Let’s play the “pay for” game. Suppose you want to spend $3-$10 trillion on a Build Back Better agenda. You’ve decided that you’re going to play the “pay for” game, which means you will show where every dollar you plan to spend is going to “come from.” 1/
The whole point is to appear “fiscally responsible,” showing that you can carry out your spending without adding to the deficit. In other words, for every dollar you want to spend INTO the economy, you have a plan to rip a dollar OUT of someone’s hands. 2/
The Biden administration has put forward their plan, which mostly relies on raising taxes on corporations. The president says it will raise more revenue (over 15 yrs) than he is proposing to spend (over 8 yrs). Don’t ask me why. 3/
Along with some other changes, the Biden plan would take the corporate income tax rate from 21% to 28%. Already, a number of Dems are balking at 28% and chattering about going to 25% instead. And, of course, CEOs are fighting back. 4/
If Dems don’t have the votes to go to 28%, then what? Scale down the package? Fight over other ways to raise taxes? The opposition loves it, because they know that the odds of passing anything bold drop precipitously when Dems hold themselves hostage to the “pay for” game. 5/
Is there a way out? Setting aside the MMT solution, which is to stop playing the conventional “pay for” game altogether, why not simply take the IRS Commissioner at his word? Why not make the case that you can spend up to $10 trillion without raising a single tax? 6/
If all you need is stepped up enforcement of EXISTING TAX LAWS, then you can play the “pay for” game even if you can’t get the votes for a slew of tax increases. Maybe I’m wrong and the votes are there. Give it a shot! 7/
Both strategies get you the revenue you think you need, and both reduce inequality. So I guess I’m curious to know whether the administration is digging its heels in on the need to RAISE TAXES or whether they would accept HIGHER REVENUE to play the game. 8/
As I’ve been saying for months, there’s yet another way to play the “pay for” game. Just make the case that the money you spend ‘today’ will come back to you ‘tomorrow.’ Fiscal multiplier and all that. 9/ larrysummers.com/2014/10/07/why…
Alternatively, we could all grow up and stop this nonsense. Admit that taxes don’t “pay for” anything and that all government spending is paid for in one way and one way only—the Federal Reserve credits the appropriate bank accounts. 10/end
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Why does the government almost always spend in excess of taxes --i.e. run a budget deficit ? A 🧵 1/
The short answer is that the rest of us, on average, typically want to accumulate more US$ than what is required to pay taxes. That is, we want to net save US$. 2/
Government spending in excess of taxes--deficit spending--manufactures the $US that enable the rest of us to net save. 3/
"Each time the Federal Reserve acts as a lender of last resort, it prevents some financial institution or some financial market from collapsing. 1/
When it does this, it introduces additional Federal Reserve liabilities into the economy and extends a Federal Reserve guarantee over some set of financial practices. 2/
Thus in 1966 it protected banks that used certificates of deposits, in 1969-70 it protected the commercial paper market, and in 1974-75 it extended the Federal Reserve guarantee to those who owned the liabilities of offshore branches of American banks. 3/
🧵
20 yrs ago, Scott Fullwiler wrote this paper, comparing the (then extant) practice of hitting interest rate targets via day-to-day open-market operations and managing TT&L accounts with the yet-to-be-adopted practice of paying interest on reserves. 1/ papers.ssrn.com/sol3/papers.cf…
Scott concluded that instead of replacing non-interest bearing reserves with interest-bearing Treasuries, it would be far "more direct and more efficient" to turn the non-interest bearing reserves into interest-bearing reserve balances (IBRBs). Treasury could then stop issuing securities altogether. 2/
But don't financial markets need Treasuries for a whole variety of reasons? Could we really just stop issuing them? Scott explains why the answer is yes. 3/
"If we could wave a magic wand and wipe out Treasury interest payments, we would have a lot of desperate people who had lost the income from savings bonds, Treasury bills, notes, and bonds and the pension funds that were holding them... 1/2
This in turn would mean less spending on goods and services, less production, and less employment for a lot of other people." 2/2
~Robert Eisner (1994)
"It is sometimes argued that this involves a regressive redistribution of income, on the assumption that the rich receive interest income...
If you see the MMT documentary, Finding the Money, you’ll hear about my struggle to make sense of @wbmosler’s ideas, including his argument that the three-sources view of public spending was wrong. 1/
Like any Econ student, I had been taught that government must choose how to pay its bills: Tax, borrow, or print.
@wbmosler argued that there was only one option. 2/
It didn’t seem right, but I worked through the mechanics of government finance (for the US) and eventually convinced myself that @wbmosler was correct. There is only one way to pay. 3/
Sorting through materials for my next book and stumbled on this piece outlining the influence of MMT in Chinese policymaking circles. 1/ bloomberg.com/news/articles/…
"Modern Monetary Theory can inspire China to make sure central bank easing supports government spending, several prominent economists said, as Beijing turns to fiscal policy to boost economic growth." 2/
"China urgently needs to 'liberate' itself from traditional ideas that fiscal and monetary policy must be kept separate and that government deficits are bad, according to Liu Shangxi, head of the Chinese Academy of Fiscal Sciences, a think tank under the Ministry of Finance." 3/