Krugman & 7DIF

>   (email exchange)
>   On Tue, Feb 22, 2011 at 9:15 PM, wrote:
>   Paul Krugman gave a speech at Florida Atlantic University and agreed
>   to a brief meeting with our econonomics club.
>   I thought you might enjoy the attached picture.

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108 Responses to Krugman & 7DIF

  1. gp says:

    Re: “It’s pretty astonishing that obviously intelligent and competent people can be so closed-minded in their own field.”

    It is not astonishing, it is usual. Paradigm shifts are extremely difficult to realize for many, if not most, people. Partly it is most often a case of vested interests of one sort or another, to be sure, but not entirely. A habit of mind, a fixed framework or lens that views the real, is not easily exchanged for another manner of thinking and evaluating. It may be easy for this or that person in relation to this or that field, but probably so not in every instance. That would require a total love of truth and an impartiality, detachment, and serenity of spirit that is extremely rare; in fact, a kind of sanctity.


  2. Jim says:

    “…it’s laws should be its laws.”


  3. Jim says:

    According to MMT, taxes are “absolutely” necessary. First, they establish the legality and legitimacy of the currency. You must pay taxes and only the fiat currency is accepted for payment of taxes. Coercion lies at the very core of the system: it is the driving mechanism. Secondly, taxes theoretically serve to diminish aggregate demand once full employment-productive capacity is reached and thus serve to forestall inflation.

    At any rate, it is not convenient to acknowledge this truth, because taxation serves not so much to enrich the rich further–taxes are just debits on the spreadsheets–but to keep the public in debt. It is a means of social control. After all, inflation is hardly a threat right now, but the government keeps taxing anyway. Moreover, this theoretical use of taxes as brakes on the system is just that: to change tax laws requires a lengthy political process; it doesn’t work like the so-called automatic stabilizers in the economy. Fiat money is theoretically merely a way to keep faciliate the exchanges and accounts of the market process of buying and selling economic goods. But in practice, it functions to greatly empower government, and as Rothschild said, “Give me control of a nation’s money and I care not who makes it’s laws”


    Neil Wilson Reply:

    Moreover, this theoretical use of taxes as brakes on the system is just that: to change tax laws requires a lengthy political process;

    That’s only because of the political process. It is fairly simple to alter that via delegable powers within a range or with a target.

    For example it would be straightforward to pass primary legislation that gives the Fed the ability to vary, say, a Land Value Tax between x% and y% to control demand inflation. Such a tax would be paid be Freeholders or those with a primary charge over the Land (ie mortgagors).

    Or any other tax system you care to design.

    Simple. After all the Fed already has the ability to jiggle monetary policy unilaterally without politicians getting involved. It’s not a huge leap for the Fed (or any other ‘independent’ institution) to do Flow control using taxation.

    The real problem is the mental block on doing that.


    beowulf Reply:

    It’s not a huge leap for the Fed (or any other ‘independent’ institution) to do Flow control using taxation.
    You’re absolutely right. I made the point at the Saudi thread that the Fed already has taxing power with its authority to levy transaction fees on wire transactions. Doesn’t matter if you call it a “user fee” or a “tax”, same difference since Fed earnings are transferred to Tsy General Fund). To excerpt some of what I wrote over there (but can’t link directly):
    “The Monetary Control Act of 1980 (MCA) requires the Reserve Banks to recover fully, over the long run, the costs… associated with the provision of most financial services they provide…Fedwire transaction fees are charged to both the originating institution (debit side) and receiving institution (credit side)… volume-based transaction fees range from 8 cents to 26 cents per transfer, per institution…Fedwire processed an average daily volume of approximately 521,000 payments… of approximately $2.7 trillion.”

    “Because the ultimate CHIPS settlements are provided by Fedwire, CHIPS is a customer, as well as a competitor, of Fedwire… daily value of CHIPS transfers is about 80 percent of Fedwire’s non-securities transfers.”</i

    Levying the tax on transactions going through the Federal Reserve Bank system (Fed) would be one of the most technically feasible implementation options for a
    broad-based transaction tax…[however] at the nominal rate of 0.01%, the effective annual rate ends up at 5%, rendering many transactions useless.×

    No reason for Congress to impose a new transaction tax (as economist Edgar Feige has proposed with his APT tax) when the Fed already sets and collects a transaction user fee that it can raise at any time. In terms of controlling inflation, it actually doesn’t matter if user fees set by BOG (presumably more than 8 cents per transaction but less than 0.01% per value of transaction) netted Tsy any revenue since Quantity of money theory is P(t) = V*M(t)

    To control P (price level), draining V (velocity of money) works just as well as draining M (money in circulation). And nothing kicks the crap out of V like a transaction tax (err, “user fee”). :o)

    I’m with you on the LVT. However in the US, property taxes are levied by state governments (technically by local tax commissioners, but state sets rules). Since the Fed already has the power to drain reserves with transaction fees it can adjust as conditions warrant, Congress could simply give a 100% federal income tax credit for LVT payments to state/local governments. State lawmakers would quickly shift their tax burden onto land value since levying any other tax (sales, income, property improvements) would force their citizens to pay federal taxes they don’t have to.


    beowulf Reply:

    Ugh, sorry for the all-italics.

  4. Howard says:

    And the Indians would do well to heed it. They certainly don’t do so now.


  5. Howard says:

    I think it is enough to say that that government “issues” currency in the form of crediting bank accounts; and that taxes debit or remove money from bank accounts. This is a concrete phenomenon that every citizen is aware of. They get paid and they see their bank account decrease. They pay taxes–or the mortgage, or anything else–and they see the bank account diminish.

    That taxes are not necessary to fund anything simply infuriates people. At least one they think taxes pay for public works they can mollify their feelings at having their earnings taken away by government. But to accept that it is to “diminish aggregate demand” is simply unacceptable–it is far too abstract. Besides, changes in taxation are not like turning a dial: they are a political process difficult to integrate in the idea that they are merely an efficient control over inflation. In addition, right now we are hardly experiencing full employment, yet government continues to tax, precisely. Add to that the idea that at root the taxes really are the driver of the system, and you confirm all feelings that government is imposed and not agreed upon. Coercion is not palatable.
    I might add that it is not difficult to foresee the possibility that states might revolt against paying federal taxes. Many of them might be able to function quite well independent of the Union. Just ask Texans.

    An important confusion is created with the word “spend.” The government does spend in buying goods and services, but it has no diminishing bank account. This is what citizens just can’t wrap their head around: the public firmly believes “there ain’t no free lunch.” Government spending is at once a “paying into” the system and a purchasing operation. But the money is free and not “earned”: this is the moral conundrum that I believe lies at the very root of the inability or unwillingness to accept the MMT description by the common man–and which also increases his suspicion and contempt for government; it all seems parasitical, deceptive, and coercive at one and the same time. MMT writers tirelessly repeat the basic truths, but they do not address the psychological and cultural obstacles preventing the acceptance and assimilation of the truths. As the Buddhists would say, they lack “skill in means.” MMT has to come up with a narrative and lexicon of its own, and not try to fight on the “enemy’s” ground–or an uphill battle, if you will. It’s no good to go on insisting that these are accounting or operational realities, etc. That simply does not convince people. It is emotions and associated ideas that are in question here, and it is these that have to be addressed. People are far more swayed by feelings than by ideas alone; or rather, the ideas have to be properly clothed and presented: “skill in means.” Any effective salesman or politician or diplomat, or even a good teacher or parent knows this; it’s second nature to them and self-evident.


    Tom Hickey Reply:

    There is an ancient Sanskrit proverb. It is now the national motto of India.

    Truth alone triumphs. (satyameva jayate)
    — Mundaka Upanishad


    Patriot Reply:

    It has a lot to do with the “taxpayer” mentality, where people have been encouraged to think of themselves as “buying” government services. See the infamous “California Tax Payers Association” for proof of this.

    In reality, if we look at the economic system from an MMT perspective, then the reason that we pay taxes is not to “buy” services on a dollar per hour basis, but as an obligation that helps keep things running.

    And, public employees should perform their services for people not because the people “paid” for it, but as part of the public servants’ obligation to the citizens on whom they depend, and who depend on them for the smooth functioning of society.

    That’s a difficult proposition in a time where most people have been indoctrinated to think of themselves as consumers and not as citizens. Therefore, our argument as MMT proponents must be in favor of citizenship and against the narrow consumerist mindset.


    Neil Wilson Reply:

    but as an obligation that helps keep things running.

    It’s more to create non-inflationary space in the economy where public goods can exist.

    If public goods don’t create any inflation then there isn’t any need for taxation.



    right, the real cost of govt spending is the actual goods and services transfered from private to public domain


  6. Danf says:

    Google “how the Fed works” and you get every crackpot from Ron Paul to the Von Mises Institute.

    There is no good source on MMT that is accessible to the general public. Until you get some real marketing it won’t happen.


  7. Tom Hickey says:

    Warren in ##14 at February 27th, 2011 at 9:04 am

    Warren Mosler Reply:
February 27th, 2011 at 9:04 am
    Jamie Galbraith and I worked on Bruce for over an hour on monetary operations a few years back and seemed he simply had no ability to grasp it.
    Kind of like people who can’t do math, or can’t do languages.

    Warren, I’d like to hear more about this, not necessarily about the person, but why you think this is so difficult to get. I would assume that explaining sectoral balances and demand leakage would make it clear, and this is simple algebra. Do some people just have closed minds. Mike Norman reported a similar experience recently, too.

    I recall Barry Ritholtz saying that your numbers don’t add up. What can he possibly mean? I have asked him a couple of times in his comment section, but no response.

    Krugman, too, in his blog duel with Jamie, where many MMT folks jumped into the comments.

    The examples multiply.

    It’s pretty astonishing that obviously intelligent and competent people can be so closed-minded in their own field.

    Without getting some of these “experts” on board, it’s going to be difficult to convince other people, many of whom take their cues from them. Could we be doing anything differently from our side?


    Rodger Malcolm Mitchell Reply:

    “Could we be doing anything differently from our side?”

    Tom, yes, that’s my question. One possibility. We have allowed the debt hawks to frame the discussion by naming the key elements. “Debt” and “deficit” have powerful, everyday meanings.

    There is no way we will convince the media and the populace that “debt” and “deficit” are good things. It would be like trying ton sell a new cola called “Vomit” or “Rat Poison.”

    Perhaps instead of “debt,” we should refer to “Treasuries sold.” And perhaps instead of “deficit” we should call it “federal money supply.”

    I really think we have allowed the semantics to carry the day. Thoughts?

    Rodger Malcolm Mitchell


    Tom Hickey Reply:

    I have long thought that the lynchpin is the false government-finance-is-the-same-as household-finance analogy. The point to convey is that government is the currency issuer and nongovernment (including states in the US) is the currency user.

    People don’t know how money is created and think that it is a scarce commodity — only so much that has to be shared — instead of being a flexible medium under the control of government as the monopolist.

    The next problem is getting to macro. Even a lot of economists presume that macro is just micro scaled up.

    There’s an opportunity for someone to write a popular book on this, breaking it down and making it accessible. Warren’s 7DIF is a good start. Now what is needed is a complete articulation of the basics of MMT and their policy implications. A good book could be the outcome of a collaboration of a liberal and a conservative, showing different policy options.

    Randy Wray’s Understanding Modern Money is accessible but it’s not written in a popular style. To be successful and also accomplish the purpose, the book would have to be clear, brief and precise, but also simple and engaging, with practical examples from recent events familiar to everyone.


    Peter D Reply:

    People don’t know how money is created and think that it is a scarce commodity — only so much that has to be shared — instead of being a flexible medium under the control of government as the monopolist.”

    See, Tom, I don’t think this is the case. In fact, every time I try to comment and educate people on MMT, everybody understands that money can always be “printed” (not a term that Warren likes, but nevermind.) The problem is that people assume that printed money automatically leads to inflation. I think the challenge of MMT is not to convince people that money is “a scarce commodity”, but that injecting money doesn’t lead to inflation when economy operates with slack capacity.


    I’ve become more ok with ‘printing money’ as a description of govt. spending, as long as I add that taxing is ‘unprinting money’

    MamMoTh Reply:

    I totally agree with you Peter. That’s why I criticize the obsession with the taxes don’t fund anything mantra. Everyone understands that money can always be printed, and that it can be shred. For any given G, T funds the net injection (G-T) when positive. So the main point is arguing that this injection is not (necessarily) inflationary.

    Neil Wilson Reply:

    The important point to get across is when the non-government sector metaphorically stuffs a load of currency under the mattress then that puts it out of use just like shredding it with taxation.

    It plays no more part in proceedings until it comes out of the mattress.

    Tom Hickey Reply:

    What I notice is that there is pretty widespread cognitive dissonance on this. Many people hold both the government/household analogy and the fiat currency is inflationary conviction. They switch back and forth. One what to get them over this is showing them the contradiction arising from their cognitive dissonance.

    For example, most people think that if someone gets a benefit, the someone else must be taxed now or later. They know that government can create all the money it wants, but they think that restrictions have been placed on this preventing it — borrowing to “finance” deficits and the debt limit for example. So they can justify holding both a fixed pie and the also possibility of rampant inflation if government is not held on a tight leash.

    They don’t get how the size of the pie changes based on shifts in sectoral balances.

    Tom Hickey Reply:

    Sorry, but that is the truth. People are not paying for anything with taxes. Get used to it.

    Democracy is supposed to work by lying to the people because they just can’t handle the truth? Really?

    Tom Hickey Reply:

    Warren: I’ve become more ok with ‘printing money’ as a description of govt. spending, as long as I add that taxing is ‘unprinting money’

    “Burn money” is more graphic. “Shred” is OK too. “Unprint”? Meh. :)



    unprint directly shows how it ‘reverses’ printing?

    Tom Hickey Reply:

    Yeah, but “unprint” isn’t a word, unless you are aiming to coin one, and it doesn’t really convey the sense of destruction. Taxes withdraw (destroy) nongovernment net financial assets. That’s why the “burn” and “shred” language is appropriate. It’s stark.

    In think that we really have to convey the idea that taxes are used to fund anything. They aren’t saved by government or spent by government. Taxes just destroy nongovernment NFA. That’s it. Obviously, the response has to be either, “That’s insane,” or “Why.” “That’s insane” signals the need for further explanation, while “Why” is a signal to proceed to FF.


    I sort of like ‘unprint’ for those reasons. It conveys the utter reversal of ‘printing’ with emphasis from using the same root word. And using a non word is a means of emphasis as well. It’s something hard to refudiate.

    MamMoTh Reply:

    No way! Can you imagine the day MMT goes mainstream and you complain to that bloody public servant who is not doing his job whilst you are paying his salary and he laughs at you and tells you your money has been shred? (or burned, or unprinted)

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