The impetus for this post is a short video in which Amy Goodman interviews David Graeber, one of the organizers of the Occupy Wall Street movement. Hat tip to Tom Hickey at Mike Norman Economics for the link. The interview touches on a number of important issues. Here, I want to explore some of the points raised by Graeber in his discussion of debt and taxes.
In particular, Graeber argues that:
1. Debt is a social/political arrangement, open to negotiation and renegotiation. As Graeber emphasizes, this is frequently recognized when it comes to renegotiating debts between the wealthy, between governments, or between governments and the wealthy. Debt obligations suddenly become “sacrosanct” only when it is a case of the poor or middle class owing the rich. Suddenly there is great moral consternation at the thought of “broken promises”. Any thought of renegotiating debt is suddenly beyond the pale.
2. Contrary to claims that taxes reduce “incentives”, high taxes on the wealthy have accompanied strong employment and economic growth in the past, for instance during the immediate postwar period.
3. For given fiscal settings, a narrowing of income and wealth inequalities will tend to generate higher income and employment because of the higher spending propensities of low and middle-income households.
The “sanctity” of private debt
The reason for the double standard on debt seems clear: the debt of the poor and “middle class” (i.e. working class) helps to reproduce a category of people – most people – who need to sell their labor power in exchange for wage or salary income or rely on a partner or parent who does. It is harder, for example, to opt for a low-income, non-materialistic lifestyle – less paid employment, more free time – if a person has incurred debt obligations in the form of student loans, home mortgages, medical expenses, and so on. Even if a person opts to rent cheap accommodation, not go to university and is fortunate enough to be healthy, the imperative to work is stronger as a result of private-debt relations in general, which impact on the availability and cost of accommodation. Under capitalist social arrangements, that rented apartment or house in most instances would not have been built in the absence of private debt being issued. Private loans were only forthcoming to the extent that an interest obligation could be imposed on somebody.
In a sovereign-currency system, there is actually no necessity for private-debt relations at all. Their existence is a political choice. Housing could be built and provided without requiring anyone to go into debt, as a basic social right. Needless to say, this is anathema to capitalism, because it weakens the compulsion of the majority of people to work for capitalists on capitalists’ terms rather than organize productive activity along different, perhaps more democratic, lines.
At one point in the interview Graeber says “debt is not really an issue”. By this I took him to mean the public debt of a sovereign currency issuer. He gives an example of “debt being higher in the past” alongside strong growth, which could relate to US public debt in the immediate postwar period. Modern Monetary Theory (MMT) is clearly in agreement with Graeber on this point.
The debt of currency users, in contrast, can obviously be problematic. Renegotiating this debt is clearly an issue for the elites when it comes to the middle class and poor, and is an issue for the middle class and poor when they cannot meet their debt obligations due to unemployment or loss of income.
Taxes and “incentives”
Graeber’s observation that high tax rates on the wealthy have accompanied strong employment and growth outcomes in the past, including during the “golden age” of capitalist growth of the immediate postwar period, is accurate. Previously I have linked to an interview in which Michael Hudson discusses this point in some depth (see here).
The claim, often made by special interest groups, that taxes create a “disincentive” to produce does not withstand scrutiny in many cases. There are many instances where taxes will in fact create an incentive to produce. This will be so whenever unproductive activity rather than productive activity is the target of the tax. Estate taxes, wealth taxes, taxes on interest income, lump sum taxes of all kinds, are actually incentives to produce, not disincentives. If a government were to tax away all property and interest income, suddenly many in the leisure class would find they had to find employment in order to meet their tax obligations. Such taxes are an incentive to produce, not a disincentive.
Taxes on income and consumption, in contrast, can conceivably create disincentives to produce, but they can also create incentives. In terms of taxes on employment income, it is not clear that there will be strong incentive effects on aggregate output and employment in either direction. It may well make sense, on normative grounds, not to tax productive activity highly, but purely in terms of aggregate employment outcomes, the impact is not obvious from the empirical evidence.
It is easy to see why taxes on employment income may not create much of a disincentive for many workers. By definition, workers are mostly people who have “chosen” (are compelled) to sell their labor power to capitalists or capitalist governments in exchange for wage or salary income. The less independent income they have and the more indebted they are, the more they will have to work, irrespective of taxes on employment income. In fact, higher taxes on employment income would mean they have to work more, not less, to meet their debt obligations.
In other instances, taxes might induce some workers to alter the productive activities they undertake, rather than the overall level of those activities. For example, if taxes on employment income were made steeply progressive, people might opt in increasing numbers to take lower paying jobs. Even if this occurred, it is not clear that it would matter. It is a political question. Less people might be drawn into high paying jobs in the financial sector, for example, and more enticed into less lucrative occupations in engineering, science, teaching, nursing, aged care services, and so on. If this was considered a bad thing – a political judgment – a special tax exemption might be needed to maintain numbers working in finance … Or maybe it would be considered a good thing. Again, that would be a political judgment.
To those who would suggest we “let the market decide”, rather than “interfere” through tax policy, patterns of demand reflect income distribution. If the market distribution is considered just – a political judgment – the resulting demand patterns may also be considered just. But if not – a different political judgment – a change in distribution is called for, and this will alter patterns of demand and the market assessment of different activities.
Overall, the incentive effects of taxes on wage and salary income are not important when it comes to the determination of aggregate employment. More likely is that taxes may to some extent alter the kinds of activities undertaken.
What matters more for total employment is the overall impact of all taxes on aggregate demand. If tax increases for some income groups are not at least partly offset by tax cuts for other income groups, then for a given level of government expenditure there will be a reduction in aggregate demand, and this will reduce total employment. This has nothing to do with incentives or disincentives. It is simply that taxes subtract from aggregate demand.
Taxes, distribution and saving behavior
There are really two important aspects of the debate over fiscal policy. Modern Monetary Theorists frequently stress the technical, apolitical aspect, which concerns the impact of the fiscal deficit on aggregate demand and employment. But there is also the political aspect of how fiscal policy affects the distribution of income. This is recognized in MMT, but understood to be a political choice and analyzed as such.
Regarding the first, technical aspect, MMT demonstrates that if full employment is to be attained alongside price stability, the fiscal deficit must be sufficient (and just sufficient) to enable the full-employment level of non-government net-saving intentions to be realized. This theoretical result is not remotely political. It dictates no particular position on income distribution, nor the size of government. It dictates no particular position on the legitimacy of private property, capital and wage labor as a social relation, private saving, private wealth accumulation, nor any other political choice. A fiscal deficit of a given size can involve high spending and taxing or low spending and taxing. Again, MMT in itself is silent on the choice. The MMT result simply says that whatever non-government net saving intentions at full employment would happen to be, the fiscal deficit will need to match them if full employment is a policy goal. MMT also shows that this creates no difficulty for a currency-issuing government. It is always feasible for such a government to net spend at the level required to maintain full employment.
Is full employment a policy goal? Should it be? MMT does not dictate answers to these questions. They are questions that will be answered politically. But if full employment is a goal, MMT indicates an effective way to deliver it (the job guarantee) and indicates that this will automatically ensure that the fiscal deficit (whether high or low tax/spend) is just sufficient to enable non-government net saving intentions.
Clearly, lower net saving intentions will mean full employment is attainable with a smaller fiscal deficit. In the case of higher net saving, full employment will require a larger fiscal deficit. For a currency-issuing government, the fiscal balance in itself is not an issue. The appropriateness of the fiscal balance can only be evaluated in relation to the overall economic context. Non-government net saving behavior shapes that context.
It is relevant, then, to ask what determines non-government net saving intentions? The short answer is: many things. Culture, political stability, past accumulation of private debt, the breadth and depth of the social safety net, the extent to which private saving is compelled (e.g. through compulsory superannuation), the current economic outlook, and much more. All these factors will have an impact on non-government net saving behavior.
Graeber touches on a significant determinant of aggregate saving behavior: income distribution. Because of different spending propensities across different income groups – the poor and middle class spend a higher proportion of income than the wealthy – a more equal distribution of income will tend to result in stronger private spending for a given level of income. It will therefore take less government net spending to maintain any given level of aggregate spending and aggregate income.
An implication is that non-government net saving intentions will tend to be lower for any given level of income when that income is distributed more equally. The requirements of full employment and price stability will then call for a smaller fiscal deficit. Again, this in itself is of no consequence to a currency-issuing government. What matters will be the moderated distribution and the more broadly distributed consumption patterns that follow.
Does that mean MMT says we must do it? No. It depends on our politics. Maybe we think inequality is good for its own sake, or an appropriate reflection of merit, productiveness, morality, or whatever. Maybe we think high unemployment is good for its own sake, or is beneficial in some way either for the unemployed or for the rest of society. If we want extreme inequality and high unemployment, MMT indicates we can cut taxes on the wealthy and increase them on the poor, increase corporate welfare and cut social services, and implement austerity measures to keep aggregate demand far too weak to sustain full employment. Every capitalist government in the world seems to be putting this set of policies to work. Either this is our political preference or we are acting in ways that are at odds with our preferences.
If, instead, we want full employment and less inequality, MMT indicates that in redistributing income downwards, we will still need to make sure that aggregate demand is sufficient to sustain full employment alongside non-government net saving behavior. Greater income equality, to the extent that it reduces the level of intended non-government net saving, will reduce the size of the fiscal deficit associated with full employment. However, a deficit will still be required if the non-government intends to net save.
As long as we continue with the present social arrangement of private property rights, private markets, private wealth accumulation, private debt and private superannuation funds, non-government will in all likelihood continue in its intention to net save, and that will mean full employment, if desired, will continue to require ongoing fiscal deficits except in a few small countries that run current account surpluses large relative to their domestic economies. At the global level, governments in aggregate will need to be in deficit.
As has been emphasized, for nations with sovereign currency systems, the need for ongoing fiscal deficits is neither a good nor bad thing. It is just the way it is. It causes no financial difficulties for the currency-issuing government. What matters, when it comes to fiscal policy, are its impacts on real outcomes such as the environment, the type and level of production, the nature and level of employment, the distributions of income and wealth in relation to a society’s expressed preferences, and other major social goals or priorities that a society might set for itself.