By Steve Roth
There’s a curious fact among the current crop of discussions surrounding Modern Monetary Theory: Leading figures in the MMT world — strong progressive voices, they — are surprisingly dismissive of higher, progressive taxes as a desirable or necessary part of funding the Green New Deal and creating an inclusive, widely prosperous economy. There are lots of examples out there over many years.
Some progressive MMT fans like me find this troubling. That dismissal is aid and ammunition for the destructive “starve the beast,” and “cut taxes (on the rich)” planks that have been so dominant in the U. S. for nigh-on half a century or longer (think: JFK’s tax cuts for the rich).
Before explaining what that stance gets wrong, here’s why the MMTers’ position is absolutely correct.
1. “Real resources.” This overwhelmingly means one thing: people’s hours, efforts, skills, and abilities. We’ve been in a global labor glut for decades, and ongoing automation promises to only increase that. Ditto terajoules of incoming sunlight, wind, etc., going unutilized every second of every day. There’s no shortage of these resources; they’re just not used. (Other resources—the earth’s contents bequeathed unto us—are definitely “scarce.”)
2. If recent decades’ inflation rates are any indication, the U.S. is nowhere close to the point where spending exceeds the capacity of our real resources (mostly people) to produce, “supply” more stuff — the point where inflation starts to bite. (Pace Milton Friedman, inflation is almost always and almost everywhere a supply-and-demand phenomenon.)
3. Over more than two centuries (three for the U.K.), the U. S. hasn’t “paid off” its national debt. The bugaboo that it suddenly will have to (absent global economic armageddon) is mostly just a deep misunderstanding: thinking that a government’s finances are like a household’s.
So yes: the government could do a lot more deficit spending to tap unused resources to save the planet, without banging against the inflation problem.
But neither the MMTers nor anyone else knows how much more. We don’t have many pertinent historical examples of “extreme” deficit spending in big, thriving, sovereign-currency economies: The U.S. in WWII, Japan today, prewar Nazi Germany (deficits very cleverly disguised), etc. For what they’re worth, they all suggest that significantly higher deficits wouldn’t be an uncontrollable inflation problem right now. They’d mostly cause higher production, not higher inflation. In simplistic Econ 101 terms, the global labor supply curve is quite flat.
The MMT takeaway, in my opinion: we should be testing that deficit limit, hard — assuming that there’s lots of pre-inflation fiscal space for pure deficit spending, and not worrying about if or when we’re gonna get there. Because really, we need to find out where “there” is.
Also: there are lots of tools for controlling inflation, in particular Fed rate hikes. MMTers are right that cutting rates seems a very weak tool to increase spending hence inflation, but the effect seems to be asymmetrical: the Fed can quash inflation much more effectively than it can spur it. (Again: to spur it we need fiscal pushing against the Fed.)
And, finally the point of this post, which is also core MMT thinking: you can also control inflation by raising taxes. But legislation is a very sluggish beast, and MMTers are the first to point out that that taxing the rich more is a heavy political lift.
So shouldn’t we get on that project right now, before we hit the inflation point — creating even more fiscal space for spending that activates resources and allocates them to saving the world and making it a better place?
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Taxing the rich may more not be the best inflation-control method. Nor should it be the only one. But the top quintile does 40-50% of U. S. household spending, so there’s real traction there.
And there’s a huge added benefit, which the these MMTers seem largely blind to: more-progressive taxation changes the spending mix, which changes the production mix. (Producers produce things because people are buying them). Rich people spend more on high-C02 (and low-utility-per-dollar) consumption goods — air travel, yachts, big expensive cars, giant (empty) residences. This spending wastefully allocates resources (people’s efforts) to satisfying those…desires, while actively contributing to global warming.
If that money is instead taxed-and-spent on widespread green investment, we’re doubly closer to the goal of saving the world.
MMT’s rather singular focus on government’s net deficit (gross revenues minus gross expenditures), and its associated private-sector “surplus,” engenders a somewhat knee-jerky aversion to taxes, which (ceteris paribus) reduce that surplus.
But net isn’t the only thing that matters. Gross taxing and spending (vastly larger than net), and in particular here the composition/distribution of the taxes, matter a lot. They have big economic effects.
MMT thinking can bring us to a conclusion quite different from the rather…unsatisfying stance of these top MMT voices (basically, “yeah, we should tax the rich because they have too much money”). Update March 13: “…to reduce their power.”
We should tax the rich because:
Higher and more progressive taxes give us the fiscal space we need…
To do the spending we need…
Which employs unused “resources” to produce actually valuable and world-saving stuff…
Without generating deficits…
That in excess would lead to excessive inflation.
(But yeah we should be deficit-spending more too, cause we don’t know where the inflation limit is. It’s time to get over the wealthy bondholders’ 1970s childhood trauma, and find out.)
And this is all before we even consider the pernicious political and economic effects of concentrated wealth and power (think: government capture, secular stagnation) — concentration that progressive taxes address directly, especially (necessarily) over years or decades.
If you’re a progressive MMT fan, what’s not to like?
2019 March 9