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For the rest of the class, this is an economic fringe theory taken by economists about as seriously as astronomers take flat earthers

JumpCrisscross 4y ago
> this is an economic fringe theory Fiscal policy's monetary effects are not a fringe theory. Increasing taxes reduces the money supply, and a smaller money supply decreases price levels ceteris paribus. This is conventional economics. Modern monetary theory goes a step further, arguing deficits and debts don't matter, all that matters is inflation. Which is sort of true, in a way, but also useless since it provides us with no system for predicting when inflation might become problematic beyond deficits and debts.
- wolverine876 4y ago
  > Increasing taxes reduces the money supply I don't doubt it, but I'm curious about how it works: If I buy a car from GM, who then uses the money to buy things from suppliers, who use the money to pay some people and build a new factory, etc. - that all increases the velocity of money which increases inflation. If I pay the same amount to the government, who then uses the money to buy things from suppliers ... how does that have a different inflationary effect? I'd guess that the government, with less revenue than expenses, doesn't save the tax revenue. It's not stuffed in a giant mattress at the Treasury. I would guess that it's spent, pretty soon. In fact, there might be more velocity if I give the money to the government than to a company sitting on fat cash reserves. EDIT: I just realized: Higher taxes reduce return on investment and thus reduce investment. Is that the only mechanism in play?
  - JumpCrisscross 4y ago
    > pay the same amount to the government, who then uses the money to buy things from suppliers The first part is tax. The second spend. There is no obligation for the government to tax everything it spends, or spend everything it taxes. In practice, governments will spend what they tax which is why we need an independent central bank.
    - wolverine876 4y ago
      > The first part is tax. The second spend. True, but I don't see how that impacts inflation. They do spend it, as you say, which returns us to my original question.

JumpCrisscross 4y ago

> this is an economic fringe theory Fiscal policy's monetary effects are not a fringe theory. Increasing taxes reduces the money supply, and a smaller money supply decreases price levels ceteris paribus. This is conventional economics. Modern monetary theory goes a step further, arguing deficits and debts don't matter, all that matters is inflation. Which is sort of true, in a way, but also useless since it provides us with no system for predicting when inflation might become problematic beyond deficits and debts.

wolverine876 4y ago
> Increasing taxes reduces the money supply I don't doubt it, but I'm curious about how it works: If I buy a car from GM, who then uses the money to buy things from suppliers, who use the money to pay some people and build a new factory, etc. - that all increases the velocity of money which increases inflation. If I pay the same amount to the government, who then uses the money to buy things from suppliers ... how does that have a different inflationary effect? I'd guess that the government, with less revenue than expenses, doesn't save the tax revenue. It's not stuffed in a giant mattress at the Treasury. I would guess that it's spent, pretty soon. In fact, there might be more velocity if I give the money to the government than to a company sitting on fat cash reserves. EDIT: I just realized: Higher taxes reduce return on investment and thus reduce investment. Is that the only mechanism in play?
- JumpCrisscross 4y ago
  > pay the same amount to the government, who then uses the money to buy things from suppliers The first part is tax. The second spend. There is no obligation for the government to tax everything it spends, or spend everything it taxes. In practice, governments will spend what they tax which is why we need an independent central bank.
  - wolverine876 4y ago
    > The first part is tax. The second spend. True, but I don't see how that impacts inflation. They do spend it, as you say, which returns us to my original question.