One way to conceive of money is as an IOU (“I owe you”) that is deemed acceptable by somebody other than its issuer. Anyone can attempt to issue an IOU. The difficulty, as the economist Hyman Minsky emphasized, is in getting it accepted.
A monetary economy needs spending for production and employment to occur. This is a truism. Spending equals income, by definition. One person’s purchase of a good or service is another person’s income. But it is also clear that causation, ultimately, runs from spending to income. More specifically, the creation of income requires a prior decision to spend. In a monetary economy, to paraphrase Michal Kalecki, each of us in isolation can decide how much to spend but we cannot choose the size of our income. Our personal income will depend not on our own spending but on the spending decisions of others acting somewhat independently of ourselves. Total income, of course, will depend on spending in aggregate – our own spending and the spending of others.
Warren Mosler (for example, here) has explained very clearly and succinctly the key steps involved in effectively introducing a currency such as the drachma. (See, also, Bill Mitchell’s recent post, ‘A Greek exit is not rocket science‘.) Fears of exchange-rate catastrophe would be unfounded if these steps were followed.
In a previous post, it was explained that enforcement of taxes (or some other financial obligation to the state) is fundamental to the viability of a national currency. Without such an obligation, widespread acceptance of the currency would not be assured. The currency might cease to serve as an effective mechanism for public provision of adequate infrastructure, education, health care, social security and much more.
It seems to me that those, including New Keynesians, who support the maintenance of a “balanced budget over the cycle” are either not recognizing or rejecting a number of points made by heterodox Keynesian (or Kaleckian) critics of such a policy approach, including proponents of Modern Monetary Theory (MMT) as well as many other Post Keynesian and Sraffian economists.
A modern money system, as that term is applied in Modern Monetary Theory, typically has three key features. Two of these features are always present. The third is optional but normally should be in place for the full benefits of modern money to be enjoyed:
1. The currency is a public monopoly. Government issues the currency and is the only entity allowed to do so.
2. The currency is nonconvertible. It is a fiat currency. The government does not promise to convert its currency into a precious metal or some other commodity at a set price.
3. The exchange rate is allowed to float. The government does not promise to maintain a fixed exchange rate with any foreign currency. Instead, the exchange rate is ‘flexible’ or ‘floating’. As already mentioned, this feature is usually operative, but not always.
Taking these three features together, we can say that modern money normally involves a ‘flexible-exchange-rate nonconvertible currency’, or ‘flex-rate currency’ for short.
The Atlantic cites a 65-year study indicating that “tax cuts don’t lead to economic growth” (h/t Tom Hickey). On closer inspection, the study finds more specifically that tax cuts on the wealthy fail to promote economic growth while exacerbating inequality. This should not be surprising to anyone cognizant of basic macroeconomic principles, but to make that point is not to downplay the value of the study. Many have made claims contrary to the findings of the study. If we consider the effects of taxes more generally, our conclusion is likely to be less sweeping. The effects of taxation vary depending on what particular tax we have in mind and the context in which that tax operates. The matter can be considered both in terms of demand effects and so-called incentive effects.
Most people have probably wondered, at one time or another, why national currencies gain wide acceptance. Why, for instance, do so many Americans choose to hold and transact in dollars rather than some other currency?
A currency-issuing government is not revenue constrained. It is always able to purchase whatever is available for sale in its own currency. This simple reality is partially concealed by a variety of contrived hoops through which modern day governments require themselves to jump. There are at least two different ways in which we can see past the confusion. The easiest way is to stand back and look at the big picture, both from the standpoint of logic and by considering the monetary and fiscal authorities as two parts of the same entity, the consolidated government sector. For the eagle eyed, this approach may appear to overlook potentially consequential details in the way governments actually spend. In practice, the monetary authority plays one set of roles, the fiscal authority plays another, and many governments have introduced various restrictions on the way in which the two can interact. The present post begins with a bird’s eye view of government spending, and then turns to a more detailed consideration of the way in which self-imposed constraints and convoluted operational procedures complicate but do not undermine the sovereignty of a currency-issuing government. The case of the US government is taken throughout as an example, but much of the discussion is also broadly applicable to other currency-issuing governments.
I’ve been pondering whether it is possible to reconcile a number of notions within the same economic story about long-run growth and accumulation:
- An accelerator-type determination of private investment;
- A possible tendency, under laissez-faire capitalism, for profitability to fall as accumulation proceeds;
- Capitalism as prone to financial instability;
- A state able either to attenuate crisis tendencies or, cajoled by democratic pressure from below, push the system beyond capitalism;
- A capitalist state able to “manage”, to a degree, the rate of profit.
It is possibly a tall order. The following is intended as just a rough sketch of what I have in mind. I might go deeper into some aspects of the argument in future posts, as it raises various questions, but think it would be better to catch any glaring faults now before carrying the exercise further.