Me and Modern Monetary Theory

I am considering reading some texts on Modern Monetary Theory. I have read some of the secondary descriptions of it on the web, and I generally find them somewhat confusing. So I want to actually see what these real texts say. As a preliminary matter, I want to explain my understanding of one of the points MMTers appear to make. I think this point is made in very confusing ways, and so I wonder if I am missing something, or if the explainers aren’t very good. In any case, here goes.

Imagine a world with two entities. One is a person named Rachel, who has $100 in a bank account. The other is the federal government, which has $0 in a bank account. Suppose the federal government wants to purchase something that costs $10. What will it do?

Normally, we would say it will tax $10 from Rachel, thus causing her bank account to fall to $90, and the government’s bank account to jump to $10. We understand this as transferring $10 from Rachel to the government. MMTers say that we are mentally confused when we call this a transfer. Money is not a real thing like that. It’s not like transferring a car or some actual commodity. Instead what we have done here is just electronically added $10 to the government’s account and electronically subtracted $10 from Rachel’s account. You do not need the concept of a transfer to make sense of this move. It suffices to just say the government ticked up its account and ticked down Rachel’s account. No transfer: just manipulating balances.

But wait a minute. If all we are doing is manipulating balances, then do those manipulations need to be symmetrical? Do they need to be “transfers” in the way we think about it (money from one account goes into another)? No. The government could just credit its account for $10 without doing anything to Rachel’s $100 account. As a matter of fact, since the US government controls its own currency, it absolutely could do this (perhaps some laws would need to change, but still). So get this “transfer” notion of how accounts move up and down out of your head. You don’t need to move money around (which is a sort of nonsense notion) to manipulate account balances.

So now the big question: what are the consequences of manipulating balances like this without simulating a “transfer” that we usually think of as a “tax”? Well, it depends on the economic circumstances we are in. If there are idle resources (e.g. unemployed people and capital resources), then just dumping money into the government’s account without reducing the accounts of anyone else would increase production. Those idle resources could be activated by the spending the government does with the money it unilaterally credits to its account.

However, if the economy is operating at capacity (no idle resources), then doing this sort of thing would lead to inflation. So what would you do to increase government spending without causing inflation? You would reduce the account balance of Rachel. But let’s be super clear here: this is not because you are transferring money from Rachel to the government. To talk about “transferring” money is to be mentally confused. Instead, the government is crediting itself $10, and then saying: oh crap, the economy is operating at capacity, so to avoid inflation, we need to cut down $10 of spending elsewhere — we better subtract $10 from Rachel’s account.

When you tilt your head sideways enough to understand what’s going on there, an interesting thought emerges: we don’t tax people to raise revenue, we tax them to reduce inflation. Recall, we don’t need to tax people to raise revenue because “transferring” money is a nonsense notion. To increase the government’s cash account, we can just credit it with more money in the computer. So since we don’t need to tax people to increase the government’s cash pile, the only reason we do it is to cut inflation. That is its only function here. Importantly, when inflation is not a threat, the government will not need to debit the accounts of others (i.e. “tax” them). It can just credit its own account, without making any offsetting debit of any account elsewhere, and spend it.

So “raising revenue” is a nonsense notion under this way of thinking about money. The government does not need to reduce anyone’s pile of money to increase its own pile of money. It may want to reduce other people’s pile of money to ensure that increasing its own pile of money (and spending it) does not cause inflation. But that reduction of other people’s pile of money (i.e. taxation) is not about raising revenue then: it is about fighting inflation.

To repeat: I have not read any of the major texts on this (not even sure yet what they are). But this is how my mind has made sense of what I have read so far. All of this seems correct to me as a way of describing what’s going on. It is not how our minds usually categorize the process of taxing and spending, but it is not an invalid or incorrect way to do so, as far as I can tell.

I am less clear, at this point, what re-categorizing things like this does for us policy-wise though. At the present moment, it would tell us to expand the monetary base and spend it on things (since there are idle resources). But people already say to do that: see helicopter drops. How is this different from a helicopter drop except insofar as it only drops the money into the government’s bank account? Also, is this stuff supposed to lead us to conclude that fiscal policy is the best way to manage inflation (by ticking up and down taxes) as opposed to forcing fiscal policy to always keep symmetric accounting (increasing its accounts only by decreasing other accounts elsewhere) and letting the Federal Reserve manage inflation through interest rate policy? By itself, I don’t see it leading to that conclusion.

Anyways, those are my thoughts. Interested to hear feedback.