameron Memorial Lecture tonight in downtown Newcastle.

The event is free for all and will be held at the University of Newcastle (City Campus), Room UNH421, Level 4 in University House, corner of King and Auckland Streets, Newcastle.

The lecture begins at 18:00 and will conclude at 20:00. A speaker from the Association for Good Government will also speak. Attendees are invited to the Surtaj Indian Cafe, Hunter Street, Newcastle (5 minutes walk from lecture) for dinner (at own expense).

Maybe I will see some locals there.

That is enough for today!

(c) Copyright 2015 William Mitchell. All Rights Reserved.

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    31 Responses to Henry George and MMT – Part 2

    1. jake says:

      The way I read Hudson quotation is that old fashioned georgists have failed to identify the role financial capital in bidding up land prices.Considering the GFC,it sounds like Hudson is highlighting and emphasising the need of an LVT to tame financial capital by getting rid of its ability to extract the economic rent of land.Putting an end to the feeding frenzy,and bank credit created land led booms and busts.Chokeing rentierism at its sources.

      Not that Bank reform is not needed but I think it is still fair to say that LVT would go a long way even by itself to prevent crises.Banks depend on the land rent for their mortgage business.If this taxed away,then Banks business and role in economy would be forced to shift immediately.

      As for the role of an LVT for freeing up real resources to give the government real space to spend.Any increase in government spending could translate into higher land prices;which then gets taxed straight back out of the system.
      This would also prevent run away house price inflation.besides all taxes come out of rent,why would taxes on land value be any less effective at reducing spending power than taxes on income or consumption?If unemployment is an issue why do real resources need to be taxed away?surely the lack of private sector demand and unemployment means that there is an underutilization of resources which government can step in to provide demand for.

      As for government wishing to increase spending for public programs(for example an ambitious space program) in an already full employment economy and maintain price stability.The LVT is the best for this as it contains property prices and prevent house price inflation.
      But if this was not sufficient I suppose vice taxes and taxes on luxury consumption goods could be reintroduced/increased,then taxes on high corporate profits and super high salaries.

    2. Bill –
      I’m in broad agreement with your main point, but I don’t think you put it strongly enough. I hope you won’t waffle like that tonight!

      And when you said…

      While taxes reduce balances in private sector bank accounts, the government doesn’t actually get anything it needs. The reductions are accounted in the ‘books’ but do not enhance the capacity of the government to spend.

      …were you reacting against my comment yesterday? Or merely ignoring it? Reconsider your next claim:

      While taxes reduce balances in private sector bank accounts, the government doesn’t actually get anything it needs. The reductions are accounted in the ‘books’ but do not enhance the capacity of the government to spend.

      This is FALSE! The government gets real value assigned to its currency, which very much enhances its capacity to spend, and is certainly something it needs.

    3. Rod says:

      Why does a government need money, that it creates from nothing, back from the taxpayer ?
      If you paid your tax in grubby old notes, the government would say thankyou and send them off to the shredder.
      So if it has shredded your tax payment how does that enhance their capacity to spend?

    4. Neil Wilson says:

      “The government gets real value assigned to its currency”

      No it doesn’t.

      The government got the real value when it spent in the first place.

      That’s the key difference – viewpoint. Government takes the real value when it purchases the goods and services or funds somebody to purchase goods and services.

      Taxation does nothing more than attempt to ensure there isn’t a competing secondary bid for those goods and resources.

      Stop overthinking the problem. Government purchases things that are for sale and simply needs to avoid a bidding war on those items.

      The two ways it can do that is to tax people, or to ban the competing activity. Simply banning the extension of loans for property beyond certain limits would free up a lot of space in the economy and that would mean the government would have to tax less. Taxing land with planning permission on it would make it expensive to hoard.

    5. Podargus says:

      All this high falutin talk about land value tax leads precisely nowhere.
      It is obvious that Henry George was a reactionary twit even in his own time.

      As a land owner (my residential property) I already pay a land value tax. Around here it is called local government rates. At least we can see where this tax is being spent and can more readily kick arse if we see a problem. Heaven forbid if the state or federal scam artists got hold of that particular tax power.

      My reading of MMT is that taxation is more a means of social control rather than an economic necessity. Outside of ensuring that the hoy polloy use the currency,anyway.
      We already have a regressive means of social control in the Goods and Services Tax. Introduced by a particularly toxic social controller by the name of John Howard. If you want to talk tax then talk about getting rid of the GST and going back to a wholesale sales tax. At least that can be targeted. Like the buyers of expensive luxury motor vehicles,expensive private schooling for the expensive brats,expensive overseas vacations – I could go on. I will spare myself the trouble.

    6. Neil Wilson —

      Taxation does nothing more than attempt to ensure there isn’t a competing secondary bid for those goods and resources.

      You’ve been on this site long enough to know that’s untrue. Taxation creates a demand for the currency, and without it the government would not have been able to get real value when purchasing goods and services.

    7. James Schipper says:

      Dear Bill

      You wrote that the private sector can only accumulate net financial assets if the government runs deficits. I think that statement should be qualified. It is true only for a closed economy. In open economies, the private sector of country A can accumulate net financial wealth as long as the private sectors of the rest of the world accumulate net debt.

      Can a government in a closed economy not be compared to a corporation that borrows only from its own shareholders? Suppose that Peter and Paul are the shareholders of Corporation X, which only borrows from Peter and Paul and which has a debt of 8 million. As shareholders, Peter and Paul have a debt of 8 million, but as lenders, they have an asset of 8 million. It therefore adds up to zero.

      Similarly, if the government of a closed economy has a debt of 80 billion, then the citizens of that government have a debt of 80 billion, but as lenders they have an asset of 80 billion. It still adds up to zero for the citizens collectively.

      Regards. James

    8. Podargus (and Bill)
      Although local government rates in NSW are based on unimproved property values, that’s not the case for the rest of Australia.

      If the Howard government had introduced LVT instead of GST, the cost of goods would now be lower, the cost of housing would be lower, the population would be wealthier and inflation would be easier to control.

    9. jake says:


      Please do tell,why should workers pay tax on their income but landowners not pay a thing.Why should people pay rent to private landowners?Even Winston Churchill described private property as the mother all Monopolies.

    10. Neil Wilson says:

      “You’ve been on this site long enough to know that’s untrue.”

      I’ve been on this site long enough to know that you’re very fond of getting hold of the wrong end of the stick.

      Taxation is there to ensure there is real space for purchases that have been made previously. What you are missing is that the imposition of a liability and its settlement are separated in time. It’s the time gap that creates the demand.

      Expectations matter.

    11. Neil Wilson says:

      “It is true only for a closed economy.”

      It’s true for any currency area, which is closed by definition.

      The mistake you are making is assuming that a currency area and a country are the same physical space. They are not.

      Everybody who holds US dollar denominated assets is in the US currency zone wherever they are in the world.

      The viewpoint of an isolated geographic country plus a single Rest of World entity that acts with a single mind and purpose is probably the most dangerous mental model in economics. Unfortunately that model is imposed by the structure of the national accounts regime. But it is not how things interact in the real world.

      The ‘private sector’ may sit on foreign soil. Always bear that in mind. And bear in mind that they are saving in the currency of the zone as well to further their real activities elsewhere in the currency zone. Causality matters.

    12. Podargus says:

      Jake – You have a problem with private property generally or just private ownership of land ?

      These are philosophical (ideological) issues,not economic issues. When ideology intrudes on economic (social) matters then all sorts of hell is raised. You won’t have to read too much history to work that out.

    13. Podargus says:

      Aidan Stanger – I am a Queenslander and I believe that local government rates in QLD are based on unimproved values. I’m not familiar with the situation in other states. Naturally these values are based on what is being paid for land in the real estate market.

      If John Howard and his neo-con minions had taken the trouble to work out a progressive approach to sales tax reform the great majority of Australians would be better off,and not just materially.
      Instead,they opted for a simplistic approach to a complex problem – the GST. LVT would be in the same stable of broken down hacks.

      Usually,when people advocate simplistic solutions for complex situations it means one or both of 2 things – they are simple minded and/or they have a self interest agenda.

    14. Jeff says:

      Podargus – we cannot separate economics and moral philosophy, they are intrinsically linked.

      “…anyone who cares to read Smith’s Wealth of Nations for themselves will find an economics discussed and justified in explicitly moral terms, in which markets, and the division of labour they allow, are shown to both depend upon and produce not only prosperity but also justice and freedom, particularly for the poor. With those concerns in mind, it should not be surprising that Smith was a staunch and vehement critic of those particularly grotesque sins associated with early capitalism: European empires and the slave trade.”

      You can google the phrase to find the source in a couple of seconds. Bill’s site puts links through a moderation process.

    15. Podargus says:

      Jeff- I am interested in practical solutions for real problems not in airy fairy ideas from people who are,more often than not,off with the fairies.

      Off topic – I have just read a news item on Fairfax that our current federal LICs (Lunatics In Charge) want to abolish the 5 yearly national census.
      They are well known to be mired in ignorance. They now want to drag the rest of us into their bog hole.

    16. Bob says:

      Bill, a key element of the Land Value Tax is it can’t be avoided. The govt controls the title deeds on anything and can sell the house. The tax creates strong demand for the currency, compared to taxes on labour/capital, that discourage creation of wealth.
      We Georgists believe most taxes to be theft and immoral but that the right to exclude others from land is created by all its citzens. This libertarian idea, opposing coercive taxes is not incomparable with MMT.
      LVT is voluntary, as you can choose not to pay and not receive the government’s services (inc protection of property rights.)
      If we had anarchy, you would still need to pay for others to protect your land. Property rights do not come from nowhere.
      In a 100% free market, you pay for the right to exclude others from land like you pay for ice cream.
      The two monopolies, land/private property and currency cancel out.

    17. Jeff says:

      Podargus – Agreed that practical solutions are needed. Sometimes, however, our airy fairy kinsmen are those who most effectively show how far off-course we have gone, and problems need to be approached from a

      “what were we trying to achieve in the first place?”

      perspective, rather than the more typical

      “how to we fix the mess we’ve gotten ourselves into?”

      perspective we are so used to hearing from politicians, business leaders and the media. The former question (properly posited) can help us do away with the smokescreens of deficits, terms of trade, interest rates and inflation and show us the bigger picture of just how “efficiently” the economy is actually working.

      If the combined economic goal of the market and of democracy is to

      * maximize production of goods and services for the benefit of the vast majority
      * sustainably produce, trade, extract and recycle such that our grandchildren and theirs can enjoy the same if not higher standards of living than us
      * see that labour and entrepreneur-ism are justly rewarded for their inputs to society
      * maximize the freedom of choice that citizens have
      * Use technology, capital, land, and labour (within acceptable limits) to ensure the ongoing protection of human rights for all citizens

      then it is of CRITICAL importance to economists (and all of us) that the monetary and judicial systems which overlay the real economy are in step with the stated goals, and that outstanding (public and private) debts and surpluses in the financial system are representative of the stated goals, and not controlled by a self-serving sociopathic elite who are very good at frightening the oppressed into making decisions that are clearly against their own desires and sense of social justice.

      On the issue of abolishing the census, absolutely nothing surprises me about these fools in parliament right now. I honestly wouldn’t be surprised if they somehow manage to turn the issue of the Bali 9 blokes on death row into an Indonesian attack on Australian soil, they are that bloody incompetent.

    18. The Dork of Cork says:

      Off – topic , but Bill Black was just on the receiving end of a hatchet job on Irish TV.

      I don’t agree with Bills bank of England like capitalistic views but admire his bluntness.

      The TV show exposed the weakest part of his interview in the Irish banking Inquiry and not the strongest.
      His biting argument was that the banks were most likely seriously bankrupt since euro inception rather then 2007 and engaged in credit hyperinflation so as to artificially jazz up profits.

      Instead they focussed ( including the seriously creepy jesuit like Donal Donovan , formally of the IMF priesthood) on the junior bond issue.

      We live in a police state of masonic insiders.
      No doubt about it.
      However this Dork believes banks were bankrupt since Tudor times and engaged in the pointless economic expansion phase so as to mask the inherent bankruptcy of their dealings so…….I guess most of yee statist insiders will not engage with the reality of the situation.

    19. James Schipper says:

      Dear Neil

      I wasn’t thinking territorially but tribally. If an Argentinian buys US Treasury Bills or other American bonds, then the tribe of Americans as a whole owes something to an Argentinian, who is not a member of the American tribe.

      You are making a valid distinction. If an Argentinian travels in the US, stays in hotels there, eats in American restaurants and shops in American malls, then all transactions take place on American soil, but they still are exports from an American point of view. From an Argentinian point of view, they are imports. If a Dutchmen crosses the border every day into Germany to work in a German factory, then his value added is part of the German GDP but of the Dutch GNP.

      Regards. James

    20. Rod –

      Why does a government need money, that it creates from nothing, back from the taxpayer ?

      Doing so creates a private sector demand for that currency. See http://bilbo.economicoutlook.net/blog/?p=1075

      If you paid your tax in grubby old notes, the government would say thankyou and send them off to the shredder.
      So if it has shredded your tax payment how does that enhance their capacity to spend?

      Taxation increases the demand for the notes, hence it increases their value, so the government gets more real value for each one it spends.

    21. Neil Wilson –

      “You’ve been on this site long enough to know that’s untrue.”
      I’ve been on this site long enough to know that you’re very fond of getting hold of the wrong end of the stick.

      It’s not that I’m fond of getting hold of the wrong end of the stick, it’s just that I don’t automatically assume that the end Bill is on is the right one. In many instances, including this one, it’s not.

      Taxation is there to ensure there is real space for purchases that have been made previously.

      That’s one function of taxation. But without the demand for the currency (which taxation creates) the existence of real space for purchases wouldn’t enable the government to make future purchases.

      What you are missing is that the imposition of a liability and its settlement are separated in time. It’s the time gap that creates the demand.

      No, the time gap creates an ability (though not necessarily a propensity) to net save, but the demand would still be there even if there were no time gap.

    22. Mark Wadsworth says:

      I think you are missing the point a bit.

      MMT and LVT are perfectly compatible as they are not in any way competing theories.

      If you have LVT, then as like as not, there would still be recessions (albeit they would be far less savage than under a land-finance-speculative based economy).

      So a sensible government would apply MMT and aim for some sort of optimum spending/output level in the short term, including running deficits for a year or two,

      But over the long run the government would aim to unprint the money it prints by spending by collecting LVT, thus preventing the extra spending/money printing from just going into ever higher land prices etc, and instead constantly rechannelling it into the productive economy or people’s pockets (via the welfare system aka Citizen’s Income).

      Remember: taxes on income take money out of the productive economy and most people’s pockets and by default divert to landowners and bankers.

    23. Icarus Green says:

      I’m coming around to MMT but I fear its fatal weakness is that it centralises and gives to much power to government, which is an ironic thing for a liberal like myself to say.

      Whats to stop the government of the day making up figures, spending the money (theoretically it should still be efficient spending, right?) on insiders and clientele or pet projects that people dont need under the veil of keeping unemployment down?

      (“Aha!”- you might retort that most governments are this slovenly with money now anyways)

      Perhaps there is significant research in the area, but in terms of the international scene, if all countries manage economies like this, what would happen to trade imbalances and competitiveness? Would countries just keep printing money no matter how inefficient and uncompetitive their traded sectors are?

      I’m sounding like a neoliberal here, but it almost feels like managing an economy like this, would make everything completely artificial and suppress price discovery…on the other hand, if we kept spending until everyone was employed, I guess we could abolish housing support, unemployment payments and perhaps even some disability payments. In a way everyone really would have to work then, because there’d be no excuses.

      Just some thoughts from an amateur.

    24. Bob says:

      Gives too much power? Sounds like you don’t like democracy much. MMT does not give any additional “powers” to govt, it just describes how the system works. If you are talking about the JG have you viewed Bill’s latest post on the sanctions, coercion, workfare, etc.
      I agree with the libertarians on ending the war on drugs, coercive taxes (I favour land value tax only as I believe coercive taxes and property as theft, all taxes come out of rents), surveillance, opposed to sin taxes, etc. I would describe myself as a libertarian socialist (if that is not a contradiction in terms.)
      Govt don’t “print money” Govt spending works by crediting bank accounts. Taxes debit bank accounts and create demand for the currency. The govt is a currency issuer, it has to spend first, then this circulates with various taxes (Goods and services, income, corporate, property tax, etc) and comes back to the govt. If there are savings or net imports there are deficits. Similarly, the govt borrowing are nothing of the sort, interest payments are corp welfare and arguably create inflation more than “printing” money. Read more of Bill’s blog.

    25. Alan Dunn says:

      “But over the long run the government would aim to unprint the money it prints by spending by collecting LVT, thus preventing the extra spending/money printing from just going into ever higher land prices etc, and instead constantly rechannelling it into the productive economy or people’s pockets (via the welfare system aka Citizen’s Income).”

      Are you serious ? it appears that you don’t know the difference between the money supply and the money stock.

      Learn how the monetary financial system actually operates in the real world and then get back to us.

    26. Bob says:

      Dear Alan Dunn
      When the govt spends, the money goes through various taxes and comes back to the govt. Tax gives the government more space to spend. So there is nothing wrong with what he said.
      This is how the system works. Govts do not borrow or tax to get money to spend.

    27. alan Dunn says:

      The quote from Mark Wadsworth – was “But over the long run the government would aim to unprint the money it prints by spending “.

      The government does not create the money supply and there is no money multiplier.
      Yet in the quote above the suggestion from you is that they do.

      The Governement / Central Bank control the Money Base – that’s it.

      Do you actually understand this ? It appears not.

      Your quote tells me nothing I don’t already know.

      The main problem with your lot is you think you are aligned with MMT [ I’m not by the way] and yet still think in terms of gold standards and fixed money supplies via a fiscal crowding out.

    28. Scott Baker says:

      I feel a bit embarrassed to be the only Georgist here to point out that George was, in fact, a Greenbacker, like his part-contemporary, President Lincoln, who issued the first Greenbacks under the original Legal Tender Law in 1862-1863 ($450m).
      In my paper for the World Economics Association: A Brief History of American Paper Money, with emphasis on Georgist Perspectives, I quoted George’s views extensively. You and other Georgists can perhaps be forgiven for not reading them in his specific reply to a reader of The Standard – the newspaper he ran in the 1880s, but Stephen Zarlenga’s 80+ page paper on “Henry George’s concept of Money and Its Application to 21st Century Monetary Reform — Concluding Remarks: – http://www.progress.org/2003/moneyz05.htm” ought to have been harder to miss, since it was commissioned by the Georgist publisher: The Robert Schalkenbach Foundation. A clue can be gathered form the RSF’s almost universal disavowal of Zarlenga’s similar conclusion that George was a Greenbacker. It is proof, as you also say, that Georgists focus on the Land-Tax solution to the exclusion of everything else, inducing sound policy (and, if we are not aiming to create sound policy, what are we in this for? Soundbites?).
      To George, quoting form my paper (peer-reviewed):
      “Henry George, writing in The Standard, (December 1889), during the height of the Greenback era, said4 (emphasis added):
      The constitutional power to issue money comes from the following clauses of the constitution:
      Sec. 8.-The congress shall have power:
      To borrow money on the credit of the United States. To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures.
      As to the nature of money…Gold and silver are not of themselves money, nor yet can money be made by legislative fiat. What makes anything money is the common consent to receive it. Where this exists without it, no intrinsic value is needed, Where this does not exist, governments may stamp and issue and fiat in vain. The history of our own governments, as the history of all governments, proves this….
      …gold and silver, and in a less degree, copper, do possess certain natural qualities of permanence, portability and divisibility which peculiarly fit them for use as money so long as intrinsic value is a necessary quality, and which still give to the first of these metals something of the character of an international money as a standard of value and in the settlement of balances. But where there is a credit and confidence behind it sufficiently stable and wide, paper becomes the most convenient and least expensive material out of which money can be made. …
      The general government should be the only issuer of money, both for the general convenience and the protection (in the true sense of the term) of those who are most liable to have inferior money passed upon them, and because the issuing of credit money for general circulation is a valuable privilege, which ought to be shared by the whole people and not suffered to enrich a few. We have at the present time in the United States nine kinds of money in circulation. Copper coins, nickel coins, silver coins, gold coins, silver notes, gold notes, national bank notes and direct treasury notes, or greenbacks. Of these nine kinds of money, only one kind, the gold coins, have an intrinsic value equal to their current value. But this one kind of money, which alone has intrinsic value equal to its current value, is not at all preferred by the people on that account. On the contrary, over the far greater part of the United States … silver notes, national bank notes, or even greenbacks, are preferred to gold as having an equal current value and being more portable; and all these nine kinds of money, differing greatly in intrinsic value and representative character, circulate interchangeably at par with one another. The induction is irresistible that it is not the intrinsic value of the money, or anything that is pledged for the redemption of the money, or is held by the United States as its representative, but the credit of the government itself which secures the common consent by virtue of which our money circulates. … One uniform currency, consisting of paper and subsidiary coins, the direct issue of the government, and such gold coin as anybody wanted the United States to assay and stamp, would save an enormous sum annually to the people of the United States. The real thing which gives paper money its validity is not the government stamp, but the common consent and general credit which attend it.”

      So, George said that governemnt should be the sole issuer of money (I think we could have a dual issuance system – private and public) and that Greenbacks were one of the most preferred forms of currency in his day – when there were many more types of currencies to choose from than today.
      He also said “The evils entailed by wildcat banking in the United States are too well remembered to need reference… and no-one would now go back to them.” – http://www.progress.org/2003/moneyz05.htm
      George, although emphasizing that the Land issue was the larger one, was perfectly aware of the evils of private money issuance and thought it was too important to be left to the banks.

      Now, the MMT position has, as Zarlenga has pointed out elsewhere in his critique of MMT, a different problem. While both Greenbackers and MMT recognize the ABILITY of governemnt to issue Sovereign Money, only the former understands that that is not what it is doing now (no, not even through QE, which Greenbackers recognize, correctly, IMO, is mostly a private institution, more beholden to the banks than to Congress, which it sometimes informs).
      MMT insists that the world is the way it would LIKE it to be, not the way it actually is. If taxes are used for spending “only by an accounting convention” and if politicians accept that convention, then by what means is there to say that is not what happens? After all, policy decisions are made on flimsier basis’ than that! And the debt, while not constrained by fiat monetary resources, ARE constrained by the political actions of those who issue spending bills (Congress). Worse, the debt is paid to the unproductive class you so right castigate, as do Georgists and Greenbackers.
      Both LVT and Greenbacking seek to eliminate this while MMT, by itself, has no way to counter rent-seeking behavior. I understand many MMTers propose regulating the banks, and maybe even taxing the rich more to reduce inequality, but there seems to be no theoretical basis in MMT for doing so as a means to eliminate well-defined unearned income. Indeed, there seems to be no way to identify unearned income at all!
      Georgism provides a way to do that, by clearly differentiating the rentier class from the productive class based on how they make their living. LVT provides the means to collect the hitherto privatized rent for the public purpose instead. Greenbacking – which I and a significant minority of Georgists recognize as part of Georgism too – provides a way to counter the worst of the financier activity that might slip by Land Value Taxation (for example, currency manipulation, or, lately, student loan gouging). In the virtual economy of today, we need both to be effective toward the social good. The clever financier certainly uses leverage on money as well as leverage on land, slipping between the two as the opportunity arises. We must be equally adept.

    29. jake says:

      I have no problem with private property.
      Private ownership of land should have a charge on it;the cost of enforcing monopoly priveledges(excluding everybody).
      I simply prefer LVT because it stabilises prices; prevents hoarding;controls booms and busts.Ends unearned income gains.Its the best type of rent control.

      As a result of it being untaxed,Where I live, earnings to price ratios are through the roof.Property price inflation is insane.It will only go upwards.
      My support for LVT isn’t ideological: its mainly about keeping a roof over my head.

    30. jake says:

      “There have been some major recessions following speculative property crashes (for example, Japan in 1991) but these ‘balance sheet’ recessions are not very often encountered”

      I will obiviously have to provide substantial statistical evidence.But I have read sources that made compelling cases that Every single recession/Depression is caused by rise private debt in mortages for residential property.Even the great depression in the 1920´s was preceded by a land led boom.
      Philip j anderson has wriiten about this.
      So I did understand that every economic downturn is caused by a credit leveraging into captialised land value followed by a collapse and then a reduction in asset prices.

      “Most recessions are driven by private investment falling due to a lack of confidence ” presumbably caused by a reduction in asset price inflation or fear of contagion caused by poorly performing loans.

      what is clear is that taxcuts/increased spending always traslate into increased land values.Which shows as Ricardo (1817) pointed out,that economic growth accrues to the land owners…in other words the economic surplus is always captured by those who own the land.

    31. Steve says:

      Georgism is a legitimate economic insight, but partial assessment of the problem in that it is a about only a diminution of money that contributes to the disequilibrating gap between individual incomes and costs/prices created by the system which labors under the flawed cost accounting convention which says all costs must go into price….despite the fact that such diminutions (and also additional costs) create the above most basic disequilibrium as a flow.

      MMT has insight about money as well, but it is basically Social Credit for the government. What we need is actual Social Credit which resolves the “Gap” problem for both the system (private and governmental) AND the individual.

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