Why don’t governments print money and use it for public services?
There’s nothing really stopping them.
There are also a lot of problems with current tax systems, such as there not being enough ‘tax’ to go around all the schools and hospitals.
So don’t give it to the banks.
Go straight for the jugular.
Of course, there is a possible fatal flaw.
Are we sure such a measure would definitely cause inflation though?
The answer is no. Economists of all ages are rethinking how it works.
And so the plot thickens.
You see, at the heart of this question is a paradox.
Governments and countries with their own independent currencies can create money, but often these same governments also say they doesn’t have enough money to pay for stuff.
Does that even make sense?
In this post, I want to grapple with this idea.
Can we buy everything we want? And if we try, will we be living in a utopia or an inflation nightmare?
The UK government can fund itself by simply creating money.
This is something that is well-known to economists.
The problem is most economists like to say that’s not really a very serious way of going about things.
Not so with Modern Monetary Theory (MMT) economists.
They say the government could create money and spend more without necessarily raising taxes or causing runaway inflation.
Mind = Blown
Okay, let’s start with something basic.
Can the government just create as much money as it wants?
Yes it can.
Think of it like this.
Most of the digital money out there in the world actually comes from banks making loans.
Say a budding entrepreneur needs a hundred thousand pounds to start a pancake restaurant.
The bank checks out her credit history, and they’re like, she’s good.
They decide to give her the money.
The loan officer will type some numbers into his or her computer, and the entrepreneur’s account balance is going to increase by £100,000.
The bank officer isn’t thinking about cash.
She’s not going down to the vault and counting twenties.
“What?! That’s crazy!
“Where did the bank get the money to make the loan?”
Well, it got it from the keyboard, right?
It was a one followed by a number of zeros.
Call it the power of the keyboard.
Banks have it. And so does the government.
This, then, is similar to the story of government spending. When parliament spends money on aircraft carriers or whatever, they just tell the government’s bank – the Bank of England – to go and type some money into the accounts of whoever’s making aircraft carriers.
Just type it in.
Can the government afford something then?
The answer to that question is always yes.
Can we afford to build a thousand new bridges?
Could we fill all of the potholes in all of London if we wanted to?
And also buy a hundred new aircraft carriers for the military?
And university for everybody? The government could pay for it?
Sounds like a utopia.
There has to be a catch though, right?
What’s the catch?
We’ll get to that.
This all leads us to the next part of our big question.
The government can create money. So what’s the point of taxes? Why does the government need to take my money?
The story on taxes that I always had in my head is as follows:
The government spends money because, you know, it has to.
It needs to pay for aircraft carriers and first-grade teachers.
And part of the government’s job is to balance the amount of money that it spends with the amount of money that it takes in.
This is the part where you hear about parliament fighting over the budget.
The government takes in money in taxes. And if it needs a little extra, it borrows some more.
And then, across town, the Bank of England – the central bank – looks at the health of the overall economy and changes interest rates or creates some money, or maybe removes some money from circulation, to keep the economy in balance.
Basically, the Bank of England handles the big picture stuff like fighting inflation, whilst government buys aircraft carriers.
Modern Monetary Theory says it doesn’t have to be this way.
Forget everything you know.
A different way of looking at things was first proposed by a finance guy named Warren Mosler.
He was an American looking at the whole American system – the federal government, the central bank – which is basically a UK equivalent.
And something happened.
It’s like when you’re looking at one of those optical illusions.
Is it a goblet or is it two faces staring at each other?
Mosler’s looking at the system and it’s like he suddenly sees the goblet.
You see, if you look at it a little differently, taxes don’t finance spending. Spending comes first and taxes second.
THIS IS SUPER IMPORTANT.
Here’s the old way:
Taxes bring in the money and government then spends that money.
To repeat, here’s Mosler’s new way:
Government just spends – power of the keyboard – and then the government has something to tax.
So in this mind-bending world, we still have an important question to answer:
Why does the government tax at all?
According to some MMT economists, it taxes because it wants to remove some of the money that it spent in the economy so that it can guard against the risk of inflation.
OK. This is one of the big ideas of Modern Monetary Theory.
Taxes are not for spending. Taxes are for fighting inflation.
And spending – that isn’t just to buy stuff the government needs, but the power of the keyboard – can be put to use for doing all kinds of good things.
It can put money into the economy to give it a boost or to help get to full employment.
OK, so the government is spending money into the economy – spend, spend, spend – and eventually, they’re going to need to drain some money out.
And some MMT economists think of taxes as a way to do that.
You’ve got to have a way to get money out of the economy, right?
Now here’s a big question. If you remind the government that it has the power of the keyboard, is the government going to go crazy?
Will you get people with wheelbarrows full of cash, dumping piles of money on the counter when they want to buy a cup of coffee?
In other words, will you get hyperinflation which has, in the past, struck the likes of Venezuela, Weimar Germany and Zimbabwe?
If you think hyperinflation is the necessary result of what’s just been described – the government sitting down with its budget and deciding how many pounds to write into each of these line items – you could well get inflation.
The UK government could try to spend too much into an economy that doesn’t have the room to absorb that much new spending.
You would begin to get an inflation problem.
MMT economists aren’t suggesting that this can’t happen.
But they think it wouldn’t necessarily happen.
Wait – how?
If a ton of money is pumped into an economy, everyone has more money. So everyone’s going to spend more money, and this is what drives up prices and causes inflation.
If there’s more money out there through the government spending, people can do whatever they want with it.
However, MMT economists make a valid counter-point
“Where is it? We’ve been doing it. We just did it with a $1.5 trillion tax cut. We did it with the 300 billion in additional spending. We’ve done it and done it and done it. Where is the inflation problem? I don’t see it in the U.K. I don’t see it in Japan. I don’t see it in the U.S.” – Stephanie Kelton, MMT economist
Here comes the catch.
All of these things are affordable in money terms but every economy has its own internal speed limit.
This ‘speed limit’ is how much money an economy can absorb before inflation takes off.
And the speed limit has to do with what economists call real resources.
After all, an economy is not just money.
If you want to build a hospital, you can’t build it out of money. You need concrete and glass and linoleum floor and sofas in the waiting room and those IV bags that hang on those rolling coat-rack things.
And let’s not forget the doctors and nurses.
These things create the speed limit.
So say the factory that makes those wheeling coat-rack things is running at half the capacity it could. If the government decides to place a big order for those coat-rack things, nothing bad really happens.
They just buy them at the normal price and put them in the hospital.
But what if the factory is at full capacity?
Then the government has to say, hey, sell to our new hospital instead of to your other customers.
And to get them to do it, they’ll have to pay more.
That is inflation.
Prices just went up.
And if the government spends so much that it drives up prices all over the economy, that’s your inflation problem.
MMT economists say that’s what the government should think about; not whether they have enough money, but whether there are enough resources in the economy to soak up that money.
So this is basically an MMT economist’s answer to the question right at the beginning of this blog post:
A government can create money and spend it up to that internal speed limit.
If you start to get inflation, that’s a sign you might be spending too much. Maybe you could raise taxes to pull some of that money back in.
But if you don’t see inflation, just go for it.
Clearly, not everyone sees it this way.
One such critic is Tom Palley:
The theory, I believe, has holes in it.
Tom Palley is an economist who’s done work for labour unions and he’s on the left of the economics profession, like MMT. But he’s been a longtime critic.
To Tom Palley, Modern Monetary Theory is useful because it points out some flaws in mainstream economics. For example, he thinks that mainstream economics is too obsessed with balanced budgets.
But he has some doubts about MMT. A big one is the whole taxes thing; the idea of using taxes to fight inflation.
Politics doesn’t work like that. Taxes are very, very contested. No one wants their taxes raised. It’s very hard for politicians to raise taxes. They’re very slow to do it because guess what? They don’t get re-elected if they do.
He says it’s just not realistic for the government to react fast enough to respond to inflation.
Here’s what Stephanie Kelton – the MMT economist – has to say about this:
If your concern is that it would be difficult to fight inflation by raising taxes, that is obviously a legitimate concern. It’s difficult to get Congress to act quickly to do the right thing. And so one of the things that MMT economists have advocated for a very long time is finding a way to take the fingerprints of Congress off of the decision making. In other words, to make it happen automatically.
She says something like this kind of happens already.
When the economy is booming, for instance, you don’t have to spend as much on unemployment benefits.
People have jobs. Spending goes down automatically.
Just do more of that.
You just need more types of taxing and spending that kick in automatically if inflation starts to tick up.
Power to Goverment
The Modern Monetary Theory folks also advocate to start thinking about how taxes and spending affect the big economic stuff like employment and inflation.
The way it is now, it’s the Bank of England’s job.
It’s just how things were set up way back when.
But MMT would say government spending and taxing is actually a much more direct way to go about this.
If you want more employment, don’t fiddle with the interest rate; just hire people or buy things from businesses who will hire people.
There are definitely questions about how this works in practice. It’s also far from the mainstream, textbook way that most economists talk about this stuff.
What’s more, if you think government sucks, you probably aren’t loving this plan.
But there’s some logic to the idea that parliament should be thinking about the big stuff.
Is the economy good? Are people employed?
And that money isn’t just a way to buy aircraft carriers.
It’s way more than that.
That’s something the MMT folks want you to keep in mind.
Don’t just think about money as a scarce resource – something you can run out of. Think about what you want money to do and go from there.
It’s a different starting point for asking the question “can we afford something like a new hospital?”
Source: Planet Money