Thanks for your thoughtful response.

First, I believe that controlling inflation is the only economic reason for taxation. Taxation is probably not necessary to make the king’s money viable. Legal tender laws take care of that.

This is probably correct, at least in the short run. Legal tender laws have been strictly enforced historically across civilizations for exactly this reason. I would say though that inflation and the viability of a currency cannot be conceptually divorced because an over-inflated currency can become de facto nonviable. In that sense, I still maintain the link between taxes and viability because of the role of taxes in managing inflation. But yes; in the most immediate sense, legal tender is what grants fiat its viability.

Second, whereas I agree that taxes are not necessary to fund government expenditures, MMTers tend to lead with the simpler claim that taxes do not fund those expenditures. But in the USA, because of the political decision to require that money be collected or borrowed to fund expenditures, the fact is that those collections and borrowing do fund expenditures.

I go over this a bit in the article. I think the main reason MMTers drive home the “taxes don’t fund spending” point is to highlight the fact that the matching of spending with revenues + debt issuance is a political decision rather than an operational necessity. The main myth MMT is trying to dispel is that fundraising MUST precede spending, whereas precisely the opposite is true. I think drawing out this conceptual understanding via a provocative mantra like “taxes don’t fund spending” is useful for getting people to wrap their minds around the actual function of taxes.

Once we get to that point, we could say that taxes “fund” spending in the sense that taxes allow for spending that would otherwise be inflationary. As you say, your tax dollars are at work fighting inflation. But that is a very different use of the word “fund” than most people have in mind when they think about taxes, and altering the semantics so soon could lead to confusion. On the non-MMT view, “fund” means the government needs your dollars to literally carry out the spending operation. I would agree that once MMT is broadly understood, it is perfectly reasonable to use “fund” in the sense you suggest.

Finally, I think of some government borrowing as a second way for the government to control inflation. Just as a government could spend without taxing or borrowing, it could borrow without spending. Every dollar lent to the government is a dollar not lent to a private user of money.

Yes, and I don’t think MMTers are against all types of debt issuance by the government. For example, the government used precisely this method to manage inflation during WWII via the issuance of ‘war bonds’. The purpose of war bonds was not to raise money for the war effort, because that was not really a problem. The actual purpose was to reduce aggregate demand while there were supply shortages by deferring consumption. The communications between the Fed and Treasury during this time are pretty well documented and are vintage MMT.

I think there’s a real difference, though, between the issuance of bonds directly to individuals and the issuance of bonds to banks on the primary market. Since banks are only transacting in reserves, the initial issue of bonds and subsequent monetary operations by the Fed don’t really have a direct impact on inflation except via the Fed Funds Rate. They’re just trading around ‘reserves’ and ‘future reserves’. This types of bond issuance doesn’t fight inflation in the same way ‘war bonds’ did because the actual bank deposits of individuals and businesses are left virtually untouched. Almost all of the transactions are taking place between banks, the Fed, and the Treasury for the purpose of setting the FFR (and ‘funding’ the Treasury). Just as how QE did not kick up the expected inflation, bond issuance/sales to banks by the Treasury/Fed is no surefire way to fight it.

Of course, the Fed’s idea is that inflation can be restrained via selling bonds and raising the interest rate, and that economic activity will slow because money is more expensive. But it’s not even clear how sensitive business decision-making is to subtle changes in the interest rate. Further, higher interest rates also increase cash returns for the bond holder, which is an inflationary pressure. It seems to me the Federal Government ought to abandon issuance to banks and instead focus on issuance directly to individuals. This view is not held by all MMTers, though.

Overall I think we are basically on the same page. I wish more people took the time to understand this stuff because it’s absolutely crucial.

Corporate accountant and former auditor with degrees in philosophy and accounting.

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