MMT as opponent of democracy and tool for entrenching inequality
Cross posted from Pruning Shears.
Disclosure: I am not an economist and have no formal training in the field. What follows are the observations of a layman.
Last week Naked Capitalism had a post by Randy Wray about Modern Monetary Theory (MMT). The theme was taxes and inequality, and the comment thread on the post is fascinating. Funny enough, while (unbeknownst to me) the debate there was raging over there, I was on Twitter having a much less edifying argument with an MMTer on roughly the same topic. Sublime to the ridiculous, as it were.
Between the two I was able to bring into focus some nagging, amorphous reservations I've long had about MMT. Here is my brief understanding of the concept, and corrections/clarifications from knowledgeable theorists are appreciated:
Taxes do not fund spending, and there may in fact be no connection at all between the two. Their macroeconomic purpose is to, as Wray writes elsewhere, prevent a "huge increase of aggregate demand, [which] could cause inflation." The federal government simply determines what it wishes to spend on, creates the reserves to fund them, and spends away. Taxes are, at best, a distant concern in MMT. They may in fact be entirely irrelevant, as evidenced by the very first two words in Wray's headline: Forget Taxes.
If that sounds like an oligarch's wet dream to you, you're not alone. Dan Kervick thought so too and commented (emph. in orig.) (also - "schmunding" is my new favorite word):
The Federal government cannot simply create all the dollars it wants and spend them without blowing up the currency. It has to tax back at least a substantial portion of what it spends. Now some think it it is really important to jump up and down at this point and say, "That's not funding! It's...it's...schmunding!" But it doesn't matter. From a policy point of view it's the same thing. You can and should convince people to run reasonable deficits. It would be nice to convince people at the same to make sure the Fed holds treasury rates down next to nothing so that Federal deficits aren't a tool for the rich to rent-farm the public treasury. But the free-wheeling, what-me-worry fiat money mania that MMT has allowed itself to be turned into is for the birds. It's both a political and economic dead-end.
There was a time when its seemed like the MMTers were going to get serious about price theory, about defining the inflation constraint in more precise theoretical and mathematical terms, and about coming up with policy rules that turned an airy framework into something policy-makers could really grab hold on. But instead they decided to stop doing research, stop engaging with any other economists and focus everything on marketing and "framing" with slogans and pictures.
And of course it matters what we spend public money on, and not just that we spend it. But if you want to expand the state, expand public education, build a national health care system and build an honest-to-goodness national pension program that works, you're going to have to raise revenues. Every hour spent kneecapping the people who want to go this route by imagining that there is a magical free money path that lets us spend freely, lets all the billionaires keep their money, and that even a hedge fund manager could love, is an hour wasted an an agenda which will never succeed politically and is crackpot policy in any case.
Lambert responds: "I don't recall claiming there was a bottomless money well; and I'm thoroughly familiar with the 'ZOMG!!!! Zimbabwe!!!' argument and how to debunk it." He doesn't do any actual debunking, though. This is one of my reservations about MMT: its adherents seem extraordinarily reluctant to address concerns head on. I've followed MMT casually, and I've seen lots and lots and lots of (virtual) ink spilled about how government can simply fund what it wants, period. MMTers are nothing if not voluminous. But boy howdy does inflation get treated lightly. You've really got to comb through the writing to find it, and it typically is relegated to a brief, oblique reference ("when potential inflation threatens" and such).
In the same comment lambert writes "If you want MMT to propagate widely, its exposition needs to be simplified and popularized." That's exactly why Kervick is right on this one. The way MMTers put the goodies front and center, and barely (if at all) discuss the risks, makes the "bottomless money well" caricature stick. They may discuss it substantively elsewhere, but it is not presented in commentary packaged for public consumption. Again, not addressed head on. If the best response MMTers have to that is "please see [48 page PDF]," then popularization fail. Requiring casual readers to have a near-comprehensive understanding of a topic is called a contradiction.
As for the charge that MMTers have stopped doing research, engaging with other economists and focused everything on marketing, at least one adherent essentially pleads nolo contendere. Joe Firestone describes himself as something of an authority on MMT ("one of the MMT writers, immersed in the MMT community") and had this to say about Warren Mosler's prospects before a theoretical Congressional committee:
Warren would have the support of the other [MMT economists], all academic economists with plenty of publications...Warren's really brilliant; all the others I've named really think so, and his common sense wrap is very plausible. Finally, he's unflappable, and knows his theory very, very well.
Epistemic closure? Check. Absence of an economic model? Check (also, I should hope he knows his own theory very well!) Emphasis on marking? You betcha. What's being described here is not a field of technical expertise but a priesthood.
What emerged in both my Twitter shitfight - where the individual I was arguing with could not get off the "taxes don't fund spending!" talking point even after I had conceded as much four times - and the thread at Naked Capitalism was an almost bristling opposition to discussing tax policy, at least among some MMTers. Lambert ("Obviously, we should tax the rich painfully,") and Joe ("Measures like that worked in this country for a very long time to reduce inequality, and I think they can work again") are in favor of taxing the rich, but they - and MMTers generally - only say so parenthetically. Forget taxes, right? The justification for taxes, if it exists at all, does so outside the ordinary scope of MMT. Taxes, as characterized by MMT's would-be popularizers, exist only as caveats and footnotes.
This makes MMT a tool that can be used for progressive ends or regressive ones. The MMT church of lambert, Firestone et. al. includes a book that calls for taxing the rich. A more fundamentalist denomination would seem to consider that book apocryphal, heretical even. After all, the next step after forgetting taxes is to do away with them entirely. Raise them? Burn the witch!
There is a kind of magical thinking among MMTers about the possibilities of their new theories, combined with a steely-eyed realism about the shortcomings of the existing system. I'm not quite sure how to reconcile that. For instance, Wray says this about the rich: "Trying to punish them with taxes is a fool's errand." (How does he explain the increase that occurred when the Bush tax cuts expired?) His preferred solution? "Put a thousand of Wall Street's 'finest' behind bars."
So, trying to increase the top marginal rate: A pipe dream. Having a starved and captured regulatory authority assemble the monstrously complex case required to prosecute individual executives - when the Attorney General of the United States has already explicitly said these very people have been granted a free pass - THAT, my friends, is the real-world approach MMT favors.
And what kind of bullshit is this:
Let's raise sin taxes on the rich to reduce the sin of ill-gotten gains.
How high? 100%? Nay, 1000%. Take everything: all their income, all their wealth, the house, the car, the dog. Don't let crime pay.
Calling prosecution a "sin tax" is a transparently phony way to get people to think a fundamentalist MMTer is actually (finally!) proposing a tax. The only problem is that it doesn't, you know, actually tax anyone - most especially not our precious, irreplaceable rich. Nay, not 1000% thanks. How about we start with a marginal income tax of, say, 75% at $5 million? And leave your sin tax in that fabulous world that has a functioning justice system for elites.
More magical thinking. Lambert has no illusions about the problem of translating additional raised revenue into just and equitable spending: "Suppose we raised a trillion new dollars with progressive taxation, and then blew it on a manned space mission that the oligarchs to build Galt's Gulch on Mars?" Yes, that sort of useless outcome is a very real possibility - and given our recent history even a likely one.
Yet look at how Firestone characterizes the MMT alternative: "using by platinum coin seigniorage [PCS] to fill the TGA with enough to pay down the debt and cover deficit spending for a long time to come." How exactly does PCS get used for such a public-spirited purpose when existing (and probable future) spending mechanisms get wrenched by the 1% to their own purposes? Is the novelty of PCS our secret weapon? If so we've only got one shot; it will just be re-appropriated for boondoggles once the powers that be know to expect it. (Um, shouldn't we be taking this discussion offline?)
The liberal denomination of MMT is already getting set up for a "MMT cannot fail but only be failed" outcome. They want it to be used to create just and popular policies, but seem to think MMT will provide some kind of painless shortcut. No, the fight is the same either way, and it will inevitably be ferocious. There's no sneaking it past anyone. As soon as MMT gets traction in Washington, it will be used to slash taxes on the rich, and pre-distribution will go where the current owners wish. At which point, please spare the rest of us your "where's my fucking pony?" outrage.
Instead of going to all the effort of establishing a new economic paradigm, one that is agnostic on taxes and as likely to be hijacked as the existing one, why not have the fight right now on the same ground? Because it's not, as Yves Smith incorrectly notes in her introduction to Wray, about redistribution for redistribution's sake, but redistribution for democracy's sake:
Scandalous as it may sound to the ears of Republicans schooled in Reaganomics, one critical measure of the health of a modern democracy is its ability to legitimately extract taxes from its own elites. The most dysfunctional societies in the developing world are those whose elites succeed either in legally exempting themselves from taxation, or in taking advantage of lax enforcement to evade them, thereby shifting the burden of public expenditure onto the rest of society.
(Fukuyama's piece is a bit, shall we say, heterodox. For as resonant as I find the preceding quote, there are some other items that are a bit eye-opening. For example, on the newly installed Obama White House: "Administration principals thought they had a mandate to move the country sharply to the Left...But as it turned out, Obama was not riding a tide of left-wing populism. While the Democratic majorities in Congress succeeded in moving this ambitious legislative agenda forward, the results fell far short of expectations." That's not quite the 2009 I remember!)
Taxing the rich is important because it measures our health as a democracy. It's not something to put, as Firestone would, at the end of several "staging initiatives.". Or rather, maybe that's an acceptable sequence from an MMT perspective but it's completely unacceptable from a democratic one. Demonstrating the ability to once again extract wealth from elites needs to be one of our highest priorities, not an afterthought. And it needs to be done directly via the income tax.
Wray has literally no proposal for extracting wealth from elites, and once again: the intellectually dishonest "sin tax" he describes ain't it. Firestone approves of taxing the rich; but he also wants to "diminish the importance of conventional corporate forms in our society, and measures limiting total compensation of executives," and to do so by "legislating structures of vigilance" (needz moar popularizing!) But again, that just highlights the problem with MMT: It's being sold as a theory that is inherently just and progressive when it's just a tool. It might liberate those who have suffered the most under the current system. It might be inequitable and exacerbate current problems.
Why re-invent the wheel? The answer to Firestone's structures of vigilance is hinted at by washunate: "We still have the IRS, too. And the SSA. Taxation and social insurance are two of the things that have survived the assault on Constitutional governance and rule of law, comparatively speaking, the best over the past few decades." The link between being able to collect what is owed and the provision of public goods is underappreciated. Both are key for equitable redistribution, but the former is also radically democratic because it extracts wealth from elites. The fact that the both agencies are objects of great antipathy among the wealthy is also instructive.
As for the argument from MMT that the rich will just get new loopholes, give themselves raises, and otherwise subvert any attempt to extract their wealth, the response is simple (though not necessarily easy): Prioritize and fund tax collection. Think of it as democracy insurance, and like with other insurance you get what you pay for. Consider this from Econned (pp. 187-8, emph. added):
But there are much deeper problems with risk management as commonly practiced. The junior risk managers will earn more if they can apply their analytical skills on the product side. Anyone who is thinking about making that change is unlikely to ruffle the feathers of the producers. In addition, risk managers are bound to sound some false alarms. If they escalate every one, they wind up looking like nervous Nellies and lose credibility. And if they win and have exposures cut back on what turns out to be a nonevent, the traders will be sure to broadcast how much they "lost," as in failed to make, thanks to the interference.
That narrow view illustrates a deeper problem: risk management is a form of insurance. Effective insurance is costly. You expect to miss a few calls, quite a few. But the noise back from the "money colonels" and the perceived importance of maximizing current extractable value means that the expense of taking protective measures is deeply resented. The predictable result was that the banks wound up being underinsured.
In fact, the obvious failings of risk management reveal an ugly truth: it is an exercise in form over substance. If a firm was serious about this sort of thing, it would not structure a supposedly crucial activity in such a way that guarantees that it is politically weak and easily suborned. Risk management is often an exercise in providing cover for managers and directors, and thus serves as another tool to hide looting.
If the IRS is viewed as being linked to social insurance, Smith's point is especially true: good insurance costs money. (And the ongoing attacks against the agency are an attempt to make it politically weak.) If you raise taxes on the rich, you damn well better be prepared to purchase a good policy for enforcement. The IRS would need to be expanded, its agents made knowledgeable of loopholes and encouraged to go after tax cheats (instead of its current state), and generally have to become much more robust than it currently is. It would need, in short, to be an object of screaming horror among the rich.
But the point is, the needed mechanism already exists. We don't need a new one, or some comparable thing, we just need to make use of what we've got. And we also need to understand that efforts to address inequality will never be settled. It will always be a fight, and each generation will have to fight it. There is no spell that will vanquish it for all time. MMT is being sold as just that, as a cure-all. It isn't. It's a tool. Why not just use the tools at hand? It will be a struggle no matter what. Why make it harder than it already is?