The Weekend Quiz – August 19-20, 2017 – answers and discussion

Here are the answers with discussion for this Weekend’s Quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of modern monetary theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

Question 1:

A sovereign national government requires taxation revenue in order to spend.

The answer is True.

First, to clear the ground we state clearly that a sovereign government is the monopoly issuer of the currency and is never revenue-constrained. So it never has to “obey” the constraints that the private sector always has to obey.

The foundation of many mainstream macroeconomic arguments is the fallacious analogy they draw between the budget of a household/corporation and the government fiscal outcome. However, there is no parallel between the household (for example) which is clearly revenue-constrained because it uses the currency in issue and the national government, which is the issuer of that same currency.

The choice (and constraint) sets facing a household and a sovereign government are not alike in any way, except that both can only buy what is available for sale. After that point, there is no similarity or analogy that can be exploited.

Of-course, the evolution in the 1960s of the literature on the so-called ‘government budget constraint’ (GBC), was part of a deliberate strategy to argue that the microeconomic constraint facing the individual applied to a national government as well. Accordingly, they claimed that while the individual had to “finance” its spending and choose between competing spending opportunities, the same constraints applied to the national government. This provided the conservatives who hated public activity and were advocating small government, with the ammunition it needed.

So the government can always spend if there are goods and services available for purchase, which may include idle labour resources. This is not the same thing as saying the government can always spend without concern for other dimensions in the aggregate economy.

For example, if the economy was at full capacity and the government tried to undertake a major nation building exercise then it might hit inflationary problems – it would have to compete at market prices for resources and bid them away from their existing uses.

In those circumstances, the government may – if it thought it was politically reasonable to build the infrastructure – quell demand for those resources elsewhere – that is, create some unemployment. How? By increasing taxes.

So to answer the question correctly, you need to understand the role that taxes play in a fiat currency system.

In a fiat monetary system the currency has no intrinsic worth. Further the government has no intrinsic financial constraint. Once we realise that government spending is not revenue-constrained then we have to analyse the functions of taxation in a different light. The starting point of this new understanding is that taxation functions to promote offers from private individuals to government of goods and services in return for the necessary funds to extinguish the tax liabilities.

In this way, it is clear that the imposition of taxes creates unemployment (people seeking paid work) in the non-government sector and allows a transfer of real goods and services from the non-government to the government sector, which in turn, facilitates the government’s economic and social program.

The crucial point is that the funds necessary to pay the tax liabilities are provided to the non-government sector by government spending. Accordingly, government spending provides the paid work which eliminates the unemployment created by the taxes.

So it is now possible to see why mass unemployment arises. It is the introduction of State Money (government taxing and spending) into a non-monetary economics that raises the spectre of involuntary unemployment. As a matter of accounting, for aggregate output to be sold, total spending must equal total income (whether actual income generated in production is fully spent or not each period). Involuntary unemployment is idle labour offered for sale with no buyers at current prices (wages).

Unemployment occurs when the private sector, in aggregate, desires to earn the monetary unit of account, but doesn’t desire to spend all it earns, other things equal. As a result, involuntary inventory accumulation among sellers of goods and services translates into decreased output and employment. In this situation, nominal (or real) wage cuts per se do not clear the labour market, unless those cuts somehow eliminate the private sector desire to net save, and thereby increase spending.

The purpose of State Money is for the government to move real resources from private to public domain. It does so by first levying a tax, which creates a notional demand for its currency of issue. To obtain funds needed to pay taxes and net save, non-government agents offer real goods and services for sale in exchange for the needed units of the currency. This includes, of-course, the offer of labour by the unemployed. The obvious conclusion is that unemployment occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save.

This analysis also sets the limits on 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 private desire to save (accumulate net financial assets). From the previous paragraph it is also clear that if the Government doesn’t spend enough to cover taxes and desire to save the manifestation of this deficiency will be unemployment.

Keynesians have used the term demand-deficient unemployment. In our conception, the basis of this deficiency is at all times inadequate net government spending, given the private spending decisions in force at any particular time.

So the answer should now be obvious. If the economy is to remain at full employment the government has to command private resources. Taxation is the vehicle that a sovereign government uses to “free up resources” so that it can use them itself. But taxation has nothing to do with “funding” of the government spending.

To understand how taxes are used to attenuate demand please read this blog – Functional finance and modern monetary theory.

The following blogs may be of further interest to you:

Question 2:

The posting of a fiscal surplus indicates that the national government has sought to reduce aggregate spending in the economy.

The answer is that False.

The actual fiscal deficit outcome that is reported in the press and by Treasury departments is not a pure measure of the fiscal policy stance adopted by the government at any point in time. As a result, a straightforward interpretation of

Economists conceptualise the actual fiscal outcome as being the sum of two components: (a) a discretionary component – that is, the actual fiscal stance intended by the government; and (b) a cyclical component reflecting the sensitivity of certain fiscal items (tax revenue based on activity and welfare payments to name the most sensitive) to changes in the level of activity.

The former component is now called the “structural deficit” and the latter component is sometimes referred to as the automatic stabilisers.

The structural deficit thus conceptually reflects the chosen (discretionary) fiscal stance of the government independent of cyclical factors.

The cyclical factors refer to the automatic stabilisers which operate in a counter-cyclical fashion. When economic growth is strong, tax revenue improves given it is typically tied to income generation in some way. Further, most governments provide transfer payment relief to workers (unemployment benefits) and this decreases during growth.

In times of economic decline, the automatic stabilisers work in the opposite direction and push the fiscal balance towards deficit, into deficit, or into a larger deficit. These automatic movements in aggregate demand play an important counter-cyclical attenuating role. So when GDP is declining due to falling aggregate demand, the automatic stabilisers work to add demand (falling taxes and rising welfare payments). When GDP growth is rising, the automatic stabilisers start to pull demand back as the economy adjusts (rising taxes and falling welfare payments).

The problem is then how to determine whether the chosen discretionary fiscal stance is adding to demand (expansionary) or reducing demand (contractionary). It is a problem because a government could be run a contractionary policy by choice but the automatic stabilisers are so strong that the fiscal outcome goes into deficit which might lead people to think the “government” is expanding the economy.

So just because the fiscal outcome goes into deficit doesn’t allow us to conclude that the Government has suddenly become of an expansionary mind. In other words, the presence of automatic stabilisers make it hard to discern whether the fiscal policy stance (chosen by the government) is contractionary or expansionary at any particular point in time.

To overcome this ambiguity, economists decided to measure the automatic stabiliser impact against some benchmark or “full capacity” or potential level of output, so that we can decompose the fiscal balance into that component which is due to specific discretionary fiscal policy choices made by the government and that which arises because the cycle takes the economy away from the potential level of output.

As a result, economists devised what used to be called the Full Employment or High Employment Budget. In more recent times, this concept is now called the Structural Balance. As I have noted in previous blogs, the change in nomenclature here is very telling because it occurred over the period that neo-liberal governments began to abandon their commitments to maintaining full employment and instead decided to use unemployment as a policy tool to discipline inflation.

The Full Employment Budget Balance was a hypothetical construction of the fiscal balance that would be realised if the economy was operating at potential or full employment. In other words, calibrating the fiscal position (and the underlying fiscal parameters) against some fixed point (full capacity) eliminated the cyclical component – the swings in activity around full employment.

This framework allowed economists to decompose the actual fiscal balance into (in modern terminology) the structural (discretionary) and cyclical fiscal balances with these unseen fiscal components being adjusted to what they would be at the potential or full capacity level of output.

The difference between the actual fiscal outcome and the structural component is then considered to be the cyclical fiscal outcome and it arises because the economy is deviating from its potential.

So if the economy is operating below capacity then tax revenue would be below its potential level and welfare spending would be above. In other words, the fiscal balance would be smaller at potential output relative to its current value if the economy was operating below full capacity. The adjustments would work in reverse should the economy be operating above full capacity.

If the fiscal outcome is in deficit when computed at the “full employment” or potential output level, then we call this a structural deficit and it means that the overall impact of discretionary fiscal policy is expansionary irrespective of what the actual fiscal outcome is presently. If it is in surplus, then we have a structural surplus and it means that the overall impact of discretionary fiscal policy is contractionary irrespective of what the actual fiscal outcome is presently.

So you could have a downturn which drives the fiscal outcome into a deficit but the underlying structural position could be contractionary (that is, a surplus). And vice versa.

The question then relates to how the “potential” or benchmark level of output is to be measured. The calculation of the structural deficit spawned a bit of an industry among the profession raising lots of complex issues relating to adjustments for inflation, terms of trade effects, changes in interest rates and more.

Much of the debate centred on how to compute the unobserved full employment point in the economy. There were a plethora of methods used in the period of true full employment in the 1960s.

As the neo-liberal resurgence gained traction in the 1970s and beyond and governments abandoned their commitment to full employment , the concept of the Non-Accelerating Inflation Rate of Unemployment (the NAIRU) entered the debate – see my blogs – The dreaded NAIRU is still about and Redefing full employment … again!.

The NAIRU became a central plank in the front-line attack on the use of discretionary fiscal policy by governments. It was argued, erroneously, that full employment did not mean the state where there were enough jobs to satisfy the preferences of the available workforce. Instead full employment occurred when the unemployment rate was at the level where inflation was stable.

The estimated NAIRU (it is not observed) became the standard measure of full capacity utilisation. If the economy is running an unemployment equal to the estimated NAIRU then mainstream economists concluded that the economy is at full capacity. Of-course, they kept changing their estimates of the NAIRU which were in turn accompanied by huge standard errors. These error bands in the estimates meant their calculated NAIRUs might vary between 3 and 13 per cent in some studies which made the concept useless for policy purposes.

Typically, the NAIRU estimates are much higher than any acceptable level of full employment and therefore full capacity. The change of the the name from Full Employment Budget Balance to Structural Balance was to avoid the connotations of the past where full capacity arose when there were enough jobs for all those who wanted to work at the current wage levels.

Now you will only read about structural balances which are benchmarked using the NAIRU or some derivation of it – which is, in turn, estimated using very spurious models. This allows them to compute the tax and spending that would occur at this so-called full employment point. But it severely underestimates the tax revenue and overestimates the spending because typically the estimated NAIRU always exceeds a reasonable (non-neo-liberal) definition of full employment.

So the estimates of structural deficits provided by all the international agencies and treasuries etc all conclude that the structural balance is more in deficit (less in surplus) than it actually is – that is, bias the representation of fiscal expansion upwards.

As a result, they systematically understate the degree of discretionary contraction coming from fiscal policy.

The only qualification is if the NAIRU measurement actually represented full employment. Then this source of bias would disappear.

So a government could still be adopting an expansionary discretionary stance yet record a fiscal surplus because the automatic stabilisers are so strong.

The following blogs may be of further interest to you:

Question 3:

To redistribute national income back to workers from capital, wages have to grow faster than the inflation rate.

The answer is False.

The wage share in nominal GDP is expressed as the total wage bill as a percentage of nominal GDP. Economists differentiate between nominal GDP ($GDP), which is total output produced at market prices and real GDP (GDP), which is the actual physical equivalent of the nominal GDP. We will come back to that distinction soon.

To compute the wage share we need to consider total labour costs in production and the flow of production ($GDP) each period.

Employment (L) is a stock and is measured in persons (averaged over some period like a month or a quarter or a year.

The wage bill is a flow and is the product of total employment (L) and the average wage (w) prevailing at any point in time. Stocks (L) become flows if it is multiplied by a flow variable (W). So the wage bill is the total labour costs in production per period.

So the wage bill = W.L

The wage share is just the total labour costs expressed as a proportion of $GDP – (W.L)/$GDP in nominal terms, usually expressed as a percentage. We can actually break this down further.

Labour productivity (LP) is the units of real GDP per person employed per period. Using the symbols already defined this can be written as:

LP = GDP/L

so it tells us what real output (GDP) each labour unit that is added to production produces on average.

We can also define another term that is regularly used in the media – the real wage – which is the purchasing power equivalent on the nominal wage that workers get paid each period. To compute the real wage we need to consider two variables: (a) the nominal wage (W) and the aggregate price level (P).

We might consider the aggregate price level to be measured by the consumer price index (CPI) although there are huge debates about that. But in a sense, this macroeconomic price level doesn’t exist but represents some abstract measure of the general movement in all prices in the economy.

Macroeconomics is hard to learn because it involves these abstract variables that are never observed – like the price level, like “the interest rate” etc. They are just stylisations of the general tendency of all the different prices and interest rates.

Now the nominal wage (W) – that is paid by employers to workers is determined in the labour market – by the contract of employment between the worker and the employer. The price level (P) is determined in the goods market – by the interaction of total supply of output and aggregate demand for that output although there are complex models of firm price setting that use cost-plus mark-up formulas with demand just determining volume sold. We shouldn’t get into those debates here.

The inflation rate is just the continuous growth in the price level (P). A once-off adjustment in the price level is not considered by economists to constitute inflation.

So the real wage (w) tells us what volume of real goods and services the nominal wage (W) will be able to command and is obviously influenced by the level of W and the price level. For a given W, the lower is P the greater the purchasing power of the nominal wage and so the higher is the real wage (w).

We write the real wage (w) as W/P. So if W = 10 and P = 1, then the real wage (w) = 10 meaning that the current wage will buy 10 units of real output. If P rose to 2 then w = 5, meaning the real wage was now cut by one-half.

So the proposition in the question – that nominal wages grow faster than inflation – tells us that the real wage is rising.

Nominal GDP ($GDP) can be written as P.GDP, where the P values the real physical output.

Now if you put of these concepts together you get an interesting framework. To help you follow the logic here are the terms developed and be careful not to confuse $GDP (nominal) with GDP (real):

  • Wage share = (W.L)/$GDP
  • Nominal GDP: $GDP = P.GDP
  • Labour productivity: LP = GDP/L
  • Real wage: w = W/P

By substituting the expression for Nominal GDP into the wage share measure we get:

Wage share = (W.L)/P.GDP

In this area of economics, we often look for alternative way to write this expression – it maintains the equivalence (that is, obeys all the rules of algebra) but presents the expression (in this case the wage share) in a different “view”.

So we can write as an equivalent:

Wage share – (W/P).(L/GDP)

Now if you note that (L/GDP) is the inverse (reciprocal) of the labour productivity term (GDP/L). We can use another rule of algebra (reversing the invert and multiply rule) to rewrite this expression again in a more interpretable fashion.

So an equivalent but more convenient measure of the wage share is:

Wage share = (W/P)/(GDP/L) – that is, the real wage (W/P) divided by labour productivity (GDP/L).

I won’t show this but I could also express this in growth terms such that if the growth in the real wage equals labour productivity growth the wage share is constant. The algebra is simple but we have done enough of that already.

That journey might have seemed difficult to non-economists (or those not well-versed in algebra) but it produces a very easy to understand formula for the wage share.

Two other points to note. The wage share is also equivalent to the real unit labour cost (RULC) measures that Treasuries and central banks use to describe trends in costs within the economy. Please read my blog – Saturday Quiz – May 15, 2010 – answers and discussion – for more discussion on this point.

Now it becomes obvious that if the nominal wage (W) grows faster than the price level (P) then the real wage is growing. But that doesn’t automatically lead to a growing wage share. So the blanket proposition stated in the question is false.

If the real wage is growing at the same rate as labour productivity, then both terms in the wage share ratio are equal and so the wage share is constant.

If the real wage is growing but labour productivity is growing faster, then the wage share will fall.

Only if the real wage is growing faster than labour productivity , will the wage share rise.

The wage share was constant for a long time during the Post Second World period and this constancy was so marked that Kaldor (the Cambridge economist) termed it one of the great “stylised” facts. So real wages grew in line with productivity growth which was the source of increasing living standards for workers.

The productivity growth provided the “room” in the distribution system for workers to enjoy a greater command over real production and thus higher living standards without threatening inflation.

Since the mid-1980s, the neo-liberal assault on workers’ rights (trade union attacks; deregulation; privatisation; persistently high unemployment) has seen this nexus between real wages and labour productivity growth broken. So while real wages have been stagnant or growing modestly, this growth has been dwarfed by labour productivity growth.

Crowdfunding Request – Economics for a progressive agenda

56 per cent raised with just 9 days to go. Please help the promoters of this event.

I received a request to promote this Crowdfunding effort. I note that I will receive a portion of the funds raised in the form of reimbursement of some travel expenses. I have waived my usual speaking fees and some other expenses to help this group out.

The Crowdfunding Site is for an – Economics for a progressive agenda.

As the site notes:

Professor Bill Mitchell, a leading proponent of Modern Monetary Theory, has agreed to be our speaker at a fringe meeting to be held during Labour Conference Week in Brighton in September 2017.

The meeting is being organised independently by a small group of Labour members whose goal is to start a conversation about reframing our understanding of economics to match a progressive political agenda. Our funds are limited and so we are seeking to raise money to cover the travel and other costs associated with the event. Your donations and support would be really appreciated.

For those interested in joining us the meeting will be held on Monday 25th September between 2 and 5pm and the venue is The Brighthelm Centre, North Road, Brighton, BN1 1YD. All are welcome and you don’t have to be a member of the Labour party to attend.

It will be great to see as many people in Brighton as possible.

Please give generously to ensure the organisers are not out of pocket.

That is enough for today!

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    15 Responses to The Weekend Quiz – August 19-20, 2017 – answers and discussion

    1. Jerry Brown says:

      Question 1:
      A sovereign national government requires taxation revenue in order to spend.

      The answer to this question is clearly “false” in the short term as you state yourself in your quiz answers-
      “The purpose of State Money is for the government to move real resources from private to public domain. It does so by first levying a tax, which creates a notional demand for its currency of issue. To obtain funds needed to pay taxes and net save, non-government agents offer real goods and services for sale in exchange for the needed units of the currency.”

      Since no tax revenue is necessary, or even possible at inception of the currency, the currency issuing government does not depend on or require ‘tax revenue’ in order to spend. Had the question asked if the imposition of taxes was necessary, in order to create a demand for the currency, rather than if tax ‘revenue’ was required to spend, then your answer would be consistent with all the other things you have taught me.

      I will give myself credit for my quiz answer based on my explanation.

    2. Alan Longbon says:

      Hello,

      Question 1, it is clear that taxation creates the fiscal space for government to obtain resources from the private sector, these could also be requisitioned by passing a law, and in which case no money is required or taxes. The question relates to taxes raising revenue to spend and should be false not true imho as such a government can always spend, which the answer to the question also states as a fact.

      How can the answer be true and yet the explanation contain a contradictory statement?

      I thought the reason for the true result was that it was not established whether the government had a freely floating exchange rate and that was the tricky difference.

      What am I missing?

    3. Nigel Hargreaves says:

      Bill’s answer is the logic I used – albeit in far fewer words.

      Jerry’s scenario only holds on day 1, probably minute 1 of a new state and currency where there had been no economic activity in the past – an impossible situation. If Scotland were to become independent, for example, and their new govenment was sensible enough to float its own currency, the new state would take on a proportion of the assets and liabilities of the United Kingdom, and the population’s assets and liabilities would be redenominated in the Scottish pound or whatever., so taxes would already be due at minutes 1 The only Jerry scenario I can think of is if the passengers and crew of a liner were shipwrecked on a dessert island and decided to run a monetary system with a paper currency called the conch. They might even be able to run the monetary system electronically using the ship’s salvaged computers. The democratically elected government would then pass a law, or possibly write a constitution, that required all citizens to pay a tax to the state on the exchange of goods and services, exclusively in the conch. Clearly no tax would be due at minute one, but it wouldn’t be long before it would. The citizens would very soon have a need for the currency not just to extinguish their tax liabilities but to facilitate the exchange of goods and serviices. That was my logic in answering the question. The government has to receive revenue denominated in the currency it issues otherwise there would be no demand for the currency and no firms would be interested in supplying the government, ergo it would not be able to spend. Which answers Alan’s question I think.

    4. Alan Longbon says:

      Hello,

      I found this explanation from another venerable MMT source: (Prof Winningham)

      “Let’s say that you use your checking account to pay your federal taxes. When you do this, the numbers in your checking account drop by the amount paid in federal taxes and are not transferred to any other entity within the banking system.
      Thus, since federal taxation is not a transfer of money within the banking system, but rather, it is a removal of money from the banking system altogether, the money in your checking account is deleted from the banking system, and M1 is destroyed because of that.
      Again – The ‘money’ in your checking account comprising M1 that was used to pay taxes was destroyed and now no longer exists as part of the stock of money.
      HPM in a reserve account at the Federal Reserve is now deleted from the reserve account to settle the tax liability because HPM is the only thing that will settle it. The US Treasury’s spending account, the contents of which are not part of the stock of money in the economy, is credited and so, the tax liability is settled and the HPM used to settle the tax liability is also destroyed.
      The federal government simply cannot finance its spending operations with ‘money’ it has destroyed. In other words, the only possible way for the federal government to fund anything, whether it be universal healthcare, a job guarantee, the military or anything else, is by literally spending into existence the dollars required to fund these things.
      And so, the notion that the federal government has no money of its own and must rely on taxpayers to give it some dollars, or that it must go out hat in hand borrowing dollars from private entities and other nations in order to afford to spend, is, operationally, an impossible condition.
      All federal spending is dollar creation. All federal taxation is dollar destruction.”

      My own view on the money supply is that the medium of exchange is like public infrastructure that the economy runs on, in a similar class to roads, bridges, utilities, education, healthcare etc. It is the job of the government to provide it to facilitate business. I do not see that taxation necessarily drives the demand for it. But that is just my view.

      Thanks

      Alan

    5. Nigel Hargreaves says:

      “…and are not transferred to any other entity within the banking system.”

      With respect to Prof. Winningham, that isn’t quite correct, although I don’t know when it was written.

      That used to be the case, but since 2008 (I think without looking at my research notes) in the UK, and much earlier in the US, the government started to run a series of “Treasury Tax & Loan accounts” (TTLs) which are effectively checking accounts at commercial banks. When you pay your taxes, or your employer pays your PAYE, the money initially goes to one of those accounts. Same goes for VAT, Corporation Tax, etc. At some stage decided by the Treasury, they “call up” that money, at which point the reerves (or what he refers to as HPM) of the commercial bank are deleted. It’s all to do with liquidity management within the banking system. It is, of course, nothing to do with funding government expenditure.

      I’m inclined to agree with your last paragraph, Alan, but that’s only because you and I here on the ground have lost sight of the horizon. Within our limited event horizon we need the currency to buy food, pay the mortgage and last and least to pay tax. But that doesn’t alter what MMT is saying in the wider horizon.

    6. Alan Longbon says:

      Hello Nigel,

      Thanks for your reply.

      “With respect to Prof. Winningham, that isn’t quite correct, although I don’t know when it was written.”

      He wrote it just the other day on his Facebook page but that does not make it correct. He is, after all, only human.

      I am correct or about to have an “aha” learning moment that I will never forget.

      Thanks

      Alan

    7. Andy says:

      There is something deep here and I’m struggling with it.

      Have I got this right ?
      In a non-monetary economy there would be no involuntary unemployment. The term would be meaningless because there would be no ‘saving’ and no taxation i.e leakages. It is the introduction of state money that changes this. In the case of saving, the desire of people and businesses to save, and, in the case of taxation, the desire of the government to move resources to the public sector.
      So the government therefore has an ‘obligation’ to ensure full employment because it, or rather its currency issuing and taxing powers…….is the problem.

    8. Jerry Brown says:

      Nigel, Randall Wray has said that MMT holds that taxation is ‘sufficient’ to cause a demand for the currency- not that it is the Only possible factor that causes demand for the currency. In an established currency, such as the US Dollar, federal taxation may not be necessary to ensure that value at all times. At this point in time federal taxation is used for Aggregate Demand management- not really to prop up the value of the currency.

      In any event- it is clear from everything Bill Mitchell has written that the currency issuing government does not require tax revenue in order to spend. When it spends it creates the currency- end of story. All the legal limitations the government has placed on itself as far as spending are self imposed and can and should be and are removed when necessary.

      I pointed out one situation where the answer to Question 1 is clearly “False”. That means the correct answer is “False”. There may be many other circumstances where a currency issuing government does not require any ‘tax revenue’ in order to spend. Think monetary policies conducted by the Federal Reserve where the reserves are created every time the Fed buys an asset from the private sector. Think of seigniorage of coins, which continues to account for a share of government spending. These are two ways even mainstream economists recognize governments can spend without taxation.

    9. Sam says:

      Seems to me that question 1 might be better worded, “A sovereign national government requires payment of taxes in order to spend.” Otherwise, it sounds like a constraint, at least to my armchair ears.

    10. Jerry Brown says:

      Andy, I think you mostly have this right as far as what MMT teaches. If you define unemployment as the situation where someone unsuccessfully seeks to exchange their labor for the currency then there can be no unemployment in a non-monetary economy by definition. Or maybe there is no employment either. So MMT rather conveniently blames all unemployment on the government that issues the currency. Which I agree with.

      Another thing MMT says is that there really are no non-monetary economies, and if there were some in the past well, we don’t have any record of them. So trying to analyze a barter economy is pretty much a waste of time. But sometimes it might be interesting to imagine a barter economy anyways. In my imagination there could still be saving, just not of currency obviously. Farmers would still save some of their crops as seed for the next year for example. People would still dry out and salt the meat from the last mammoth they killed so they could eat it later. Government leaders could still move resources according to their whims even without currency, they would just have to do it forcibly or depend on volunteers. This can be a lot of fun imagining these things :)

    11. Mel says:

      “A sovereign national government requires payment of taxes in order to spend.”

      I’m not even sure of that. As I imagine the primal situation:
      The government goes to a peasant and says “Good peasant, give me that wagon load of barley, and I will give you these sequins in exchange.”
      The peasant says “Who are you,and what use do I have for sequins?”
      The government sends soldiers to burn the peasant’s house down, then says “Sequins, such as this one, are what you give me to keep me from burning your house down.”
      This gives the peasants a reason to swap goods for the government’s money, in the form of sequins or anything else. The critical point is not that they pay the taxes, the point is that they accept the money. It’s up to the impersonal market after that to spread the money around so that nobody’s house gets burnt down. Though I guess the govt would have to collect some taxes occasionally to make sure people’s minds stay focused.

    12. Jerry Brown says:

      Mel, perhaps it is time for some humor about the government repressing the peasants which your comment made me think of. From Monty Python-

    13. Hog says:

      the question is if there is really no drain (as could be considered revenue) could that hypothetically work as a tax. maybe, in the unlikely scenario that no one ever spends any of the income in order to avoid the tax. but if so why would they want to have that income in the first place.

    14. Andy Smith says:

      I am puzzled by the answer to 1.
      Take the UK at the moment. There is I contend significant under-utilisation of our human capital despitebthe official ‘stats’. Given this surely HMG can simply initiate and fund various programs to soak up this spare capacity WITHOUT first raising tax.

    15. Derek Henry says:

      In Question 1 for me ” Revenue” is the wrong word to use therefore it should be false. I would have been a lot happier if the question was ..

      A sovereign national government requires taxation in order to spend.

      If you read Deficit spending 101 – Part 2 at the bottom of the second paragraph it states quite clearly. Operationally, this process is independent of any prior REVENUE, including taxing and borrowing.

      When I was reading the answer I nearly had heart failure because until you get to last part it sounds as if both the Republicans and the Tories have had it right all along with their economic policies.

      Then Bill goes into Warren Mosler mode and explains that It is clear that government spending has to be sufficient to allow

      a) Taxes to be paid.

      b) To meet the private desire to save (accumulate net financial assets).

      That’s the key here for me and one of Warren’s main points and what differentiates between MMT and everybody else. Hence why the JG is so important to the theory.

      We say governments need to spend enough to cover a) and b) yet the Republicans and the Tories and Labour are always trying to destroy b) and never meet that desire. Even when they want to cut taxes it won’t work because along with cutting taxes they want to cut government spending which means they still don’t meet b)

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