MMT as Engine of Inequality
MMT avers that Federal taxation works as calumny doth per Shakespeare: it Robs me of that which not enriches him, And makes me poor indeed. MMT sees Federal taxation as useful to combat inflation and maintain demand for the currency, but recognizes neither taxation nor borrowing as adding to the U.S. Government’s checkwriting capabilities, which in its view are expressed by the act of appropriation itself, no “pay-fors” involved.
“Taxes only have to be raised if we have too much spending power, and the economy is doing so well and unemployment is so low we want to cool things down with a tax increase, to keep inflation where we want it.”
http://moslereconomics.com/2009/07/17/federal-taxation-for-dummies/
Once we acknowledge that Federal taxation augments USG spending accounts, we can contrast the MMT argument, via Ruml, that Taxes for Revenue are Obsolete, with a policy founded on Eisenhower-era tax rates whereby Federal taxation simultaneously funds the public purpose and curtails the accumulation of dynastic wealth that is otherwise destined to control the political realm.
So: the first way MMT-inspired policies foment economic inequality is via the tax channel.
The second way inheres in spending beyond taxation, which I’ll call, without disparagement, deficit spending. I affirmed its desirable effects enthusiastically in an earlier post. But there’s an adverse consequence as well: financialization of the economy because of the different rates and mechanisms of redemption in commercial bank money vs. reserve balances and US Treasuries.
You’ll recall that we rely for most of our spending on commercial bank credit, the primary constituent of M2. Like any liability, commercial bank credit vanishes when redeemed to its issuer.
As we described in the Introduction, the money in your checking account is money the bank owes you, not money it is holding for you. So when a bank charges a service fee to your checking account, it obtains no money from you. Rather it ceases to owe some money to you. The money aggregate M2 is diminished by the stop payment fee or the safe deposit fee, whereas it’s unchanged if we spend a like amount at the hardware store. What Dr. Kelton depicts as happening when we pay Federal taxes actually does happen when we make payments to the bank, be it principal, interest or fee. Money is erased from the economy, and not in the temporary form of disintermediation that obtains when we withdraw cash at an ATM, but for real and for good.
So consider a highly indebted society such as our own. Individuals, institutions, businesses and governments are overwhelmed with debt to pay back to the bank. The multiplier effect that attends USG spending diminishes with the increasing likelihood that the next person we pass the funds to will be using them to repay bank debt, student debt, mortgage debt, credit card debt. Principal, interest or fee, that money is extinguished, the multiplier effect curtailed, the circular flow short-circuited.
Now consider what happens when USG sells a billion dollars worth of Treasuries to augment the TGA, and directs the funds to what we’d both consider a vital purpose. USG gets one spend of the funds for which it has sold the Treasuries. Does the flood worker, let’s say, get the Net Financial Asset? No, she gets the bank account increment, the Debt Deflation money, rapidly dissipated by her debt repayments and those of those that she pays and they pay.
USG, for its one spend, must repay that Treasury, with interest compounding unto eternity. The bondholder, most likely a financial institution or one of 1%, gets the Net Financial Asset. In exchange for its essential, magical service of transforming USG’s cumbersome IOU into an effortless tap-to-pay, the financial institution has an asset that will accumulate forever, via rollover of the Treasuries, the interest upon them, and upon the Reserves they engender. And another institution, the fees and interest charged to the bank customer.
Reserve balances of depository institutions expanded in the face of the Global Financial Crisis from $46B in September 2008, to a recent peak of $4.188T in December 2021. The explosion in reserve balances made it infeasible to manage interest rates via Fed Funds Rate. Thus began the regime of Interest on Reserve Balances as an incentive to commercial banks to abridge their lending. (Banks do not lend reserves, but bank loans lead to borrower’s checks written and thus adverse reserve clearances, so a higher IORB raises the opportunity costs of bank lending.) As of July 2024, the Reserve Banks were paying depository institutions 5.4%/yr on $3.302T in reserve balances. These incentives not to lend, achieving policy interest rate goals by an extraordinarily expensive and stimulative mechanism, reduce dollar-for-dollar the profits the Reserve Banks are able to remit to the Treasury.
This process is inequity institutionalized. Financial Conquest, as Michael Hudson would say. Not sovereign. Not stock-flow consistent. Deposit Currency Go Pfft! The MMT claim that USG’s red ink is “our” black ink is disgraceful demagoguery.