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How come the principles supported austerity one day but fiscal dominance the next?

As part of the paradigmic turmoil that is confronting mainstream economists, we are witnessing some very interesting strategies. Imagine you establish a set of principles that are seemingly inviolable. They are the bedrock of the belief system, even though it is not called that. These principles then offer all sorts of predictions about, yes, the real world. They are without nuance. The predictions are so worrying, that politicians, whether they are knowing or not, proceed with caution in some cases, and, in other cases, openly damage the well-being of citizens because they have been told that shock therapy is better than a long drawn out demise into ‘le marasme’. The authority for all the carnage that follows (unemployment, poverty, pension cuts, degraded public infrastructure and services, etc) is these ‘inviolable principles’. Economists swan around the world preaching them and bullying students and others into accepting them as gospel. The policy advice is hard and fast. Governments must stay credible. Except one day they completely change tack and all the policy advice that established certain actions to be totally taboo become the norm. We observe things are better as a result. Does this mean those ‘inviolable principles’ were bunk all along? Not according to the mainstream economists who are trying to position themselves on the right side of history. Apparently, their optimising New Keynesian models can totally justify fiscal dominance and central bank funding fiscal deficits when yesterday such actions were taboo. Which leg are they trying to pull?

So this set of principles is held out as a science – a body of principles embedded in an understanding of human psychology and incentive systems. Except, the practitioners forget to tell you that they are not sociologists and psychologists, nor are they anthropologists.

And they ignore the fact that those social sciences actually are built on establishing a clinical and social understanding of human behaviour, motivation and organisation.

And so these ‘principles’ create an image of humanity that no other social scientist or medical scientist, for that matter, can identify as being human.

Never mind. Continue. Who are they to tell us what it right anyway?

These principles then offer all sorts of predictions about, yes, the real world.

The principles are abstractions but are held out as being of fundamental relevance to the real world.

As a result of the nature of the discipline, the predictions have manifest consequences for human well-being, physical, mental, and material.

And these predictions also condition the way our governments design and implement policy interventions, which link the world of thought to humanity.

It turns out at some point, the predictions are so worrying that politicians, whether they are knowing or not, proceed with caution in some cases, and, in other cases, openly damage the well-being of citizens because they have been told that shock therapy is better than a long drawn out demise into ‘le marasme’.

And all manner of damage is inflicted on communities around the world by governments who follow the advice of economists based on these inviolable principles.

Anyone who dares contest them is summarily dismissed as being unknowing, ideological, dangerous leftist, stupid, and all manner of slights that I, personally, could document over my career to date.

The principles are typically expressed in abstract mathematical language that even the true mathematicians find rather simplistic and naive.

Never mind. Continue. Who are they to comment?

The predictions and the abstractions sit uncomfortably next to each other.

In fact, while the defenders of these principles dwill never admit it openly, the predictions are not directly derivable from the principles.

The logic says they cannot be because in order to ‘solve’ the mathematical representations the ‘models’ (their abstract depiction of reality) are so simplified that they are incapable of ‘tracking’ the real world data.

Which means in English that without further ad hoc manipulation, the theoretical models have no empirical application.

So to satisfy some semblance of statistical congruency (using the established diagnostics of mathematical statistics and distribution theory), the operational frameworks deployed depart from the starting principles and framework.

If that doesn’t make sense, try this.

They justify the principles as being ground, for example, in optimising behaviour by humans. The so-called ‘micro-founded’ macroeconomic models.

They harp on to their students about the beauty and authority of these ‘micro-founded’ approaches.

But as soon as they have to apply those models to the real world, they introduce all sorts of ad hoc manipulations, which help the statistical expression of the models ‘fit’ the data.

There are two problems for them as a result:

First, the predictions systematically fail to account for real world developments.

Fiscal deficits rise and interest rates or bond yields do not.

Central banks buy massive quantities of government bonds, effectively financing fiscal deficits, and inflation rates hover at low levels and price expectations follow.

Government debt rises but bond markets keep queuing up for more except in the Eurozone where they start pushing up demands for higher returns to accommodate the increased risk because they know the governments do not have their own currency any more.

Except, even then the ECB steps in an absorbs all the yield pressure using keystrokes in computers to buy huge amounts of government debt.

The Treaties are written to prevent the ECB doing that and the economists talk relentlessly about maintaining credibility (one of those principles that are allegedly inviolable) but still the ECB breaks taboo because they know without them the common currency collapses fairly quickly such is the dysfunctional nature of the monetary architecture the economists insisted was put in place – following their ‘principles’.

Second, and moreover, no-one owns up to the fact that once the highly abstract, simplified mathematical models, that are constructed following the application of these optimising assumptions, are tampered with in order to get any semblance of a statistical fit to the real world data, the users can no longer say that the results (the predictions) flowed from the principles (the micro-foundations).

Once the ad hoc changes are made (lags added to relationships etc) then we are sailing in unknown waters – certainly not in any waters that their so-called optimising principles can apply to.

They don’t tell you that though.

If they did, their cover would be blown. They would lose their own perception of rigour or technical authority.

The reality is they have none.

Please read my blog post – Mainstream macroeconomic fads – just a waste of time – (September 18, 2009) – for more technical discussion on this point.

So humanity suffers and none of these characters lose their jobs, go to prison for professional incompetence, or lose their pensions when they decide to depart the scene.

They wander around appearing at conferences, write Op Eds that just repeat and repeat, in some cases receive huge speaking fees from organisers who represent segments of society that are the winners of the application of these principles, and that has been the world for some decades now.

As time passes, we start to put two and two together. We get four.

We realise that the outcomes that these professionals promised us, if only we sacrificed and pulled our belts in, haven’t transpired.

We realise that our wages haven’t grown much yet incomes at the top-end of the distribution have gone through the roof.

We realise that the quality of our jobs, if we are able to keep one, have deteriorated.

More of us are forced onto contracts without the old protections.

More of us are ‘casualised’. They tell us that this helps us achieve work-life balance – which sounds beautiful – but is, in reality, a road to a low-wage, precarious life with little balance being evident – split-shifts, zero-hour commitments, capricious and bullying bosses.

We realise that the investment in our public education and health systems is falling and services are deteriorating yet profits in the privatised health care and educational sectors are booming.

We learn that private education providers are receiving massive contracts from government in the ‘competitive’ educational sector and provide students with libraries that consist of one shelf in a sparsely occupied office in a back street of our cities.

I was approached this week by a student from some private college in Australia which boast it offers the No 1 on-line MBA in Australia. He wanted me to send him a published article I authored in one of the top Australian economics journals last year – a totally mainstream journal at that – because his college does not provide access!

Go figure.

Anyway, then the tide turns.

There is a commercial property collapse in Japan that leads the government to break ranks with the neoliberals and increase fiscal deficits, see the Bank of Japan buying up massive quantities of government debt.

Interest rates stay zero for decades.

Bond yields fall towards zero and into negative space.

Inflation struggles to record positive numbers.

But that is Japan – ‘cultural’. It doesn’t apply to us.

Then there is the GFC.

Bank of England, the ECB, the Federal Reserve all start looking very Japanese.

The treasuries (Ministries of Finance) all start looking very Japanese.

Big deficits, big central bank bond buying.

No inflation.

No interest rate or bond yields breaking through any roofs.

Then comes the pandemic.

The whole world goes Japanese.

And guess what, the economists start shifting ground.

They have to because even they know how stupid they have looked over these various crises.

How stupid did Olivier Blanchard look when he had to apologise in 2012 for overseeing the IMF recommendations to impose harsh austerity onto Greece and then to discover the underlying modelling they had used to justify that program was deeply flawed?

Not a little bit flawed. Deeply flawed to the extent the applying it would have generated exactly the opposite outcomes to what the IMF claimed would follow from the bailout program.

How stupid did Reinhardt and Rogoff look when, after swanning around gaining world-wide attention for their debt threshold study (‘this time is different’) it was discovered by a postgraduate student that their spreadsheet calculations were wrong?

We will never know whether this was deliberate or just incompetence but policy makers took heed of their initial claims as part of the justification for imposing harsh austerity onto citizens.

How stupid did Paul Krugman look when he claimed in 2017 that “Deficits Matter Again” only to change his mind again when nothing happened according to his script, which in his own words “didn’t come out of thin air … [but … was based on well-established macroeconomic principles.” (Source)?

How much time have I got?

I could document these idiocies for days on end and still not get close to the end.

But the point is that now we are witnessing papers and Op Eds coming out from various economists and groups which now claim that the fiscal dominance we are witnessing with central banks effectively keeping the private bond investors at bay, while governments continue the unnecessary act of issuing public debt to match their fiscal deficits is fine and they knew it all along.

Just a short time ago, they were arguing that it was not.

Then they said that counter-stabilisation (macroeconomic policy) had to be the domain of ‘independent’ central banks at arm’s length from government and that fiscal policy had to concentrate on reducing public debt, which meant it had to be biased towards surplus.

Where did they get those recommendations from?

Their inviolable principles of course.

Apparently, assigning policy precedence to monetary policy and eschewing fiscal policy was the outcome of their modelling logic following the application of their ‘micro-founded’ New Keynesian frameworks.

A reasonable person would then ask such an economist this sort of question.

If your micro-founded principles and resulting analytical framework so strongly established this macroeconomic policy mix yesterday and today you are advocating quite the opposite, does it mean your underlying analytical framework that you used yesterday was wrong and that you have abandoned it?

Quite a reasonable question.

You wouldn’t have to know anything about economics to ask that question.

Well it turns out that it seems that the underlying analytical framework still applies but because it is obvious that fiscal dominance is the only way to save capitalism, which is now on state life support systems, the framework can be tweaked to justify the abandonment of the old policy recommendations, which, as we all know were presented more as taboos than preferences.

That is where the mainstream is at now.

Totally confused. Adrift. Hanging on to their security blankets (the principles) but trying to convince us that they are on top of things.

A good example of this sort of sophistry was released by the Centre for Economic Policy Research in partnership with the International Center for Monetary and Banking Studies (ICMB), under their so-called “Geneva Reports on the World Economy” (No 23) on December 15, 2020.

The CEPR are funded by their membership base and the “financial sector currently makes up two thirds of the membership base”. They claim that they are “broadening the membership base” and cite “for example, the support of most European Union Central Banks as well as the ECB, World Bank, IMF, EBRD and the BIS.”

I would not call that broadening. I would call that deepening the Groupthink base.

Anyway, their paper – It’s All in the Mix: How Monetary and Fiscal Policies Can Work or Fail Together – notes that “the notion of the monetary-fiscal policy mix has made a spectacular come back” because of “the COVID-19 pandemic”.

They claim that:

To deliver the required macroeconomic stabilisation, monetary and fiscal authorities had to join forces and pull together, blurring the traditional boundaries between monetary and fiscal interventions.

And:

The policy mix, long forgotten in the public debate as well as in economics textbooks, is back with a vengeance, and with it the impression that the conventional wisdom about the respective roles of monetary and fiscal authorities is seriously outmoded.

So they ask whether this shift:

Are we witnessing a policy revolution that will shatter the decades-old consensus on the respective roles of central banks and treasuries?

The answer to the question is that what we are observing now should definitely “shatter” the New Keynesian ‘consensus’ once and for all.

But they couldn’t bring themselves to reach that obvious conclusion because then they would have to make further admissions along the lines of what have they been doing all these years while taking good salaries.

That wouldn’t be a very comfortable exercise.

Which is why Groupthink is so hard to, dare I use their word again “shatter”.

So to save face we get the usual tripe.

This new policy mix – fiscal dominance/central banks basically funding the deficits and more – is only possible – “can only work”:

… if the credibility of their commitment to desirable long-term goals – healthy growth under price stability and public debt sustainability

And that means that policy makers have to start moving back to the old policy mix.

Which means that austerity is back in town even though governments are doing exactly the opposite.

I don’t recommend you read their report – it is 181 pages of standard guff.

I read this stuff every day – it is sort of a rod I took on when I became an economist unfortunately. I suspect you all have much better things to do with your time.

The issue is clear enough.

Apparently, they now believe that:

… successful stimulus requires fiscal and monetary authorities to create policy space for each other. With high debt, monetary stimulus creates fiscal space by determining favourable borrowing conditions for the treasury. But for this space to be effective, the central bank must also provide a credible monetary backstop to government debt – essentially shielding the debt markets from belief-driven surges in sovereign risk. With rates at their lower bound, the treasury creates space for monetary stimulus via QE and unconventional measures by offering a contingent backstop to the central bank balance sheet, so that monetary authorities do not face the risks of losing control of money creation and inflation even in the case of large losses.

So, it’s all there. The myths.

1. Governments have to issue to debt to spend above taxation revenue.

2. Private bond markets rule but occasionally they don’t.

The question they can never answer is when it is optimal for the switch to be made from private markets determining the bond yields to central banks determining the yields?

It is obvious that central banks can always keep yields at whatever level they desire. Why don’t they always do that?

3. Central bank can go broke if they buy too much public debt and markets crash so the treasury has to guarantee that won’t happen.

Of course, central banks are not corporations that can become insolvent. They could operate with negative capital forever and no-one would be the wiser.

They could also just type a zero against all the public debt they currently own as a result of their various bond-buying programs and nothing else would happen.

Other than, the public debt ratios would dramatically fall.

When would it be optimal to do that? Always, but the New Keynesians have no analytical capacity to answer that question even though they claim lower public debt ratios are preferable.

4. QE could lead to money creation getting out of control and inflation accelerating – taboo taboo taboo.

They just cannot get over the fact that central banks have been doing this for years now and inflation has gone the other way.

They just cannot comprehend that the central banks have been telling us they are trying as hard as they can to get their inflation rates back up towards their so-called (arbitrary) price stability levels and they have failed.

But, undaunted, the CEPR authors continue to invoke the old principles:

1. “a ‘fiscal backstop’ to central banks’ unconventional policy cannot work if public debt sustainability is in jeopardy” – how can the public debt be unsustainable if central banks hold increasing proportions of it and control yields over the rest of it?

This is a scare-type threshold that has no meaning. The dramatic shift in policy mix that they acknowledge has demonstrated that once and for all, even though they cannot seem to comprehend that.

2. “What the two authorities cannot do is fall into a regime where optimal temporary actions turn into a permanent situation, leading to disaster.”

Taboo doesn’t apply now. But it will later logic.

3. “the budget should tend to be in surplus in booms to create a fiscal buffer for rainy days.”

A ridiculous proposition. Why would that ever been sensible.

What if the boom (high employment) was accompanied by high overall saving from the non-government sector according to preferences?

Then the boom would only have been possible with fiscal deficits of a size commensurate to offset the overall non-government saving.

And if we decompose the non-government sector, what happens if the boom was accompanied by an external deficit, and a desire to save overall by the private domestic sector, which one might offer is a pretty normal situation for a nation to be experiencing?

Then the fiscal deficit would have to even bigger and continuous.

So these context-free claims that the fiscal position has to ‘save’ up currency for rainy days is preposterous and unfounded.

Governments that issue there own currency can always increase deficits no matter what they were doing yesterday or the day before.

They can always respond to declines in non-government spending to protect jobs and incomes.

And their central banks can always ensure bond yields (if debt is issued) are low, irrespective of how much debt is currently outstanding.

There is never a situation where a currency-issuing government can go broke.

Conclusion

So the question remains: if all this talk of credibility and sustainability and the rest of it justified austerity in the past, how can it now justify a diametrically opposite approach to policy?

The answer is that it cannot.

The inviolable principles are bunk.

Which is why the sky hasn’t fallen in on Japan.

Which is why central banks cannot really push up inflation rates despite trying.

Which is why bond yields are low and have been in, say Japan for years despite high, continuous fiscal deficits.

Which is why the New Keynesian paradigm in economics is breaking down.

This lot will eventually die out.

That is enough for today!

(c) Copyright 2021 William Mitchell. All Rights Reserved.

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    This Post Has 41 Comments
    1. Not being a trained economist but an autodidact with a formal engineering background, I have come to the view that the study of economics should start with an understanding of the operations and practicalities of money. As I see it everything that happens in the sphere of economics and its place in society revolves around what money is and how it is used to advance the welfare or not, at the choice of those in control, of the people.

      In engineering the basic understanding is that if it doesn’t work then there must be something wrong that needs to be fixed or changed. Such a simple tenet doesn’t seem to be the case with real world economics as it is currently practised and has been for my whole working life.

      I can sense the steam coming out of Bill’s ears as he wrote this post. Austerity or “you have to be cruel to be kind” practice has always seemed to be an absurdity but being a member of the relatively advantaged classes (salariat and managerialists co-opted by the ultrawealthy) and busy with the day to day of accumulating enough to opt out, it has only been in retirement that I’ve had the time to be driven by concerns with global warming to try and understand, in a detailed way, what this subject called economics is really about and how it (doesn’t) works. Clearly economics is key to making things happen, so, I believe, that it is only by changing the way we do it that we can mount a socially acceptable response to overcoming global warming. Orthodox economics plays a zero sum game Ponzi scheme which must, by definition, fail in the ultimate.

    2. The new keynesians built their myths on David Ricardo’s work, back in the XIX century.
      Those myths were proven wrong for what they caused and I’ll just mention two: the great depression in 1929 and second world war in 1936.
      So it was dumped after Keynes and Roosevelt decided to save the world economy.
      And so it was recovered after the war.
      First in some club in a switzelland mountain, with Hayek and the like (like Bill said one day, there’s allways a Austrian economist hinding in the bushes).
      And then with full steam ahead after the break up of the Bretton Woods consensus and the end of the gold standard back in 1971.
      8 years later, Thatcher begun the recovery of Ricardo’s failed work and Reagan followed one year latter.
      They all know it’s rigged.
      So why continue?
      Because these fellars are the oligarchy’s handy men.
      They are there to fullfill a job: the job of taking the money away from everybody to feed the bank accounts of the top 1% of the population.
      It’s the old class struggle and we’re loosing it.
      But they also know that their world is doomed, if our world collapses.
      So they recovered Keynes for the time beeing, because it will be a lot worse if Keynes gets imposed on them, as it was back in the 1930s.

    3. @Paulo Rodriques ‘second world War in 1936’ I guess you’re refering to the Spanish Civil War but I think you’ll have more difficulty in shifting mainstream consensus to that starting date for WW2 than MMT will have in replacing the mainstream garbage that Bill has to wade through. Another date as important as 1936 is 1937, the outbreak of war between Japan and China (not a civil war and one with far greater future consequences).

    4. I was really pleased today to see a video (interview with Starmer) from Positive Money UK, shared by GIMMS on Twitter, rubbishing views expressed and totally supporting the MMT position. They have a big network here and, I believe, in other states. I considered them as rivals but we need to work together on this now.

    5. @Fred Schilling

      Like yourself, I have no formal economic training. But this actually proved to be advantageous because I had less to unlearn when I first undertook my crusade to discover and understand the origins, purpose and operations of currency/money after the Great Financial Crisis made obvious to even a casual observer that the paradigm dominating the public discourse could not account for mounting empirical evidence, and therefore must be false.
      Newly retired, I’m trying to learn more (I read Bill’s textbook earlier this year) so that I can arm myself to engage with friends and those online who are still steeped in gold-standard era monetarist ideologies detrimental to their own understanding of political economy and the well-being of their fellow citizens.

      So I’ll be going to bed early tonight so I can set my alarm for 2AM local time to take in Bill’s Helsinki lecture tomorrow …

    6. As elsewhere, confusion reigns among the mainstream pro-austerity crowd here in Canada. A few months ago the C.D.Howe Institute, a “think-tank” supported mostly by the big banks, came out with weekly articles saying “OK, now we have to tighten our belts after all that crazy spending” in our national business newspaper (the Globe and Mail). But the big bank economists don’t agree. They support the large fiscal deficits and aren’t calling for “belt tightening” any time soon. Oops! Now the silence from the C.D.Howe Institute is deafening…
      Of course the governor of the Bank of Canada denies the Bank is supporting government fiscal spending by buying massive quantities of government bonds as they are issued. It’s just liquidity management.
      Sometimes I wonder if all these people didn’t miss their true vocation as stand-up comics. But then I think of all the suffering they have caused…

    7. Re eg: It’s definitely an advantage not to have been trained as an economist. I have a Masters’ degree in economics from McGill University in Montreal. It took four months of intensive detox training by Marc Lavoie, a very patient man, to wean me off the mainstream view and introduce me to functional finance.

    8. Forget what I posted about Positive Money. As a comrade just reminded me: “Have they dropped their stupid proposal to forbid banks creating credit ex nihilo? Until they do that they are worse than useless & grossly ignorant, and not an org MMT should associate with.”

    9. Keith Newman, fortunately I was a mature student with toddlers and an out-of-work husband when I did my degree in early 80s. I didn’t believe most of what I was being taught. I experienced the ‘beauty treatment’. I called out the prof on his description of the comparative advantage model. Steve Keen’s Debunking did a lot to boost my confidence.

    10. Excellent post today coupled with excellent comments. This is the reason we come here–isn’t it?–to learn from Bill and each other. Let me try to extend the discussion by emphasizing a small piece of Bill’s post: “the economists talk relentlessly about maintaining credibility….” So on the money this observation is, especially when one considers for whom that “credibility” must be maintained. For the people in general? Surely not. For logic and reason? Clearly not. For the capitalist elite? Of course! And what then, in such a context, does “credibility” mean? To put it Bill’s way, doing whatever is necessary “to save capitalism, which is now on state life support systems….” When one grasps that virtually everything economic outside of MMT, all mainstream economic theory and practice, serves this single purpose, then the outline of what is happening around us, including the laughable contradictions and equivocations, clicks into place.

    11. I only took away 2 things from my economics degree: the importance of market failure and that land value tax is the best tax (because it corrects the most dysfunctional and important market).

    12. Except it can’t be said that the MMT School favors fiscal dominance since they favor INCREASED* government privileges for private depository institutions, aka “the banks.”

      * e.g. unlimited, unsecured loans from the Central Bank to private banks at ZERO percent interest.
      * e.g. unlimited government-provided guarantees of private bank deposits FOR FREE.

    13. “and that land value tax is the best tax (because it corrects the most dysfunctional and important market).”

      Still got a way to go on the deprogramming then.

      Taxation is about freeing up physical resources for the public use, largely manpower, and little else. Other uses of taxation are political, and, unlike the US, we tend to have different names for those in the UK (Duty, levies, fees, even tithes).

      The land tax sits with “full reserve banking” and “tax the rich” in the neat, plausible and wrong category. It falls into the “part of the problem” category – alongside the positive money view and the obsession with rich people. None of them are important to the job at hand.

      Taxation in MMT needs to be a rapid response autostabiliser that ramps up quickly as business activity increases, is paid over quickly to drain funds and reserves labour for the public use. That points to transaction taxes, not value taxes.

    14. The answer to Bill’s question about “which leg they are trying to pull?” is that those charlatans are trying to pull all the legs.

      There is a need for formal inquiry into how this lot managed to to seize control of policy development and the academic mainstream narrative so completely and with such apparent ease, when it’s transparent to all who care to take a close look, that they have brought us nothing but harm.

      Were I a student who majored in economics New Keynesian style, I would be suing for the return of money spent on tuition right now. They might as well have spend their time studying astrology.

    15. It’s OK, Neil, I’m well used to insults at my age.
      I recommend ‘The Corruption of Economics’: “Professor Mason Gaffney charges his colleagues with using a theoretical apparatus that is fatally flawed. But he goes further: he accuses the founders of neo-classical economics – the paradigm taught in schools and universities – of acting in bad faith. They distorted the science of economics to protect vested interests, and prevented governments adopting policies that would yield prosperity for everyone.
      Do you conflate ‘land’ with ‘capital’? Marx certainly didn’t.
      One thing that has stuck with me from hearing the late Prof Gaffney is that unused usable land is a permanent loss to production, just like unemployment.

    16. Neil Wilson: based on your own arguments, which I have followed for more than a decade, I think you are too hard on the land value tax. (Nothing I say differs from you have said.) A land value tax fulfils a political purpose (which you say is a valid reason to tax), especially for sub-national governments in federal systems. As Michael Hudson has said, “unlike the industrial sector, real estate does not report a profit – and hence, pays no income taxes. Property owners do pay state and local real estate taxes, to be sure, but they have been joined by the financial and insurance lobbies to shift local government budgets away from the land and onto the shoulders of labour, through income taxes, sales taxes and various user fees for municipal services hitherto provided as part of the basic economic needs and infrastructure.”

      To be sure, in a macroeconomic sense, the purpose of taxation is to create space for the public purpose, but the public purpose itself depends in part on which taxes are used, because they help define public needs. So, nothing new here, just that sometimes writers living in unitary (or near unitary) states are not sensitive to the difficulties of those living in federal systems.

    17. @ Andrew Anderson. Always remember MMT is a lens to see more clearly, not a policy. Seeing more clearly we might see that with Government backing of private banks continuing, it doesn’t prevent the regulation of lending. Of course one might want to go further to curtail sanctioned private lending.
      @Carol Wilcox. I’m sure you’re right that if we want to do more to restrict the power of the wealthy and their ownership of vast tracts of resources, much given at the whim of a previous King or gained on the backs of slaves and desperate workers, often used unproductively, while many struggle to put a roof over their heads, then a little more is needed than, per Neil, ‘freeing up… manpower’.

    18. Responding to the blog post,

      The scariest thing is that you can spend years learning and promoting mainstream economics without realizing that is nonsense and is hurting people.

      I am not making much money with my degree but at least it is physical science and is real.

      Most people don’t really know mainstream economics. The people who do often get so wrapped up in it, they become danger to any meaningful social movements. Mainstream economics is just harmful everywhere it goes.

      As for pulling bootstraps, I don’t even want to spend money on boots.

      If I were an economist, I would really doubt my theories when the population is suffering so much. Or, just Ad hoc your way out of everything.

    19. Seeing more clearly we might see that with Government backing of private banks continuing, it doesn’t prevent the regulation of lending. Patrick B

      And how is that regulation supposed to prevent the use of what is, in essence, the public’s credit but for private gain?

      Let’s have ethical finance then and then workers, for instance, shall not be dis-employed, for example, with automation financed with their own legally stolen purchasing power/investment opportunity.

      Otherwise, the MMT School is just the latest attempt to defend the indefensible: government privileges for a private-credit-for-usury cartel.

      And really, shall we continue with an inherently corrupt, obsolete Gold Standard banking model when inexpensive fiat allows an ethical banking model that does not violate equal protection under the law in favor of the banks and the most so-called “credit worthy?”

    20. Banking used to be a manilla function. That’s before deregulation reduced it to a rent-seeking operation. There is a strong correlation between deregulation and house price inflation. Most lending is collateralised by land value. One of the arguments for LVT.

    21. @Patrick B You’re absolutely right. It’s not 1936, but 1939. Editing text on cellphones its a tricky business. Characters are too small for my eyes.
      But the Spanish Civil War would fit the argument too. And unlike WW2, the Spanish people still argue about it today, as the crimes commited by franco and his cronies still need reparation.
      His bones were taken from the tomb he had built to himself, with slave work.
      And a palace he took for himself was recently been nacionalized from his grandsons.
      And many more reparations are beeing questioned.
      I’m happy to say that I’m very proud of my neighbours and brothers in Spain.

    22. @Tom Bergbusch,
      Tom, I agree that we need to look at the needs of local and state govs. in federal systems.
      I like land taxes and/or real estate taxes because the income is fixed if the assessed value doesn’t drop rapidly in a recession. If the owner can’t pay, then the gov. seizes the property and sells it, which will always be for enough to cove the tax owed. Compare this to a sales tax, where in a recession tax revenues drop as people stop spending because their income dropped.
      OTOH, if MMT is being used, then likely there will be fewer and shallower recessions and very few depressions.
      Also, in the passed the US Gov. did support state and local govs. in my lifetime with grants to help them pay unemployment claims and welfare needs increases. Now, we see the crazy Repud party refusing to do this.
      [Let me explain why I call the Republican Party the insulting name, Repud Party. (‘Pud’ is yiddish for a penis.) I do it because they have refused to call the Democratic Party by its name for over 20 years now. Just like with people, it is insulting to not call a person or political party by the name it wants to be called by. They insult ‘my’ Party, so I insult theirs. (I put ‘my’ in quotes because I’m now more loyal the the Progressive wing of the Dem Party, than I am too the sell-out Dems. In fact, I’m so pessimistic about the soon mega disasters that will be caused by ACC aka GW that starting now, I would never vote for a sell-out Dem ever again (even if Trump runs again), because either we control CO2 now or we *all* *die* in 50 years. This is because of the known tipping points that will be triggered if we do too little now. Remember I said, I am pessimistic. YMMV)]

    23. @ J Christensen
      Looks like you have the same bias against the ancient study of astrology (six thousand years) as mainstream has against MMT!

    24. While here in New Zealand we read this.
      ACT leader David Seymour raised concerns about New Zealand’s increasing debt pile.
      “Today’s announcement from the Treasury that [net] core Crown debt is on the cusp of $100b should worry future generations who have seen no steps taken to protect them from a growing and unsustainable debt mountain,” Seymour said.
      “If the Government was taking steps to trim and save in some areas, to offset the debt they’ve been taking on to cushion the blow of Covid-19 and attempt to spend their way out of it, that might provide some solace to future generations.
      “Instead it’s been business as usual plus, as if money was free,” he said.
      https://www.stuff.co.nz/national/politics/300217184/government-up-19-billion-as-recovery-softens-pandemic-hit

    25. “A land value tax fulfils a political purpose”

      Then it is not a tax. It is a levy. A political levy based upon a political position.

      Those constantly going on about land taxes are getting in the way, and it would be useful if they understood it is a political position and dialled back so we can concentrate on what actually needs to be corrected in the tax system according to MMT principles.

      The UK has council tax, which is a value tax. The values it is based upon have not been updated since 1991, such that any property built after that has to have an invented value ascribed to it. The previous rates system suffered from precisely the same problem, such that by the end of the system the rateable value was laughably out of kilter with the actual exchange prices. The commercial property rates system suffers from the same periodic revaluation problem. The evidence is pretty conclusive – taxing on a matter of opinion is fraught with problems, because all that happens is everybody objects to the opinions, since they have a different one. Updating values becomes near impossible, both physically and politically. About the only thing going for it is that it is local and easily collected, although recovering default is rather more politically fraught than you’d imagine. Throwing the little old lady out of her six bedroom mansion uses up a lot of political capital. Lots of people are asset rich and cash poor.

      It’s way past time that progressive people got past their obsession with taxation. Nobody likes paying tax (particularly at this time of year since that is when the cheques are paid over to the Exchequer here in the UK – another problem with the tax system that needs fixing) and nobody wants their attention drawn to it, any more than they want their attention drawn to the sewerage system. The progressive approach should be to make taxation automatic and largely invisible to the general population by interjecting at the transaction level, and then only when they need to obtain physical resources for the public good.

      The attention should be on resource allocation. Bringing things into use that are currently idle. And if more things suddenly become idle for some reason (*kof*) then we can put them to good use too. In fact here’s a plan I prepared earlier…

      Levies, duties, fees and tithes are available for political positions. Leave tax to its job as the monetary sewage system.

    26. Purists say LVT is a levy or impost. It’s actually about the allocation of a real resource.
      Neil, tell me how labour and wages are macroeconomics, but land and rent (which is everything except humans and what they create – i.e. the environment) are microeconomics.

    27. Regarding taxes:
      My point here is that with respect to taxation, our countries bear the burden of past arrangements, some going back for centuries. Changing these arrangement is difficult and sometimes ad hoc fudging is in order.
      In Canada the provincial governments are responsible for health, education and “welfare” (support for those unable to work but not retired), and some of the natural environment. They are not currency issuers. Clearly it makes little sense to have such important areas paid for by this level of government. However, offsetting the inappropriateness of the arrangement, the federal government makes substantial payments to the provinces explicitly to assist with these areas of responsibility. It’s not enough, but it is substantial.
      It is one reason I have been working for 16 years (!) to have a national, public prescription drug plan brought in. It would largely be funded by the federal government, increasingly so as the years go by. It seems we are close to achieving it but Big Pharma is steadfastly opposed and has a lot of money and power.
      At the municipal level we pay property tax on houses and undeveloped municipal land according to its market value. This pays for garbage collection, water treatment, police, public transit, municipal parks, other services. There is also a property tax that partly funds local schools. In the province of Quebec where I live, property values are kept up to date by an arms-length system that seems fair enough as far as I can tell since no-one seems to complain about it. Apparently municipal taxes unfairly favour property developers because they benefit from new city services, in particular the extension of public transit, and manage to avoid paying their fair share of taxes. There is also the problem that Neil alluded to, that of people who are house rich but cash poor.
      How politically you rejig all these taxes I do not know. Clearly there is scope for expanding federal funding for services but that requires a sympathetic federal government that would get positive political credit for it. Currently our federal government does seem favourable. However if the Conservatives are elected that will all end. Occasionally there is a tweak here and there. For instance my school taxes were cut in half a year ago when the provincial government set one rate for the entire province.
      With respect to the funding of a prescription drug program, my economic professor colleagues in the campaign wanted to increase taxes of various kinds. Inspired by Bill’s uncompromising perspective, I strongly opposed any new taxes of any kind, arguing it was both unnecessary economically and bad politically because it would turn many people against the new program. Interestingly I was thanked for my strong position by our most powerful labour ally. We won the day on the issue. Very satisfying it was! Thanks Bill!

    28. As I ruminate on this some more, I think the title of this article is genius.

      Because that’s actually the question we post when we want to shatter mainstream economics.

      I think that we need to destroy mainstream’s credibility/authority and offer an alternative.

      I think we live in a strange world because people are living miserably but they can’t quite pinpoint what is wrong when there are experts who look at economy closely. How can so many PhD’s be wrong?! It can’t be!

      Perhaps when people understand that the experts’ stupid theories then people would realize that organizing against them is the way to go.

      Just some thoughts.

    29. As a wise man previously stated:

      “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.”

      The End.

    30. @Neil Wilson

      The point of taxation is to free up real resources. That goes beyond labour. Without land, labour can not exist. Taxation therefore can free up land for productive use. Land is the primary resource of any nation. If I own all the land, and you own all the money – how much could I charge you for your first night’s rent? Land Value Tax addresses the loss of value to the community from idle land resources being monopolised by private individuals/entities by returning that value to the community and deterring land monopoly. Land is unlike any other resource in that it can not be reproduced, replicated or manufactured anew. Let me control all the land, and you will all be my slaves.

    31. @Neil Wilson:
      There’s nothing wrong with “tax the rich”. Excess money selects for/ drives people insane. It gives the lunatics it finds and produces far too much influence on the political process. So even worse, the even greater sums of public money are spent mainly in insane ways for the insane purposes of rich lunatics. So “tax the rich” is a usually a win-win – reduces the wealth insanity disease and its enormous secondary effects and / or increases the value of the public money. Equally, the land value tax has the many good points usually cited, and is closer to core, standard MMT recommendations.

      NW: “Taxation is about freeing up physical resources for the public use, largely manpower, and little else. Other uses of taxation are political, and, unlike the US, we tend to have different names for those in the UK (Duty, levies, fees, even tithes).”

      It’s hard to break it to people … But: Politics is Political! Sewage is political. “Freeing up physical resources for the public use” is political. Economics is political. Everything is political. This can be especially hard to those trapped in the deepest and most powerful of all illusions – which is the illusion that one is free of illusions, neutral, objective, apolitical or deprogrammed.

      The USA uses such alternative words also, so I’m not sure there is a real difference. But this is mainly “elegant variation”. There is a strong real necessity for a general term. “Tax” is the most standard one. So if anything, its use should be –generalized– to include all payments to the State. Not –restricted–, a mistake in terminology and pedagogy that can easily lead to confused thinking. Knapp had some vocabulary for such things, but they never caught on.

      Your misuse of “political” is similar to one stemming from Marx – e. g. using “politics” to mean “class politics” – which has had serious but unintended real world consequences. That just is not very practical or useful anywhere these days, even it may have been in 19th century Germany. Such restricted usage is NOT at all the classical or standard usage, which is all embracing and universal- as in “Man is a political animal”. So Marx’s translators would have produced more intelligible output – that would have made Marxism less prone to developing into a cult with incomprehensible dogmas of religious mysteries – if they frequently replaced “politics” with “class politics”, or read “withering away of the state” as meaning that states ruled non-democratically by a governing class (based on wealth) would disappear – as Marx at times made clear was his meaning.

    32. not against land value tax but do we want to force out high asset low income homeowners?
      can landlords pass on tax increase s to tenants?
      Still think rent controls is the best way of addressing the dysfunctional rental market

    33. Kevin, I can answer all your questions but I don’t want to lumber Bill’s blog. I can’t put my email here – google Labour Land Campaign and use ‘info at’.

      But, whilst I’m here: there was a letter in the Guardian last week from Nigel Willmott in which he writes of support within his constituency Labour Party for the job guarantee. I’ve been trying to contact him via Facebook, Twitter and email to a local LP member. However when I was trying to find the letter by google it showed that a Nigel Willmott was the Guardian letters editor 2001-18. The twitter account I’m following describes him as a writer and journalist. So I’m guessing he knows our friendly Guardian leader ‘writer’.

    34. @Kevin harding
      1. The poor widow in her mansion argument has been addressed…many ways to resolve including deferred tax added to death duty etc
      2. Landlords can not pass on land tax…all landlords are already extracting the maximum market rent they can…unless you know of a landlord that offers discounts!
      3. Rent controls are not a bad idea but they need enforcement and they add nothing to the local authority’s balance sheet, whereas LVT can fund LAs and address the problems of speculation and monopoly. It’s also very cheap to collect and can’t be avoided.

    35. Year on year despite flatlining wages rents go up.
      Its a power thing .With control that maximum extraction never maxes out,
      Rents a decade ago seemed unsustainable to me but apparently not .
      Inflation is a conflict. Landlords are winning and rentiers are losing.
      Taxes , rent controls whatever makes landlordism unprofitable sign me up as long as
      the goal is increasing owner occupation and establishing a rental sector not for profit.

    36. Lot of stuff here about landlords and LVT’s. I assume LVT’s are property taxes somewhat similar to the real estate property taxes I pay. Being something of a small landlord myself maybe my experience is relevant. I prefer to say that I provide housing services for people rather than being any sort of ‘lord’ though.

      Property taxes absolutely drive demand for the currency. They are completely consistent with MMT analysis of taxation. The ‘Hut Tax’ is actually used as an example of taxation by many MMT explainers of how currency works. In my opinion, property taxes are a very good tax for MMTers to argue for.

      But property taxes are almost always completely passed on to tenants. Property taxes are one of the many costs involved with providing housing. They can be a large part of that cost in fact. In my case at least 40% of the costs of providing housing are property taxes. Theoretically, every property owner in my city is subject to similar taxes and that pushes up the costs across the whole area. Costs are reflected in the market price for rental housing for the simple reason that private firms cannot indefinitely provide services at rates that do not meet their costs.

      I guess there could be an argument that higher property taxes will increase supply of housing by reducing the amount of land that wealthy individuals hold for their own personal use. That might work where property taxes were minimal to begin with. It would not work in my city in the US where property taxes are already such a significant cost.

    37. Picketty proved that the path to riches and greater inequality was owning assets or capital which includes land/property.

      It looks to me that to equalise the competition between capital and labour that both should as a minimum be taxed at the same rate.

      Most would probably argue that asset appreciation should be taxed at a higher rate than labour as the wealthy just have more assets – makes sense?

      In Australia asset appreciation is generally only taxed upon sale and the federal government offers a 50% discount on real estate and company shares capital gains. Owner occupied homes are however capital gains tax exempt and there are no death duties. Not sure about mega million dollar mansions though?

      Equity would suggest that the 50% capital gains tax discount be abolished and probably also the owner occupied home exemption be abolished and that death duties be implemented. Any politician or party in Australia that attempts all three has just committed political suicide.

      The only plausible avenue politically is to means test all assets taxes so that only ‘rich bastards’ have to pay them but they hire the accountants, lawyers and political class so again the chances are not looking good.

      Like in the UK, Canada and New Zealand local council rates in Australia are calculated on capital improved property values which are updated about every four years. This is our property tax and I struggle to pay it as like many in the neoliberal era and having bought/built prior to the neoliberal era, I am asset rich (well comparitively) and income poor.

      I too would vote against ongoing high property taxes and even death duties which would force my family into the ‘path to poverty’ rental market.

      So after all that theorising I think Neil Wilson is yet again on point and we should stop fussing about the rich and just use MMT to deliver a better more just world with full employment and environmental sustainability. Attacking the rich is a seperate sport.

      I do however concede eliminating any capital gains discounts and to disincentivise speculation is well worthwhile but as for ongoing high land taxes and death duties – bugger off!

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