Groucho Marxism

What are taxes for? Everyone thinks they know the answer to this question: To pay for public services. In this blog post, I will put forward the idea that this answer is incorrect, and that taxes do not pay for public services at all. This idea comes from an economic school of thought known as ‘Modern Monetary Theory’, or MMT for short. The basic tenets of MMT are: 1) a currency-issuing government can pay for any goods and services it needs that are on sale in that currency without having to obtain the money first; and 2) a currency-issuing government can never default on debts issued in that currency. In a nutshell, MMT argues that contrary to popular belief, government spending must come before taxation and borrowing and it can never be the other way round.

To see why this is so, ask yourself the following question: If the government didn’t spend the money first, then where else would the money to tax or borrow come from? A moments reflection should be enough to convince you that the question has no answer. Where else could the money possibly come from other than from the government that is solely responsible for issuing the money? An educated critic might respnd that private banks create money when they make loans, which is correct (although is again contrary to popular belief which holds that banks simply act as intermediaries that loan out other people’s deposits). But private banks are only allowed to do this under strict rules and by licence from the government, which effectively has a monopoly on money creation.

So if taxes aren’t needed to fund public services then why tax at all? The answer is that taxes give money value by creating a demand for it. Governments levy taxes on their citizens and decree that these taxes can only be paid in the currency they issue, which ensures that people willingly give up goods, services, and labour-time in order to obtain this currency. The idea that governments need to create a demand for money seems absurd at first as we are used to there being a constant demand for money. But when you think about it, what’s actually absurd is that people willingly give up things they value to obtain some made-up numbers with zero intrinsic value. It is necessary for governments to imbue these made-up numbers with value, and they do this by levying taxes.

Similarly, you may ask: Why do governments borrow, if they can simply spend money into existence? The thing to note here is that government ‘borrowing’ isn’t really borrowing, at least not in the sense that people normally understand the term. Rather, it is the process of issuing bonds – essentially, savings accounts – to the private sector. Most governments have a rule that any difference between government spending and taxation must be made up with borrowing (i.e. bond sales) of an equivalent amount; but this rule is self-imposed. There are various theories as to why governments really do this which I won’t go into here. But the key thing to note is that a currency-issuing government never needs to borrow money in order to make up a budget deficit.

There are a few caveats that should be made at this point. First, the arguments sketched out above only apply to currency-issuing governments, so do not apply to local or regional administrations that really do have to obtain money before they can spend it. They also don’t apply to otherwise sovereign nations within currency unions such as the Euro-zone (which is one reason why joining the Euro is a terrible idea). Furthermore, they don’t apply when a currency is linked to a commodity such as gold, as was the case for countries on the gold standard. It is also possible for currency-issuing states to rack up debts in currencies they don’t issue and to then default on these debts. But the majority of nations today issue their own currency, are not on the gold standard, and do not have significant foreign-denominated debts; for these nations, the arguments above remain perfectly valid.

MMT is an explanation of how government spending, taxation, and borrowing really work, and as such is in theory apolitical. In practice, however, those on the right of the political spectrum tend to despise these ideas and try to tear them down at every opportunity. One reason right-wingers hate MMT so much is that it cuts right through the narrative that governments have no money and therefore must obtain money from the private sector in order to pay for public services. This narrative is extraordinarily beneficial to the capitalist class, as whenever governments threaten to increase taxes on them they can threaten to leave the country and deprive the government of the money it needs. MMT demonstrates just how empty this threat is: a currency-issuing government simply doesn’t need rich people’s money.

Another reason right-wingers hate MMT is that if taxes are not required to for raising revenue, that frees up taxes to be used for other purposes – in particular, wealth redistribution. Yet another reason is that MMT  cuts through the narrative that governments cannot do anything about unemployment. Maintaining a class of unemployed workers is essential to the functioning as capitalism, as it disciplines the working class and ensures wages don’t get too high so that capitalists can maintain their profits; this is what Marx referred to as the ‘reserve army of labour’. MMT economists often propose the introduction of a job guarantee, whereby the government provides a job to anyone who cannot find one in the private sector. A currency-issuing government is able to do this as it is not revenue constrained.

MMT is the theory that naturally emerges once you accept that currency-issuing states can create money at will. Almost everyone accepts this basic premise but relatively few people seem willing to accept the conclusions that logically follow. As we have seen, this reluctance is political rather than economic. It is particularly important that socialists embrace the MMT narrative – primarily because it is true, but also because it neatly debunks so many erroneous economic arguments put forward by capitalists. Until we do, we will be confined to fighting economic battles on terms dictated by the ruling class, and these are battles we can never win.