An Austrian Critique of MMT?

Economics Economics Questions
1

Ok, I tried this once before and now it looks like another thread has taken off where my last one was left.

What I’m looking for is a formal, thorough, critique of MMT from an Austrian perspective.

Please do not post unless you understand MMT, meaning you have read something like the explanations by Cullen Roche and Warren Mosler.

A decent critique has been done at Seeking Alpha, but it fails by over criticizing in some areas and not going into much of the Austrian concepts I am interested in hearing about, like interest rates and the production structure.

If you know of an article, or are willing to provide your own insight I would very much appreciate it.

2

Here are some critiques by Robert Murphy, a well-known Austrian economist:

Mises.org: Aren’t Deficits Another Name for Saving? Nope.

Mises.org: HuffPo Abolishes Scarcity

He may or may not had been aware that these were about Chartalist / MMT concepts, but there is no mistake that they are.

3

Here is what I consider a decent critique of Chartalism / MMT by a forum poster. Maybe the Chartalists would probably disagree, but it’s probably best to continue the conversation in the other thread:

4

I won’t refute this entirely because it is HIGHLY flawed and the author clearly lacks an understanding of MMT. To begin with MMTers are technically Minskians based on Abba Lerner’s beliefs.

As for the nonsense above, with regards to #3 - the bond market exists solely as a monetary tool that drains exess reserves and helps the Fed hits its overnight rate. It funds nothing. There is demand for bonds primarily becaue the primarily dealers with which the Fed conducts its business are required to make a market in government bonds.

The other notions have been soundly refuted by Warren Mosler, Cullen Roche and other MMTers.

5

If anyone wishes to respond to Esuric’s comments quoted above, then they should post on the other thread:

[url]MMT redux]

6

OK, once again, this time Mosler’s paper:

Starts off by saying the govt can print all the money in the world.

Agreed. Nobody can stop them. But their money can become worthless if too much is printed. This is simply the law of supply and demand. Even if we grant that there is a need for govt money to pay taxes, that need is finite. Meaning the demand for money is finite. Meaning you can increase the supply to a point where its value goes down really really low, so low the citizenry start to get restless. So low the whole economy collapses. Like Argentina, which has changed from the richest to the most messed up economy in the world, all because of money printing. The seeking alpha article someone linked to claims that the MMTers understand this. I’m glad we agree.

Then it says:

Given that a government of issue is not revenue constrained, taxation and bond
sales obviously must have other purposes.

I assume Mosler recognizes the existence of Zimbabwe, as above. So that maybe, just maybe, govt officials understand also that too much printing and we get a Weimar Republic. Better to tax and borrow then risk hyperinflation.

Besides which, taxation is a good way to twist the economy around to favor ones friends. Give tax breaks to the connected, and tax the others.

Now comes one of the deeper arguments. The govt will have to be at a deficit, under normal conditions. Because it prints the money first, then spends it [thus giving paper dollars to people], then takes away some, but not all, of that paper money in taxes.

To quote Mosler:

Note that, from inception, and as a point of
logic, in order to actuallycollect taxes, the government, as the monopoly issuer of the cur-
rency,must, logically, spend (or lend) first.Note that it wouldbe logically impossible for
the government to collect more than it spends (or run a budget surplus) unless it had
already previously spent more than it collected (past budget deficits). Thus the normal
budgetary stance to be expected under these institutional arrangements is a budget
deficit.

Lemme see. Let’s do the accounting.

Step 1. Govt prints a trillion dollars, gives it to itself. Score: Govt +1 trillion, Everyone else, zero paper, a trillion dollars worth of dresses [say]. No deficit so far.

Step 2. Govt spends the full trillion on dresses for Michelle. Score: Govt zero paper money, lots of dresses. Dressmakers +1 trillion paper, no resources. A balanced budget, still no deficit.

Step 3. Govt taxes 500 billion back. Score: Govt +500 billion paper, plus a trillion worth of resources taken away for Michelle, Dressmakers +500 billion in paper, no resources. Here we are, end of story, and still no deficit. In fact a surplus of 500 billion in paper and a trillion in resources gobbled up. Both of htese appear on the books, for a total net worth of 1.5 trillion. No cash deficit, no nothing.

Where’s the deficit?

The author then explains to us once again why a deficit is the normal state of affairs:

The government budget deficit is also “normal” in the sense that it is the mirror
image of the nongovernment surplus in the basic macroeconomic accounting identity:
Government deficit =Nongovernment surplus
where nongovernment surplus includes both the domestic (or resident) private sector
and the foreign (nonresident) sector,which includes foreign firms, households, and gov-
ernments.

Let’s look at this equation. Where did it come from? Fortunately, the Mosler Economic Policy Center [mopec.org] explains it: [my comments in bold and in brackets]:

Government $ Deficit = Non Government $ Surplus (Net Financial Assets)

Explanation why: Taxes are liabilities that the state has the authority to impose on private sector’s balance sheets. It is a unilateral transaction driven by a hierarchy relation (not by contractual arrangements). At the moment a new tax is approved (and before it is paid), the net worth of the private sector is reduced.

[So far so good. A tax means you and I are worth less than before, because we owe money to the govt. Ah, but what is the state of the govt’s books when a tax is declared but not yet collected? Is it unchanged? Or does the uncollected tax appear as a deficit in the books? Or maybe as a surplus? Read on for the answer].

Under current institutional arrangements, when a tax liability is due and private agents pay their tax, they write a check to the US Treasury. The commercial bank issuing the check debits the account of the taxpayer, and the check is cleared directly with the Fed. The Fed debits the bank’s reserve account and credits the General Account of the US Treasury at the Fed.

[Yep].

While the tax payment has no further effect on the net worth of the private sector (dollars are paid while a tax liability is written off), it cancels a government’s claim (thus reducing the ‘government deficit’ for the period), and simultaneously reduces the net financial assets owned by the private sector. If the government returned the tax paid (as it happens with a tax credit), the deficit will increase and the private sector net financial assets will increase dollar-by-dollar.

[Whoa! Whoa! Hold your horses right here. Look at what he’s saying. The moment the govt declares a tax, but has not yet collected it, it appears on the govt books as a deficit!

So lets get this straight.

Step one. Assume the govt has 500 billion in cash from last year, and we have 1,000 billion of their paper money.

Step two. Govt declares that you and I now owe them 600 billion dollars. By this step, the govt is 100 billion in the red. It still has 500 billion cash to spend right now, free and clear, and it will get 600 billion more by April 1, but by the authors equation, the govt is running a deficit.

Creative bookkeeping, hey? Utter garbage, if you ask me. After all, there is 1,500 billion out there. At this stage of the game, the govt is 100 billion in the red and we supposedly now have 1,600 billion dollars. Not 1,000 billion, 1,600 billion. All because WE OWE 600 BILLION IN TAXES.

OK, maybe, maybe accounting is like that. maybe wierd stuff happens in accounting in order to keep the accounting rules consistent. Maybe. Ask an accountant friend if this is true. But to draw conclusions from this [possibly] neccesary accounting fiction is the work of a nut job.

I would put it another way: Uncollected taxes=Uncollected taxes. That’s all that’s happening. But by calling uncollected taxes “govt deficits” and “private sector surplus”, we can really go to town and draw insane conclusions, as we shall see in what follows].

Therefore, for any change (increase or decrease) in the government deficit, there is an identical change in the net financial assets (or financial surplus) of the private sector.

[Put another way, every penny of taxes they dont collect is a penny we get to keep].

Well, there you have it. The source of that equation, as explained by Mosler’s website. Notice that deficit there on the website meant “uncollected taxes”. Will it mean the same thing here?

The author now complictaes the equation a bit, then draws a conclusion from it:

It is therefore equivalent to the well-known identity:
(G–T)=(S–I)+(M–X)
Government budget deficit =Domestic private sector surplus + foreign sector
surplus
where the foreign sector surplus is another way of expressing the trade deficit.

[OK, whatever. But here comes the whopper].

The gov-
ernment budget deficit permits both the domestic private sector and the foreign sector to
“net save” in the government’s unit of account.Only a domestic government budget defi-
cit permits the domestic private sector and foreign sector to actualize their combined
desired net saving.

OK, what’s he saying here? If the govt runs a deficit, it means you and I have more money in the bank. And it’s the only way you and I won’t wind up with zero at year’s end. The govt is doing us all a big favor by running a deficit.

Huh? What? Where did that come from? The only way I can make sense of this is to assume the govt has decided to tax us all at the rate of 100%. We have to give it all to the govt, everything. By the bookkeeping wizardry of before, if the govt decides to let us keep some of our money, and says “Guys, guess what? We won’t collect the full 100% of your money that you owe us. We will let you keep a few bucks. It will mean a sacrifice on our part, because on the govt books it will appear as a deficit, but hey, we are here to serve you.”

Yeah, so if that’s the case, he’s right. Otherwise he’s a dodo. Even using his Bizzaro world accounting scheme.

For example:

Step one: Govt has 500 billion, we have 1,000 billion.

Step two: Govt taxes us at the rate serfs used to have to pay, 25%. At this stage govt has 250 billion surplus, we have 750 billion surplus.

Step three: Govt actually collects the tax. It winds up with a cool 750 billion surplus, and so do we.

The rest of the article may or not make sense. I don’t really care. The elephant is already in the room.

7

With all due respect, that’s like the top floor of a skyscraper. And MMT seems to be flawed on the ground floor. One need not reach deep into the magic bag of AE to see what’s wrong with MMT.

8

Dave doesn’t even begin to understand MMT. If you can’t grasp it then please stop trying to critique it. You clearly have no idea what you’re talking about.

9

Show me where I’m wrong. I showed exactly, line by line, where Mosler is wrong.

10

Your entire argument is based around the idea that the government collects money to use it for something. You’re referring to the government sector like it’s exactly like a household. This is an egregious misunderstanding of MMT. You have not even displayed an ability to get beyond the very most basic concepts. Lord help you when we get into the intricacies of the actual banking operations involved…

11

Thank you for letting me know it is not worth my time.

12

And your entire argument ignores the very concept of money, an it’s origins. Honestly would it be so harmful for you to read up on your opponents before critiquing them? Start with Carl Menger.

Beyond that, you’ve yet to bring anything related to economics to the table.

13

A physicist does not go out of his way to refute witchcraft. It’s implied in the very nature of his reasoning. Do you understand? A physicist may lack the understanding of the witchcrafters arts, but thats irrelevant. It’s not necessary for Esuric, or anyone to waste their time refuting you or the MMT. It’s witchcraft, and we’re physicists.

A physicist does not need to understand witchcraft to know it’s a fallacy. Quite honestly I am shocked he’s given you any breath. Your not capable of reasonable argumentation. But thats normal of most modern mystics.

14

A lot of the prior posts ignore the distinction between convertible currency, such as a gold standard, vs the non convertible currency (fiat currency) that we have today.

With non convertible currency the US govt/Fed is the ‘scorekeeper’ for the dollar.

The Fed never has, nor doesn’t have any dollars.

When in taxes you, it changes the number in your bank account down, but doesn’t actually get anything. Just like in a card game, if you lose points the score keeper subtracts them from your score but doesn’t then have more points himself, or more points to give to someone else.

And when govt spends, the fed changes the number up in your account, and doesn’t ‘use up’ anything. Just like when you kick a field goal and get 3 points. No one wonders where the stadium got the 3 points they posted.

Those are the operational facts of today’s US dollar.

You may not like them, which is certainly your prerogative, but an entirely different matter.

So back to the card game, unless the score keeper gives out more points to the players than it subtracts from the players, the total points the players have can’t go up. Same with the dollar.

As for banks creating money, they create both bank loans and bank deposits at the same time. So every dollar in bank accounts came about as the result of someone borrowing that amount. For example, if I sell you my house and you get a mortgage of $100,000 to buy it, at the end of the transaction you have the house and a loan from the bank of $100,000, and I have a $100,000 deposit. So while there are $100,000 in new deposits created by the loan, there is also someone who now owes that amount. So what’s called net financial assets are unchanged by banks ‘creating money’ because they create equal debt for the private sector at the same time. And while deposits add to your savings, debt subtracts from savings.

See ‘The 7 Deadly Innocent Frauds of Economic Policy’ at:

http://www.moslereconomics.com/?p=8662/

It’s neither Keynesian nor Austrian. But whatever are, you need to read it to make sure to tie it all down to the actual operational reality.

warren mosler

15

The legal characteristics of various types of money are entirely unessential for economic theory.

No. Also, there’s no relationship between average and/or marginal tax rates and the general price level. The two are entirely unrelated.

No. Government expenditure neither creates money nor does it credit bank accounts. Government expenditure is not, in itself, inflationary; it becomes inflationary only when the Federal Reserve monetizes government debt (open market purchases), i.e., when it creates reserves (money base) in the system ex nihilo.

And? No one believes that the money creation process (the money multiplier) actually creates real savings. Inflation does not magically make additional resources fall from the sky. Savings constitutes the differed consumption of real resources (assuming that the demand for cash balances does not change). Stop focusing on irrelevant accounting identities and think about economic theory for a moment. Society can elevate its savings rate by forgoing consumption, and this can occur even when government expenditure is zero.

16

^ This is an essential insight, and one Mises stressed heavily in Theory of Money and Credit. Monetary economists often forget to think as economists, and instead think as jurists or numismatists.

17

I wouldn’t call it formal, but Taylor Conant was working on a series of posts that refute Mosler’s 7DIF.

http://conant.economicpolicyjournal.com/search/label/Mosler%20Economics

18

TY Mr Mosler for gracing our forum with your presence. Had I known you would be reading here I would have been way for polite in dealing with your theory, even though I would still disagree. So please do not take anything personally.

Oddly enough, I wrote a post about the 7 Deadly Frauds a few months ago. It’s here: https://forum.freecapitalists.org/t/the-seven-deadly-innocent-frauds-of-economic-policy/12837 The main refutation is that you seem to be ignoring the fact that printing money raises prices, aka inflation and hyperinflation.

I don’t think anyone here is taking a stance because they like or dislike your description of what happens to tax money. Rather it is a question of agreeing or disagreeing.

You wrote:

What is your source for such a seemingly wild claim? have a look at this, from Wikipedia:

One need only visit cbo.gov, the website of the Congressional Budget Office, and see that virtually every page talks about how much money they collected in taxes, and of course that they need more in order to be able to spend. Here’s a snippet from http://cboblog.cbo.gov/?p=1769

Revenues through December totaled about $531 billion, $43 billion more than in the same period last year. Most of that net increase stems from higher withholding of individual income tax and social insurance payroll taxes, which rose by $33 billion (or 8 percent) in the first quarter because of strengthening economic conditions. Revenues also increased because individual tax refunds were lower than the abnormally high amounts for the same period a year before.

Receipts from corporate income taxes, net of refunds, were also higher—by $2 billion (or 5 percent)—than in the same period a year before, almost entirely because of estimated payments made in December 2010. Many observers had expected a decline in December because legislation enacted in September extended businesses’ ability to immediately deduct 50 percent of their 2010 investments in business equipment.

Note what they call the tax money. REVENUES.

from wikipedia:

In business, revenue is income that a company receives from its normal business activities…In general usage, revenue is income received by an organization in the form of cash or cash equivalents.

from investopedia:

In the case of government, revenue is the money received from taxation, fees, fines, inter-governmental grants or transfers, securities sales, mineral rights and resource rights, as well as any sales that are made.

So the govt, over at cbo.gov, is saying it gets revenue from taxes. Meaning money. But according to you, they just take taxes from us, but don’t get any themselves. Where did you get such an idea? What is your evidence?

You also wrote:

First of all, this has been refuted in the above. But more importantly, there is a deeper problem here.

This is a good example of what I claimed earlier, that MMT seems to confuse money and that which money can buy. When the govt spend, it ceratinly “uses up” resources. For example, when it spends money to buy fuel for Michelle’s trips, that takes away fuel that we could have been using.

19

It’s one crazy economic fallacy because it fuses accounting (bookkeeping) with economic theory (if I understand it correctly). If you define savings as purchasing financial assets, rather than the differed consumption of final goods and services, then the economy cannot increase its net savings rate without government deficits (i.e., without the government issuing its own liabilities). Those who issue private financial securities are, in his mind, engaging in a form of consumption which diminishes from total private savings, but which is counterbalanced by those who purchase such financial securities (which simultaneously and correspondingly increases private savings–there is no net change).

Thus, if an individual purchases a government bond, for example, rather than a corporate jumbo bond, than net private savings has increased, but if he buys the corporate bond instead, than private savings remains unaltered. The fact that society goes from consuming 70% of its total annual income to consuming 60% does not, according to him, constitute a higher savings rate (no net change). I think MMT fails to realize that saving is just another form of consumption, which manifests itself as a higher demand for future goods, i.e., investment. If I issue a bond and use the funds to finance R&D or purchase intermediary goods, then my consumption rate has not increased (and my savings rate, therefore, does not fall). The only thing that changes is investment. Additionally, a higher savings rate would lead to additional reserves in the banking system.

MMT is a smokescreen; it prevents clear thought.

20

“The main refutation is that you seem to be ignoring the fact that printing money raises prices, aka inflation and hyperinflation.”

I thought I made it pretty clear that spending supports prices? And how the danger of excess spending for a given level of taxes is inflation, but not solvency? Take another look, thanks. It’s a central point.

I know they all talk about how much they ‘collected’ and ‘received’ in taxes, but close examination shows this talk is misleading, as a simple point of logic.

Think of the Fed as running the ‘extended spreadsheet’ called ‘the banking system’

It’s all just debits and credits- computer information- data entry- score keeping- etc.

That’s just an operational fact, not theory or philosophy.

You don’t agree? You think when you pay federal taxes they actually ‘get’ something that’s actually ‘used’ for spending, rather than just accounting (record keeping)?

And should you pay your federal taxes with actual cash- like old $20’s- they just shred them after giving you a receipt. Same if you loan dollars to the federal gov and give them old $20’s- they give you your bonds, etc. but shred your payment. Again, they don’t actually ‘need’

yes, spending can use up real resources, like oil, labor, etc. that’s all made clear in the book?