It is my design to render it manifest that no one point in its composition is referrible either to accident or intuition — that the work proceeded, step by step, to its completion with the precision and rigid consequence of a mathematical problem

March 13, 2013 § Leave a comment

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Modern money is is state money. Taxation today functions to create demand for state currencies in order for the money-issuing authority to purchase requisite goods and services from the private sector. Taxation, in a sense, is a vehicle for moving resources from the private to the public domain. Government spending in sovereign currency systems is not limited by the ability of the state to ‘raise’ revenue. In fact, as it will be explained below, sovereign governments face no operational financial constraints.

To fully grasp the logic of sovereign financing, one must make the analytic distinction between the government and non-government sectors. For the private sector, spending is indeed restricted by its capacity to earn revenue or to borrow. This is not the case for the public sector, which ‘finances’ its expenditures in its own money. This is a reflection of its single supplier (monopoly) status. For example, in the USA, the dollar is not a ‘limited resource of the government’. Rather it is a tax credit to the population which is confronted with a dollar-denominated tax liability. Thus government spending provides to the population that which is necessary to pay taxes (dollars). The government need not collect taxes in order to spend; rather it is the private sector, which must earn dollars to settle its tax debt. The consolidated government (including the Treasury and the central bank) is never revenue constrained in its own currency.

If the purpose of taxation is to create demand for state money, then logically and operationally, tax collections cannot occur before the government has provided that which it demands for payment of taxes. In other words, spending comes first and taxation follows later. Another way of seeing this causality is to say that government spending ‘finances’ private sector ‘tax payments’ and not vice versa. Several other implications follow.

Deficits and surpluses
Government spending supplies high-powered money to the population. If the private sector wishes to hoard some of it – a normal condition of the system – deficits necessarily result as a matter of accounting logic. Furthermore, the government cannot collect more in taxes than it has previously spent; thus balanced budgets are the theoretical minimum that can be achieved. But the private sector’s desire to net save ensures that deficits are generated. The market demand for currency, therefore, determines the size of the deficit.

In a given year, of course, surpluses are possible, but they are always limited by the amount of deficit spending in previous years. If during the accounting period government spending falls short of tax collections, private sector holdings of net financial assets necessarily decline. The implication is that surpluses always reduce private sector net savings, while deficits replenish them. It should also be noted that, when governments run surpluses, they do not ‘get’ anything because tax collections ‘destroy’ high-powered money.  read more

PHOTOGRAPH: Hans-Peter Feldmann

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I really do think that the crowning glory of the Sex Pistols is that we’ve always managed to disappoint on big occasions. When the chips were down we never came through

October 17, 2012 § 1 Comment

Our instictive aversion to freeloaders was an evolutionary response to pre-industrial times. But it is a maladaption in our present environment, an atavistic anachronism. There is now – and there is likely to remain – a shortage of jobs. In this world, the fact that some (few?) people don’t want to work should be welcomed, as it increases the chances of getting work for those who want it. This is a good thing because involuntary unemployment is a big source of unhappiness.

What’s more, many of the few low-wage jobs that are available are of private benefit but little or even negative social value. Incentivizing people to work in call centres cold-calling people to sell them PPI compensation is not an obviously Pareto-efficient policy.

In this context, we can think of the tax and benefit system as being like an auction in which people bid for the scarce right to work; taxes are the price we pay to buy that right.  read more

PHOTOGRAPH: Larry Sultan

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