7 ms·

So I recently had a realization that the money the US government spends has absolutely no relation to the money the government receives they can spend whatever

by hpoe 5y ago

So I recently had a realization that the money the US government spends has absolutely no relation to the money the government receives they can spend whatever they want in any quantity they want. The only barrier is inflation; however that instead means that taxes at the federal level have nothing to do with income or revenue but only inflation control. So the IRS should be the Internal Inflation Control Service. I am still working on the full implications of that understanding but it has definitely changed the way I look at things. EDIT: Updated to make clear I am discussing the US government, not governments in general. EDIT EDIT: To make clear I think this is a bad thing, it is a lever that the more powerful in society have the ability to pull, in order to move wealth from the lower class to themselves as inflation is generally only positive for the asset owning class.

xxpor 5y ago
For anyone trying to google: this is modern monetary theory.
- sharklazer 5y ago
  AKA, “wishful thinking”.
syshum 5y ago
Your Realization is call MMT, it is a terrible theory of economics and will likely be the downfall of the US Dollar and other Fiat Currencies if it continues to become more popular
Jensson 5y ago
That only applies to the US, most countries has to balance their budget.
- tut-urut-utut 5y ago
  Not really. Most of the countries run a budget with a huge deficit or debt. USA is not even in the top 10 when you look at the debt by GDP ratio. https://worldpopulationreview.com/countries/countries-by-national-debt https://worldpopulationreview.com/countries/countries-by-nat... EDIT: Just so clarify, first list on the linked page is irrelevant, scroll down to the list of countries ordered by debt to GDP ratio.
  - delusoryitem 5y ago
    Lol its 11th, and if you remove most failed states the us is well within top 10. Ignorance is bliss but we all know where the us is heading. Edit: bang there appears the nationalists downvoting anything remotely true about the state of affairs.
    - rory 5y ago
      You blame nationalism, but we very much don't know where the US is heading. Japan has maintained massive debt for decades, but the US is very different from Japan, so what exactly happens to us remains to be seen. Also, most of the large European countries are more or less in the same boat as the US debt-wise, so it's not like the American case is particularly special in that regard.
      - ur-whale 5y ago
        > so what exactly happens to us remains to be seen. Nope. The only unknown is how long it'll take to happen not what will happen. And that applies to both the US and Japan.
        rory 5y ago
        Don't be coy, Nostradamus, tell us the future.
        wbtism 5y ago
        No need to insult op. There are plenty of example of what happens when economies are deep in debt. All you need is a basic google search and sticking your head out of the “patriotic” chocolate jar.
      - wbtism 5y ago
        Oh look, american whataboutism. How the tables have turned. If you cant tell what japan has been going through since the 90s then you should probably read a bit more before commenting on hm. The US (i cant talk for the whole of America) is indeed different from Japan. I am not sure a certain population category will endure stagnation for a long time, and the standard of living is already well below that of Japanese counterparts. I mean the us already had a failed coup, and i cant even begin to think what the future will look like if it ends up like japan in terms of growth. Which is not bad but as you pointed out the us is different but not in a good sense. Regarding european countries…yeah whataboutism wont help you.
- xxpor 5y ago
  Why? Most countries are also currency issuers. The major exception is the Eurozone, and those countries can still run deficits.
  - im_down_w_otp 5y ago
    Because the US Dollar is the predominant world reserve currency, and has continued to be through several significant shocks to the system. In 2008 it looked like the EU had a chance to significantly adjust that balance in favor of the Euro, but the EU went down the austerity path in handling member states problems, which slowed their recovery, and made the US Dollar still the least bad option on the table. Because of this dynamic, the rules end up being different for countries like the US. I wish more economic research went into this end of things to try to study the boundaries and nuances of this altered reality. But, instead we're still stuck interacting with the world mostly through the lens of neoclassical models. Which, if I'm being frank, are basically to economics what the lobotomy was to neurology.
someguydave 5y ago
It is true that the US gov can print and spend whatever it wants, but that ability will only last as long as the dollar is the global reserve currency. Confidence can be broken very quickly.
- sovnade 5y ago
  Because we can borrow money at an interest rate lower than inflation. Most other countries with a AAA credit rating can also, even if they're not on USD. But this is a result of the pandemic and shouldn't be taken as a direct indicator of economy health. We haven't had something of this magnitude in almost 100 years, and so far we've fared MUCH better than the 30s.
  - someguydave 5y ago
    No, the US gov has been on this spending trajectory since well before the pandemic.
  - sharklazer 5y ago
    > because we can borrow at an interest rate lower than inflation. I don’t think you understand what it means for the inflation rate to be above the return rate of promissory notes, but the only incentive to buy such notes is to prop the system with the belief this is temporary—otherwise, by definition, you are just throwing money away (sans considerations of ownership).
  - ShroudedNight 5y ago
    > and so far we've fared MUCH better than the 30s. There was an entire decade between the Spanish influenza pandemic and the beginning of the depression - it's not obvious to me why we should already presume to have mastered economic effects that trailed the historical "equivalent" by a decade
  - asow92 5y ago
    > we've fared MUCH better than the 30s. Didn't it take years to feel the effects of the 1929 crash (just as it _may_ with our current crisis), and didn't FDR's Keynesian economic polices actually make things worse, albeit while providing hope of recovery to those affected? What might have actually got us out of that decade long slump towards the end? I am also hopeful that it won't be as bad this time around, and who's to say since we're all still in the middle of this.
neximo64 5y ago
Its almost as if the US an run a trade deficit with these US dollars and demand 'tribute' from the exporter nations and they can't do much about it.
sesuximo 5y ago
Have you read Kelton's “The Deficit Myth“
nickik 5y ago
While this is not totally false, this way of understanding monetary theory, 'Modern Monetary Theory' is not accepted by economics. While conceptually it is not false, many of the conclusion this school builds on this is not very accurate. It is much better to separate fiscal and monetary. The monetary policy has one job, the fiscal policy has another. The monetary policy should be based on rules and targets, and not just be in the hands of politicians to crank up spending whenever they feel like it. There is a reason this was separated in the first place.
metalliqaz 5y ago
Printing money is one way to get inflation. The 2021 supply chain disruption is another. Goods can't be purchased in the quantities people want them, so the ones that are available become more expensive.
Spooky23 5y ago
Debt is the backbone of society and post-feudal national power. In this era in the US, inflation is the only meaningful form of taxation, as the ability of the national government to explicitly tax is essentially gone.
- FpUser 5y ago
  >"as the ability of the national government to explicitly tax is essentially gone." Where did it go? Last time I remember I still pay taxes
xibalba 5y ago
So what happens when your currency is no longer a reserve currency? After all, currencies don't exist in a vacuum. Are you not then highly constrained in your currency creation ability? I would think there might be disastrous implications for foreign trade, upon which the U.S. economy is extremely dependent. Additionally, does this not imply a significant shift in private property rights (possibly to the degree of being unconstitutional)? MMT seems to imply near complete control of the economy of by a central authority. Is there not a major problem with the timing and syncing of inflation (money creation) and deflation (via taxation)? The velocity of transactions and thus the velocity of inflation seems to be far, far greater than the velocity of tax transactions. What's more, our ability to measure inflation is very slow, incomplete, and politicized. There is also no consensus on how to do it. For evidence of this, just go look at the different published inflation numbers and dig into what does and does not get included and the measurement methodologies. > So I recently had a realization that the money the government spends has absolutely no relation to the money the government receives This might be true in the short run, or even over one lifetime that started in in the 1940s, but it may not true in the long run. Ray Dalio has some interesting thoughts on short and long term debt cycles and their relation to money.
ur-whale 5y ago
> So I recently had a realization that the money the US government spends has absolutely no relation to the money the government receives You're correct. As a matter of fact, it has gotten to the point where I believe the US could do away with taxes entirely and borrow the entire budget ... it wouldn't make much of a difference.
- tzs 5y ago
  I remember that came up in my income tax class in law school. I don't remember if the professor suggested it as an interesting thing to consider, or if it was in some of the optional supplementary reading he recommended (if so, most likely Chirelstein's book on federal income taxation [1]). Suppose under a conventional tax system there is some total W available and the government takes 10% of that in taxes. Then you end up with the government has 0.1 W and everyone else has 0.9 W. The government ends up with 1/10th of the money, and people's purchasing power is reduced by 10%. If instead of taking 10% of W, the government prints new money equal to 11.11...% of W, increasing the total money to 1.111... W, you end with the government has 0.111... W and everyone else has W. As with the conventional taxation case, the government ends up with 1/10th of the money, and people's purchasing power is reduced by 10%. It is just that the 10% reduction in purchasing power comes from prices rising instead of money being directly taken, but at the end of the day it means pretty much the same thing as far as how much you can now buy goes. The big plus for this approach is that it is ridiculously simple. No need for filings or dealing with collections and handling tax evaders. A big minus is that constant significant inflation is pretty damned annoying. Merchants have to keep updating prices, employers have to keep raising wages, and you have to keep dealing with larger and larger amounts. It also probably wouldn't reduce bureaucracy as much as you might hope. Many of the things governments currently encourage or discourage through tax deductions, tax credits, and tax penalties they would still want to do. They'd just have to change to grants and fees/fines. Still, it is an interesting idea to think about. [1] https://www.amazon.com/Federal-Income-Taxation-Concepts-Insights-dp-1640208240/dp/1640208240 https://www.amazon.com/Federal-Income-Taxation-Concepts-Insi...
- betwixthewires 5y ago
  It would make a huge difference in certain areas. First it would function as a flat tax, not a progressive one, assuming everyone holds dollars. But they don't, disproportionately wealthy people hedge against dollars with other assets and poor people don't, so practically it would function as a regressive tax. Unless poor people catch on and stop holding dollars. This would lead to a demand crisis with the currency. Remember, the only way a government can effectively dictate the currency of an economy is to create artificial demand for it by requiring taxes be paid in it. Without that, and with a highly inflationary currency, people will dodge "taxes" by simply not holding dollars. The relationship between government revenue and spending has a broken relationship, yes, but the conclusion is that at this point the government taxes to keep demand for the currency and to massage certain numbers, in particular the inflation rate, deficit and employment numbers, to maintain faith in the economic system. It doesn't actually need the money, but it does need to take the money.
nopassrecover 5y ago
In addition to inflation control, if you accept the classic story that “we tax so we can spend” is wrong (for the US at least, perhaps also to some degree for other currencies with monetary sovereignty) then I feel we need to consider that taxation and expenditure are tools of not just monetary but social policy. For instance, how does taxation play a role in keeping the most productive people in society producing, motivated, and feeling like they’re getting fairly rewarded, without them say checking out for “less challenging” work or making enough to retire early? I suspect at some level, consciously, intuitively, or perhaps just accidentally (and the US seems a bit exceptional here to e.g. Canada, UK, Australia, NZ) that housing policy is similarly supported by an idea that the productive middle class and upper working class are kept as active participants in society by some sort of debt-fuelled hedonic treadmill. From what I understand other sources of debt (student debt, new cars etc.) play a greater role in the US. This is of course in addition to and balanced against all other monetary sinks / rents, e.g. utility bills, literal house rent, health costs etc. And being a dynamic system, it’s hard to model outcomes, e.g. would cutting income taxes liberate workers to put a bit extra away and perhaps invest extra hours in overtime or a side gig, or would it just serve to give temporary wage pressure relief to companies who are already refusing to fairly pay workers while allowing easier wealth extraction by rent-seekers? I find it a bit interesting we aren’t having more discussions about employment vs capital taxation, especially now that we’re seeing both escalating (rich getting richer) and broadening (a wider class of “rich” getting richer) inequality. I suspect historically there was little awareness/interest in your extremely wealthy growing their portfolios, but it becomes a bit more interesting when there’s eg a lottery around “the bank of Mum and Dad” or simply which specific year you were born (relative to eg the GFC) fuelling extremely different outcomes for people with otherwise similar backgrounds, capability, class, and contributions to society.
- JaimeThompson 5y ago
  " the most productive people " How are you defining productive here?
  - nopassrecover 5y ago
    Good question. Something like “produces the most highly valued outputs per hour of worked input” which should roughly correlate with wages with the assumption that if those inputs are easily interchanged then there will be more competition and the output value will fall. I’m sure there are good exceptions, but I’m not sure they’re material to the argument that taxation to some degree influences social mobility and participation. Perhaps I’m also considering situations in which there is a close link between labour and output, and where those outputs are deemed necessary for society (eg doctors, tradespeople), even where perhaps there may not be high productivity multipliers in the same ways there are at somewhere like Netflix. So in my mind I’m thinking what role is taxation playing to keep electricians, plumbers, doctors, and software developers working for as long as they can without retiring (ie maximising their consumer value without compromising their productive value). I’m trying to put aside a value judgement about what I feel taxation policy _should_ be doing around this subject, but broadly I feel there’s a modern lens of alienation here in which control of means of production is perhaps less important than control of means of consumption.
dageshi 5y ago
It seems like it would be borderline impossible politically to raise taxes at a time when inflation is high.
organic_popcorn 5y ago
Inflation is also positive for those in large amounts of debt since their debt is “worth less”.
- jjk166 5y ago
  But it becomes harder to take on new debt as lenders require higher interest rates and are generally more selective with loans.
jvreeland 5y ago
This is actually a big part of Modern Monetary theory: From the wikipedia page ...the primary risk once the economy reaches full employment is inflation, which can be addressed by gathering taxes...
- colinmhayes 5y ago
  MMT is the climate change denial of economics. No one in the mainstream believes it to be true.
boringg 5y ago
While an interesting perspective, this is inaccurate. The US government has more leeway than most other countries in the world to spend higher amounts. There is a theory that has not been accepted by a majority of economists (Modern Monetary Theory) that governments can spend without impact. The counter theory (which I prescribe to) is that the US government has more leeway to increase their debt burden higher than most countries as a function of being the global reserve currency (and having a long track record, federal reserve separated from political power and a mostly functioning democracy). That has given a bit more tolerance to their higher debt load as well economists have forever underestimated the end point at which that would create problems (also they misunderstood the benefits the US had accrued as a function of aforementioned features of the Union). We are still within the tolerable range. However this misstep by economist has created space for MMT to get traction amongst those who do not understand the economy but need a mechanism to finance their ideas. I believe it can work for a little while but it certainly gets closer to a dangerous situation. Higher inflation (~>4%) just erodes the power of our dollar and increases costs throughout the supply chain. The IRS has nothing to do with monetary supply, they only collect taxes on behalf of the people of the country. Monetary supply is controlled by the Federal Reserve and is completely separate. Based on your comments about the IRS/monetary supply I believe this you should do a full read up on how our monetary system works (not being rude, just want educated conversation here and don't want you to fall victim to poor sources of information/conspiracy theories).
helen___keller 5y ago
I think you're correct in the vacuous sense that money is fungible. Investors who purchased US treasures ("the debt") don't care whether they're getting taxpayer dollars or dollars that on paper exist because we minted a trillion dollar coin. They got dollars either way, and what they care about is how valuable those dollars are ("inflation") But in this MMT world, tracking US debt is still valuable (think of it as a measure of how much money was printed, which correlates through some unknown economic function to inflation). Either way, all the bad things that happen with printing money can be reframed as "bad because inflation" if you want them to. E.g. we print infinite money to pay off debts denominated in foreign currencies, which blows out the exchange rate and results in hyperinflation; yep, that's an inflation problem, check!
tootie 5y ago
There's really one big variable and it's interest rates. In the 70s stagflation era, we had very high interest rates. Government debt came with a heavy dose of debt service. Currently rates are super low. We can accrue way more debt and still not be burdened with a lot of interest payments. Debt service as a percentage of GDP is about half of what it was in 1991 and trending downwards: https://fred.stlouisfed.org/graph/?g=HHdA https://fred.stlouisfed.org/graph/?g=HHdA
AnimalMuppet 5y ago
It's not that simple in the US. They currently have this thing where there's a legal limit on how much the federal government can borrow, and it takes an act of Congress to raise it. So there is also a political barrier to borrowing more money.

by hpoe 5y ago

xxpor 5y ago

For anyone trying to google: this is modern monetary theory.

sharklazer 5y ago
AKA, “wishful thinking”.

syshum 5y ago

Your Realization is call MMT, it is a terrible theory of economics and will likely be the downfall of the US Dollar and other Fiat Currencies if it continues to become more popular

Jensson 5y ago

That only applies to the US, most countries has to balance their budget.

tut-urut-utut 5y ago
Not really. Most of the countries run a budget with a huge deficit or debt. USA is not even in the top 10 when you look at the debt by GDP ratio. https://worldpopulationreview.com/countries/countries-by-national-debt https://worldpopulationreview.com/countries/countries-by-nat... EDIT: Just so clarify, first list on the linked page is irrelevant, scroll down to the list of countries ordered by debt to GDP ratio.
- delusoryitem 5y ago
  Lol its 11th, and if you remove most failed states the us is well within top 10. Ignorance is bliss but we all know where the us is heading. Edit: bang there appears the nationalists downvoting anything remotely true about the state of affairs.
  - rory 5y ago
    You blame nationalism, but we very much don't know where the US is heading. Japan has maintained massive debt for decades, but the US is very different from Japan, so what exactly happens to us remains to be seen. Also, most of the large European countries are more or less in the same boat as the US debt-wise, so it's not like the American case is particularly special in that regard.
    - ur-whale 5y ago
      > so what exactly happens to us remains to be seen. Nope. The only unknown is how long it'll take to happen not what will happen. And that applies to both the US and Japan.
      - rory 5y ago
        Don't be coy, Nostradamus, tell us the future.
        wbtism 5y ago
        No need to insult op. There are plenty of example of what happens when economies are deep in debt. All you need is a basic google search and sticking your head out of the “patriotic” chocolate jar.
    - wbtism 5y ago
      Oh look, american whataboutism. How the tables have turned. If you cant tell what japan has been going through since the 90s then you should probably read a bit more before commenting on hm. The US (i cant talk for the whole of America) is indeed different from Japan. I am not sure a certain population category will endure stagnation for a long time, and the standard of living is already well below that of Japanese counterparts. I mean the us already had a failed coup, and i cant even begin to think what the future will look like if it ends up like japan in terms of growth. Which is not bad but as you pointed out the us is different but not in a good sense. Regarding european countries…yeah whataboutism wont help you.
xxpor 5y ago
Why? Most countries are also currency issuers. The major exception is the Eurozone, and those countries can still run deficits.
- im_down_w_otp 5y ago
  Because the US Dollar is the predominant world reserve currency, and has continued to be through several significant shocks to the system. In 2008 it looked like the EU had a chance to significantly adjust that balance in favor of the Euro, but the EU went down the austerity path in handling member states problems, which slowed their recovery, and made the US Dollar still the least bad option on the table. Because of this dynamic, the rules end up being different for countries like the US. I wish more economic research went into this end of things to try to study the boundaries and nuances of this altered reality. But, instead we're still stuck interacting with the world mostly through the lens of neoclassical models. Which, if I'm being frank, are basically to economics what the lobotomy was to neurology.

someguydave 5y ago

It is true that the US gov can print and spend whatever it wants, but that ability will only last as long as the dollar is the global reserve currency. Confidence can be broken very quickly.

sovnade 5y ago
Because we can borrow money at an interest rate lower than inflation. Most other countries with a AAA credit rating can also, even if they're not on USD. But this is a result of the pandemic and shouldn't be taken as a direct indicator of economy health. We haven't had something of this magnitude in almost 100 years, and so far we've fared MUCH better than the 30s.
- someguydave 5y ago
  No, the US gov has been on this spending trajectory since well before the pandemic.
- sharklazer 5y ago
  > because we can borrow at an interest rate lower than inflation. I don’t think you understand what it means for the inflation rate to be above the return rate of promissory notes, but the only incentive to buy such notes is to prop the system with the belief this is temporary—otherwise, by definition, you are just throwing money away (sans considerations of ownership).
- ShroudedNight 5y ago
  > and so far we've fared MUCH better than the 30s. There was an entire decade between the Spanish influenza pandemic and the beginning of the depression - it's not obvious to me why we should already presume to have mastered economic effects that trailed the historical "equivalent" by a decade
- asow92 5y ago
  > we've fared MUCH better than the 30s. Didn't it take years to feel the effects of the 1929 crash (just as it _may_ with our current crisis), and didn't FDR's Keynesian economic polices actually make things worse, albeit while providing hope of recovery to those affected? What might have actually got us out of that decade long slump towards the end? I am also hopeful that it won't be as bad this time around, and who's to say since we're all still in the middle of this.

neximo64 5y ago

Its almost as if the US an run a trade deficit with these US dollars and demand 'tribute' from the exporter nations and they can't do much about it.

sesuximo 5y ago

Have you read Kelton's “The Deficit Myth“

nickik 5y ago

While this is not totally false, this way of understanding monetary theory, 'Modern Monetary Theory' is not accepted by economics. While conceptually it is not false, many of the conclusion this school builds on this is not very accurate. It is much better to separate fiscal and monetary. The monetary policy has one job, the fiscal policy has another. The monetary policy should be based on rules and targets, and not just be in the hands of politicians to crank up spending whenever they feel like it. There is a reason this was separated in the first place.

metalliqaz 5y ago

Printing money is one way to get inflation. The 2021 supply chain disruption is another. Goods can't be purchased in the quantities people want them, so the ones that are available become more expensive.

Spooky23 5y ago

Debt is the backbone of society and post-feudal national power. In this era in the US, inflation is the only meaningful form of taxation, as the ability of the national government to explicitly tax is essentially gone.

FpUser 5y ago
>"as the ability of the national government to explicitly tax is essentially gone." Where did it go? Last time I remember I still pay taxes

xibalba 5y ago

So what happens when your currency is no longer a reserve currency? After all, currencies don't exist in a vacuum. Are you not then highly constrained in your currency creation ability? I would think there might be disastrous implications for foreign trade, upon which the U.S. economy is extremely dependent. Additionally, does this not imply a significant shift in private property rights (possibly to the degree of being unconstitutional)? MMT seems to imply near complete control of the economy of by a central authority. Is there not a major problem with the timing and syncing of inflation (money creation) and deflation (via taxation)? The velocity of transactions and thus the velocity of inflation seems to be far, far greater than the velocity of tax transactions. What's more, our ability to measure inflation is very slow, incomplete, and politicized. There is also no consensus on how to do it. For evidence of this, just go look at the different published inflation numbers and dig into what does and does not get included and the measurement methodologies. > So I recently had a realization that the money the government spends has absolutely no relation to the money the government receives This might be true in the short run, or even over one lifetime that started in in the 1940s, but it may not true in the long run. Ray Dalio has some interesting thoughts on short and long term debt cycles and their relation to money.

ur-whale 5y ago

> So I recently had a realization that the money the US government spends has absolutely no relation to the money the government receives You're correct. As a matter of fact, it has gotten to the point where I believe the US could do away with taxes entirely and borrow the entire budget ... it wouldn't make much of a difference.

tzs 5y ago
I remember that came up in my income tax class in law school. I don't remember if the professor suggested it as an interesting thing to consider, or if it was in some of the optional supplementary reading he recommended (if so, most likely Chirelstein's book on federal income taxation [1]). Suppose under a conventional tax system there is some total W available and the government takes 10% of that in taxes. Then you end up with the government has 0.1 W and everyone else has 0.9 W. The government ends up with 1/10th of the money, and people's purchasing power is reduced by 10%. If instead of taking 10% of W, the government prints new money equal to 11.11...% of W, increasing the total money to 1.111... W, you end with the government has 0.111... W and everyone else has W. As with the conventional taxation case, the government ends up with 1/10th of the money, and people's purchasing power is reduced by 10%. It is just that the 10% reduction in purchasing power comes from prices rising instead of money being directly taken, but at the end of the day it means pretty much the same thing as far as how much you can now buy goes. The big plus for this approach is that it is ridiculously simple. No need for filings or dealing with collections and handling tax evaders. A big minus is that constant significant inflation is pretty damned annoying. Merchants have to keep updating prices, employers have to keep raising wages, and you have to keep dealing with larger and larger amounts. It also probably wouldn't reduce bureaucracy as much as you might hope. Many of the things governments currently encourage or discourage through tax deductions, tax credits, and tax penalties they would still want to do. They'd just have to change to grants and fees/fines. Still, it is an interesting idea to think about. [1] https://www.amazon.com/Federal-Income-Taxation-Concepts-Insights-dp-1640208240/dp/1640208240 https://www.amazon.com/Federal-Income-Taxation-Concepts-Insi...
betwixthewires 5y ago
It would make a huge difference in certain areas. First it would function as a flat tax, not a progressive one, assuming everyone holds dollars. But they don't, disproportionately wealthy people hedge against dollars with other assets and poor people don't, so practically it would function as a regressive tax. Unless poor people catch on and stop holding dollars. This would lead to a demand crisis with the currency. Remember, the only way a government can effectively dictate the currency of an economy is to create artificial demand for it by requiring taxes be paid in it. Without that, and with a highly inflationary currency, people will dodge "taxes" by simply not holding dollars. The relationship between government revenue and spending has a broken relationship, yes, but the conclusion is that at this point the government taxes to keep demand for the currency and to massage certain numbers, in particular the inflation rate, deficit and employment numbers, to maintain faith in the economic system. It doesn't actually need the money, but it does need to take the money.

nopassrecover 5y ago

In addition to inflation control, if you accept the classic story that “we tax so we can spend” is wrong (for the US at least, perhaps also to some degree for other currencies with monetary sovereignty) then I feel we need to consider that taxation and expenditure are tools of not just monetary but social policy. For instance, how does taxation play a role in keeping the most productive people in society producing, motivated, and feeling like they’re getting fairly rewarded, without them say checking out for “less challenging” work or making enough to retire early? I suspect at some level, consciously, intuitively, or perhaps just accidentally (and the US seems a bit exceptional here to e.g. Canada, UK, Australia, NZ) that housing policy is similarly supported by an idea that the productive middle class and upper working class are kept as active participants in society by some sort of debt-fuelled hedonic treadmill. From what I understand other sources of debt (student debt, new cars etc.) play a greater role in the US. This is of course in addition to and balanced against all other monetary sinks / rents, e.g. utility bills, literal house rent, health costs etc. And being a dynamic system, it’s hard to model outcomes, e.g. would cutting income taxes liberate workers to put a bit extra away and perhaps invest extra hours in overtime or a side gig, or would it just serve to give temporary wage pressure relief to companies who are already refusing to fairly pay workers while allowing easier wealth extraction by rent-seekers? I find it a bit interesting we aren’t having more discussions about employment vs capital taxation, especially now that we’re seeing both escalating (rich getting richer) and broadening (a wider class of “rich” getting richer) inequality. I suspect historically there was little awareness/interest in your extremely wealthy growing their portfolios, but it becomes a bit more interesting when there’s eg a lottery around “the bank of Mum and Dad” or simply which specific year you were born (relative to eg the GFC) fuelling extremely different outcomes for people with otherwise similar backgrounds, capability, class, and contributions to society.

JaimeThompson 5y ago
" the most productive people " How are you defining productive here?
- nopassrecover 5y ago
  Good question. Something like “produces the most highly valued outputs per hour of worked input” which should roughly correlate with wages with the assumption that if those inputs are easily interchanged then there will be more competition and the output value will fall. I’m sure there are good exceptions, but I’m not sure they’re material to the argument that taxation to some degree influences social mobility and participation. Perhaps I’m also considering situations in which there is a close link between labour and output, and where those outputs are deemed necessary for society (eg doctors, tradespeople), even where perhaps there may not be high productivity multipliers in the same ways there are at somewhere like Netflix. So in my mind I’m thinking what role is taxation playing to keep electricians, plumbers, doctors, and software developers working for as long as they can without retiring (ie maximising their consumer value without compromising their productive value). I’m trying to put aside a value judgement about what I feel taxation policy _should_ be doing around this subject, but broadly I feel there’s a modern lens of alienation here in which control of means of production is perhaps less important than control of means of consumption.

dageshi 5y ago

It seems like it would be borderline impossible politically to raise taxes at a time when inflation is high.

organic_popcorn 5y ago

Inflation is also positive for those in large amounts of debt since their debt is “worth less”.

jjk166 5y ago
But it becomes harder to take on new debt as lenders require higher interest rates and are generally more selective with loans.

jvreeland 5y ago

This is actually a big part of Modern Monetary theory: From the wikipedia page ...the primary risk once the economy reaches full employment is inflation, which can be addressed by gathering taxes...

colinmhayes 5y ago
MMT is the climate change denial of economics. No one in the mainstream believes it to be true.

boringg 5y ago

While an interesting perspective, this is inaccurate. The US government has more leeway than most other countries in the world to spend higher amounts. There is a theory that has not been accepted by a majority of economists (Modern Monetary Theory) that governments can spend without impact. The counter theory (which I prescribe to) is that the US government has more leeway to increase their debt burden higher than most countries as a function of being the global reserve currency (and having a long track record, federal reserve separated from political power and a mostly functioning democracy). That has given a bit more tolerance to their higher debt load as well economists have forever underestimated the end point at which that would create problems (also they misunderstood the benefits the US had accrued as a function of aforementioned features of the Union). We are still within the tolerable range. However this misstep by economist has created space for MMT to get traction amongst those who do not understand the economy but need a mechanism to finance their ideas. I believe it can work for a little while but it certainly gets closer to a dangerous situation. Higher inflation (~>4%) just erodes the power of our dollar and increases costs throughout the supply chain. The IRS has nothing to do with monetary supply, they only collect taxes on behalf of the people of the country. Monetary supply is controlled by the Federal Reserve and is completely separate. Based on your comments about the IRS/monetary supply I believe this you should do a full read up on how our monetary system works (not being rude, just want educated conversation here and don't want you to fall victim to poor sources of information/conspiracy theories).

helen___keller 5y ago

I think you're correct in the vacuous sense that money is fungible. Investors who purchased US treasures ("the debt") don't care whether they're getting taxpayer dollars or dollars that on paper exist because we minted a trillion dollar coin. They got dollars either way, and what they care about is how valuable those dollars are ("inflation") But in this MMT world, tracking US debt is still valuable (think of it as a measure of how much money was printed, which correlates through some unknown economic function to inflation). Either way, all the bad things that happen with printing money can be reframed as "bad because inflation" if you want them to. E.g. we print infinite money to pay off debts denominated in foreign currencies, which blows out the exchange rate and results in hyperinflation; yep, that's an inflation problem, check!

tootie 5y ago

There's really one big variable and it's interest rates. In the 70s stagflation era, we had very high interest rates. Government debt came with a heavy dose of debt service. Currently rates are super low. We can accrue way more debt and still not be burdened with a lot of interest payments. Debt service as a percentage of GDP is about half of what it was in 1991 and trending downwards: https://fred.stlouisfed.org/graph/?g=HHdA https://fred.stlouisfed.org/graph/?g=HHdA

AnimalMuppet 5y ago

It's not that simple in the US. They currently have this thing where there's a legal limit on how much the federal government can borrow, and it takes an act of Congress to raise it. So there is also a political barrier to borrowing more money.