Taxes don't fund the government, spending does

[Hygro]

Hm. Of course, with no taxes, the government has nothing to spend. I'm sensing a circular argument here...

The government has infinite money to spend taxes or not. It's just that without taxation there's a real chance the spent money will be worth nil. I'm not sure which of the two likely meanings you intending to convey by your post.

 

[onejayhawk]

Hm. Of course, with no taxes, the government has nothing to spend. I'm sensing a circular argument here...

No! Really?

It's not completely bogus, just mostly. There is some elasticity in the system, but money eventually ties to tangible things. Inflate too much and the bubble bursts.

The government has infinite money to spend taxes or not. It's just that without taxation there's a real chance the spent money will be worth nil. I'm not sure which of the two likely meanings you intending to convey by your post.

No, not really. Definitely not infinite.

J

 

[Borachio]

I've read all of this thread. Two or three times.

I honestly don't understand any of it. I understand the words all right. It's just that they don't add up to anything like sense.

This comes as no surprise to me. Economics has always had me baffled.

But never mind. Just give me some money to buy food with, and do whatever you think best.

 

[bhsup]

Hygro, I am going to defer to you on this overall and just accept that in some abstract way you're probably right. I do this because you're educated in this stuff and I'm not. That said, I feel I have to tell you that it strikes me instinctively as very suspicious, so I am just going to file it away in the "dangerous pinko stuff" area of my brain and try not to think about it too much.

EDIT: Yeah, what Borachio said!

 

[luiz]

Yes and no. If we divided up GDP/capita in the US equally each family of four would get $212,000 a year. If you argue that that would be bad because it's too inflationary, then you are conceding that rich people are economically contractionary, aka bad for the economy

I wouldn't argue that it would be bad because it's inflationary, I would argue that it's impossible to divide the GDP like that...

It really depends on what you mean.

We would all be richer if the government financed investment where there be unemployed people and resources. Economies that rely purely on the banking sector bring money demand power in line with economic supply (i.e. those who don't use deficit spending) perform sub-optimally. There's always unnecessary unemployment in a banking-only system. Every day a person is unemployed is a day of forever-lost wealth.

But Hygro, no economy is composed purely of the banking sector. And if there is a positive return for investing somewhere (say because there are idle resources), then under normal circumstances the private sector will finance it, no? And under normal circumstances, government investment will only crowd out the private one. There's a case to be made that the government should finance such investments when times are not normal, but not that it should always and everywhere do it. No economist argues that.

The non-academic takeaways are that sovereign governments like the USA, Canada etc. will never face a money shortage, that all federally funded programs are intrinsically solvent, and that the budget never needs to be balanced for the sake of it.

And my own personal bit, that the government isn't spending the money it taxes. It is spending money, and it is taxing, as two separate things.

Sovereign governments like the US, Canada, etc. will never face a money shortage and the federally funded programs will remain solvent so long as they keep the budget relatively balanced and there's enough confidence in the system.

History has abundantly demonstrated that sovereign governments with their own currency can indeed face a money shortage and become insolvent. It happened to my own country in my lifetime, and was indeed very common in Latin America in the 1980's and is happening again in Venezuela and Argentina right now (they're not insolvent yet but will be soon; Venezuela first). There's no rule set in stone that says that the same can never happen to the US. In fact it will happen if the US follows what we could call the Latin American heterodox recipe: persistent and big budget deficits, printing money to pay bills, subsidies to consumption... you get the picture.

 

[Harv]

That said, I feel I have to tell you that it strikes me instinctively as very suspicious, so I am just going to file it away in the "dangerous pinko stuff" area of my brain and try not to think about it too much.

Here, let me try:

Taxes don't fund the government, spending does we the serfs do.

There are a few pretty good explanations, but you have to look for a subtle little switch in the logic. Here is one:

Let's start from scratch. I declare the Kingdom of Tim. If you want to live in the Kingdom of Tim, there is a ten Timbuck tax, due immediately.

Actually, you live in Timbucktu, the capital city of the Kingdom of Tim. So you have no choice. You owe a ten Timbuck tax, due immediately.

Basically this tax is a claim on your labor. It might be 10%, 50%, or 100% of the value of your labor.

History has abundantly demonstrated that sovereign governments with their own currency can indeed face a money shortage and become insolvent. It happened to my own country in my lifetime, and was indeed very common in Latin America in the 1980's and is happening again in Venezuela and Argentina right now (they're not insolvent yet but will be soon; Venezuela first). There's no rule set in stone that says that the same can never happen to the US. In fact it will happen if the US follows what we could call the Latin American heterodox recipe: persistent and big budget deficits, printing money to pay bills, subsidies to consumption... you get the picture.

So what happens is domestic production keeps getting slower and imported goods keep getting more expensive?

 

[luiz]

So what happens is domestic production keeps getting slower and imported goods keep getting more expensive?

Among other things...

But the first result of highly expansionist policies like Latin America is so fond of is a huge increase in imports (and thus of the trade deficit), as there is a lot more money circulating but obviously local production does not increase overnight. Service inflation spirals upwards almost immediately, as services can't be imported, but the inflation of goods that suffer international competition takes a little longer to kick in, and will be the result of the national currency losing value.

 

[Farm Boy]

In fairly short order you hit full employment. Assuming no massive breakthroughs in productivity you get significant inflation over twenty years, making the numerically enormous national debt no more of an issue than it would be under any other approach.

People heavily invested in US treasuries aren't happy, because returns have not kept up with inflation. The inflation will not occur in a uniform manner though, so smart/lucky investors who have timed their jumps from bubble to bubble well have accumulated wealth. The average working folk are happy because they have experienced very little unemployment, and their five digit paychecks are appropriate for their five digit rent so the inflation has made no difference to them.

That's about that.

It's a little more complicated. I know farming doesn't work like everything, but it's a good proxy for certain types of small entrepreneurship, which usually gets buried on the issue because all that's convenient to talk about is large corporate/government employers and their wage laborers.

If you crank inflation to that degree certain things still work. The price of fuel goes up but so does the price of grain. The valuation of your labor goes up as your purchasing power per buck goes down.

Now off the top of my head it skews the crap out of two things. It craps on the value of debt you already hold before the inflation starts, which is great for your land mortgage and any operating loans you still hold. It also craps on the value of the equity you've built up on that mortgage. This is probably again a wash for huge owner/operators that are big enough to have lots of wage laborers. But it intrinsically reams out the rears of the smaller guys. Why? Because when you have an enterprise that requires a massive relative investment into non liquid assets having the value of that investment decay rapidly is a problem. Ok, so lets assume the market can build this in relatively neatly. What's it do? It spikes the crap out of the value of long term held assets, like agricultural real estate, in anticipation of the increase in currency value due to inflation. Here's the kicker though, since that spike in value comes at the expense of the relative value of past built equity, not everyone is on equal footing when this starts to happen. If you aren't huge then you're pretty hosed if you either want to look at expanding your control of the finite acreage on the market by buying more and your slightly less hosed if you want to continue holding onto what you've already got. If you're content to sell out now and do something else, like get a wage job like everybody is supposed to have, you might make out like a bandit until the inflation eats down the cash-out. Go you.

Am I missing anything fundamental? Like the cost of risk that needs to be built in seeing as governmental policy can't really be counted on to be fantastically consistent over the course of 30-60 year investments?

Edit: Actually. I knew I was missing something. I think you actually wind up fine, and better than you would have been if you want to stay with the same amount of acreage. You get the benefit of the market adjusting for what you already own and the benefit of the loan getting shrunk in relative value. I think the problem lies in being able to accumulate enough capital fast enough to reinvest in order to buy more. This isn't just a problem for small farming landholders when they want to become big ones, it's a problem generationally for small landholders because(if you've played Crusader Kings II) they deal in Absolute Cognatic Gavelkind Succession(kind of. Titles are too chunky to work here. Inheritance will happly split or auction them off to deal equally). You're left attempting to re-expand back over the same ground every generation before the neighboring kingdoms snatch you up during your succession crisis.

 

[Bootstoots]

Sovereign governments like the US, Canada, etc. will never face a money shortage and the federally funded programs will remain solvent so long as they keep the budget relatively balanced and there's enough confidence in the system.

History has abundantly demonstrated that sovereign governments with their own currency can indeed face a money shortage and become insolvent. It happened to my own country in my lifetime, and was indeed very common in Latin America in the 1980's and is happening again in Venezuela and Argentina right now (they're not insolvent yet but will be soon; Venezuela first). There's no rule set in stone that says that the same can never happen to the US. In fact it will happen if the US follows what we could call the Latin American heterodox recipe: persistent and big budget deficits, printing money to pay bills, subsidies to consumption... you get the picture.

That's more or less what I was thinking: MMT is probably a decent approximation of reality when you have low inflation, high unemployment, and medium debt levels.. Latin America in the 1950s-1980s (and Venezuela and Argentina again today) was what came to mind for me as well when thinking of examples of what happens if a sovereign government continued running high deficits indefinitely. It's probably worth noting that the US is nowhere near this point yet; fortunately, the Japanese are exploring far ahead of us and will probably be the ones to find out where it lies for developed countries.

One question I have and would be interested to know your response: what was the unemployment rate like in high-inflation Latin American economies? Were they at something resembling full employment for the duration of their 2-4 digit inflation periods, or were there periods of "hyperstagflation" in there as well?

 

[Harv]

Spoiler :

It's a little more complicated. I know farming doesn't work like everything, but it's a good proxy for certain types of small entrepreneurship, which usually gets buried on the issue because all that's convenient to talk about is large corporate/government employers and their wage laborers.

If you crank inflation to that degree certain things still work. The price of fuel goes up but so does the price of grain. The valuation of your labor goes up as your purchasing power per buck goes down.

Now off the top of my head it skews the crap out of two things. It craps on the value of debt you already hold before the inflation starts, which is great for your land mortgage and any operating loans you still hold. It also craps on the value of the equity you've built up on that mortgage. This is probably again a wash for huge owner/operators that are big enough to have lots of wage laborers. But it intrinsically reams out the rears of the smaller guys. Why? Because when you have an enterprise that requires a massive relative investment into non liquid assets having the value of that investment decay rapidly is a problem. Ok, so lets assume the market can build this in relatively neatly. What's it do? It spikes the crap out of the value of long term held assets, like agricultural real estate, in anticipation of the increase in currency value due to inflation. Here's the kicker though, since that spike in value comes at the expense of the relative value of past built equity, not everyone is on equal footing when this starts to happen. If you aren't huge then you're pretty hosed if you either want to look at expanding your control of the finite acreage on the market by buying more and your slightly less hosed if you want to continue holding onto what you've already got. If you're content to sell out now and do something else, like get a wage job like everybody is supposed to have, you might make out like a bandit until the inflation eats down the cash-out. Go you.

Am I missing anything fundamental?

Did you mention huge capital costs and having to borrow money to cover them? What is your cost of capital (interest rate) if you are big? What is it if you are small?

The mortgage interest might be small if it is government subsidized. I do not know what interest rate is paid on stuff like farm machinery.

. . . .
Edit: Actually. I knew I was missing something. I think you actually wind up fine, and better than you would have been if you want to stay with the same amount of acreage. You get the benefit of the market adjusting for what you already own and the benefit of the loan getting shrunk in relative value. I think the problem lies in being able to accumulate enough capital fast enough to reinvest in order to buy more. This isn't just a problem for small farming landholders when they want to become big ones, it's a problem generationally for small landholders because(if you've played Crusader Kings II) they deal in Absolute Cognatic Gavelkind Succession(kind of. Titles are too chunky to work here. Inheritance will happly split or auction them off to deal equally). You're left attempting to re-expand back over the same ground every generation before the neighboring kingdoms snatch you up during your succession crisis.

How much is the inheritance tax?

 

[luiz]

That's more or less what I was thinking: MMT is probably a decent approximation of reality when you have low inflation, high unemployment, and medium debt levels.. Latin America in the 1950s-1980s (and Venezuela and Argentina again today) was what came to mind for me as well when thinking of examples of what happens if a sovereign government continued running high deficits indefinitely. It's probably worth noting that the US is nowhere near this point yet; fortunately, the Japanese are exploring far ahead of us and will probably be the ones to find out where it lies for developed countries.

One question I have and would be interested to know your response: what was the unemployment rate like in high-inflation Latin American economies? Were they at something resembling full employment for the duration of their 2-4 digit inflation periods, or were there periods of "hyperstagflation" in there as well?

By the late 1980's "hyperstagflation" was actually the norm. Unemployment in Brazil was consistently around 10% or even higher, and in terms of economic growth the period from early 1980's to the early 1990's is known as lost decade (GDP per capita was actually lower in 1993 then in 1983).

Of course, when you first start the massively expansionist policies economic growth will increase and unemployment fall, but after a while things revert to their previous state and the turmoil and misallocation of resources will eventually hamper growth and lead to higher unemployment then you had before the expansion.

 

[Timsup2nothin]

@Luiz...There's a point where 'sovereign nation issuing its own currency' breaks down. Your country, like most of Latin America, was in the extremely uncomfortable position of having a very large portion of its debt payable in a foreign currency. In effect, this entire conversation cannot be applied to them.

@Farmboy...full employment and high inflation does in fact make the concentration of wealth harder. While this can have the 'locking in' effect, where those who have 'made it' no longer have to worry that those who 'haven't' suddenly will and will start horning in on their action, in our current reality those who have made it are mostly devouring those who haven't and driving them further down anyway, so the 'locking in' is at least a step in the right direction.

 

[Bootstoots]

By the late 1980's "hyperstagflation" was actually the norm. Unemployment in Brazil was consistently around 10% or even higher, and in terms of economic growth the period from early 1980's to the early 1990's is known as lost decade (GDP per capita was actually lower in 1993 then in 1983).

Of course, when you first start the massively expansionist policies economic growth will increase and unemployment fall, but after a while things revert to their previous state and the turmoil and misallocation of resources will eventually hamper growth and lead to higher unemployment then you had before the expansion.

That makes sense - thanks for the response. That leads me to another question. How much of their debt was denominated in dollars, and were there any cases of very high inflation without significant amounts of dollar-denominated debt? If a large proportion of it was in dollars or other foreign currencies, that could be a key difference between Latin America in the 1950s-early 1990s and the US and Japan now - it's good to control the currency you issue debt in.

edit: x-post with Tim

 

[Farm Boy]

Did you mention huge capital costs and having to borrow money to cover them? What is your cost of capital (interest rate) if you are big? What is it if you are small?

Not entirely positive. Could probably go look it up, but Dad mostly handles the management, I'm mostly trying not to screw up the craft. I might even get decent at that part some decade.

The mortgage interest might be small if it is government subsidized. I do not know what interest rate is paid on stuff like farm machinery.

Same cop-out answer.

How much is the inheritance tax?

The threshold is high enough now that it's been a concern for bigger fish than me. But such is the nature of government the last time we cycled a generation in the 90s it helped to crap us down on the total acreage we could re-consolidate by about 37%. I just figure it'll stay a non-issue for as long as it doesn't apply and then become re-enabled in time to F us the next time it applies.

@Farmboy...full employment and high inflation does in fact make the concentration of wealth harder. While this can have the 'locking in' effect, where those who have 'made it' no longer have to worry that those who 'haven't' suddenly will and will start horning in on their action, in our current reality those who have made it are mostly devouring those who haven't and driving them further down anyway, so the 'locking in' is at least a step in the right direction.

It's a bad step from a bad place. Sure, you moved, but it still sucks. The primary purpose of taxation should be to counterbalance the capitalistic tendency of wealth/power gravity.

 

[luiz]

@Luiz...There's a point where 'sovereign nation issuing its own currency' breaks down. Your country, like most of Latin America, was in the extremely uncomfortable position of having a very large portion of its debt payable in a foreign currency. In effect, this entire conversation cannot be applied to them.

Of course it can. The only reason such a large part of the debt was in foreign currency was exactly because creditors didn't have confidence that the Central Bank wouldn't inflate the debt away if it was held in national currency. That's why I mentioned earlier that the whole thing depends on the confidence on the system. The US enjoys the greatest creditor confidence of any country on Earth. Should it pursue irresponsible policies for what is perceived to be an excessive amount of time, such confidence will erode and you will have to take debt on foreign currency as well. People don't loan to the US on dollars and for cheap because they like the food, they do it because the country never defaulted and has generally kept conservative policies.

Another thing. Nowadays most debt of the major Latin American economies is on domestic currency, since those countries recovered creditor confidence after the "neoliberal" reforms of the mid 1990's. Still, Venezuela and Argentina are again at the point of insolvency. So yeah, even if you issue your own currency and the vast majority of your debt is on your currency there's only so far you can go with expansionist policies before you go broke.

That makes sense - thanks for the response. That leads me to another question. How much of their debt was denominated in dollars, and were there any cases of very high inflation without significant amounts of dollar-denominated debt? If a large proportion of it was in dollars or other foreign currencies, that could be a key difference between Latin America in the 1950s-early 1990s and the US and Japan now - it's good to control the currency you issue debt in.

edit: x-post with Tim

See answer above.

 

[Harv]

There's a point where 'sovereign nation issuing its own currency' breaks down. Your country, like most of Latin America, was in the extremely uncomfortable position of having a very large portion of its debt payable in a foreign currency. In effect, this entire conversation cannot be applied to them.

Of course it can. The only reason such a large part of the debt was in foreign currency was exactly because creditors didn't have confidence that the Central Bank wouldn't inflate the debt away if it was held in national currency.

Agreed. So in order for the Latin American countries to finance trade deficits, they have to borrow foreign currency in increasingly larger amounts on increasingly bad terms.

That's why I mentioned earlier that the whole thing depends on the confidence on the system. The US enjoys the greatest creditor confidence of any country on Earth.

The USA is still able to export dollars and T-Bills and stock to fund trade deficits. People in the world still generally trust US Dollars.

Should it pursue irresponsible policies for what is perceived to be an excessive amount of time, such confidence will erode and you will have to take debt on foreign currency as well. People don't loan to the US on dollars and for cheap because they like the food, they do it because the country never defaulted and has generally kept conservative policies.

Here is another problem: If you sit on a pile of hundreds of billions of dollars in cash and T-Bills and T-Bonds, the value will be there as long as there is confidence. If you lose said confidence and dump them, then their value will erode. You can call this a game of confidence or a game of chicken.

So if the USA continues what you call irresponsible policies for what you perceive to be an excessive amount of time, the question is, will you continue to buy US dollars and keep the confidence game up; or will you sell your pile of US dollars?

What I have trouble understanding is the expected real rate of return on a 10-year Treasury bond.

 

[luiz]

Just to be clear, I'm not suggesting that the US is presently pursuing irresponsible policies that will lead to an erosion of confidence in the dollar or the Fed. I'm just saying that there's no reason to imagine that if the US government behaved like a Latin American one, it wouldn't get a Latin American outcome.

 

[Timsup2nothin]

Just to be clear, I'm not suggesting that the US is presently pursuing irresponsible policies that will lead to an erosion of confidence in the dollar or the Fed. I'm just saying that there's no reason to imagine that if the US government behaved like a Latin American one, it wouldn't get a Latin American outcome.

I don't think that they could if they wanted to. There isn't any way I can think of that they could take on that much debt payable in foreign currency. The dollar is too much of a standard, and even the gross irresponsibility of the recent congresses hasn't made a really significant dent in that.

 

[luiz]

I don't think that they could if they wanted to. There isn't any way I can think of that they could take on that much debt payable in foreign currency. The dollar is too much of a standard, and even the gross irresponsibility of the recent congresses hasn't made a really significant dent in that.

That's because what you call gross irresponsibility of the recent congresses would be called ultra-orthodox austerity in Latin America.

When the Fed expands the monetary base by a factor of ten in one year we'll talk.

 

[Angst]

First off, just sayin' that I'm a noob at understanding money and economics.

3) They hold back aggregate demand for better (reduced inflation, stronger currency) or worse (reduced employment, stronger currency)

Since I can always just issue more Timbucks, I could end up with my subjects just swimming in them. At that point my happy subjects are going to want more stuff than my little kingdom can produce, so there will be too much aggregate demand for our capacity. I need to tax them to keep them from ending up with piles of Timbucks and nothing to spend it on. But this is a short term solution. What I really need to do is get our productivity up. The Kingdom needs more subjects!

Question: Due to the observed behavior of rich people not spending their money, isn't this again a good reason to tax the wealthy in order to balance aggregate demand? Or something in the lines of what you said.