FEB 25, 2021 AT 6:29 PM
L. Randall Wray: So what is the purpose of a tax? It's redemption. We use the term 'revenue', which comes from French, then to early English, revenue means return to, so we say tax revenue - 'return to' - what returns? The currency you spent. What do you with it? You burn it. If it's coins, you melt them down and re-stamp them. If it's paper notes, you just burn them. If it's tally sticks, you burn them. If it's clay tablets, you break them. So that's what you've always done with revenue - governments do not spend revenue, they never have.
I don't support things like carbon taxes. The market caused this problem, the market is not the solution - forget the market. We don't want to tax polluters - we want to eliminate pollution. It doesn't make sense. The people who sell carbon tax say it will raise a lot of revenue, so what? I mean, if it raises revenue, that means it failed!
[Music]
[This is the MMT podcast with Patricia Pino and Christian Reilly]
Christian: Hi, I'm Christian Reilly and welcome to the Modern Monetary Theory podcast. You can find us on Twitter, @MMTpodcast and you can support the show by going to patreon.com/mmtpodcast. For as little as $1 a month, you can get early access to all our episodes and patron-only episodes. A big thank you to all our supporters so far.
At the beginning there, you heard our guest this week, primary MMT academic and author of Understanding Modern Money, Professor L. Randall Wray, and we are going to be talking to him in a moment about his early insights into the origins and nature of money and how an understanding of modern money is a vital piece of ammunition for people fighting for an urgent transformation of our economies in the face of today's global health and climate crises.
When people misunderstand how modern money systems work, they make the mistake of thinking that taxes are the way that governments get the money they need to spend, and therefore as nations, we can only do what we can afford in terms of money received via taxes; viewed this way, it makes intuitive sense to think of high income earners and high wealth-individuals as, like it or not, vital contributors to the common good - if only they'd be a bit nicer and pay the government more, we could stop people dying from poverty. Or if only politicians weren't so venal and easily bought, we could change our tax laws and then we could afford to stop the planet burning to death. But the MMT analysis shows where the money to pay taxes comes from in the first place, whether it ends up in a slush fund or paying a nurse's salary, or paying for a prime-ministerial advisor's travel expenses on a bank holiday weekend.
Monetarily sovereign governments, like the UK, the US, Japan, Canada, Australia, New Zealand, to name a few, are the monopoly issuers of their own currency. That means the pounds or the dollars or the yen, to pay for anything - including to pay taxes or to buy government bonds - can come only from the government in the first place. They are spent into existence by the government using key strokes at a central bank.
So where does that leave us with taxes? Well, taxation takes money out of existence as far as the private sector is concerned, so taxes function to control the spending power of the private sector as a whole, and tax bills or tax liabilities, are issued in the first instance to get the private sector to need the government's money - and you can listen to our first three episodes if you want more detail about how that works.
So, to paraphrase Professor Wray, we should tax the rich, but we should tax the rich because they're too rich and not because we need their money to spend. People are suffering right now who could be helped, right now. Climate change is an emergency right now, that we could start addressing, right now. Tying the ability to solve these urgent problems to the ability to tax the rich will have deadly consequences while we wait.
I say let's make the fight for tax justice and the fight for human survival, two separate fights. They both need fighting, but let's maybe do them on different days of the week.
So before we dive in, Randy mentions his first encounter in the 1990s with Warren Mosler, the founder of MMT, who was a bond manager at the time, and if you want to hear Warren's story in his own words - and trust me, it's worth it - you can listen to our episodes 20 and 21.
You'll also hear that Warren, at that time, shared an insight with Randy, that government bond sales are a reserve drain - and if this is your first time hearing that phrase, you can listen to the introduction to our episode 50 for the short version of what that means, but to fully understand it, our more in-depth episodes on Central Banking and the interplay between Central Banks and commercial banks, are episodes 13, 30, 31 and 43, in that order. That said, I think this episode makes sense without you having to grasp that right away.
There's a link to Professor Wray's paper which he co-authored with Yeva Narsisyan, called How to Pay for the Green New Deal in the show notes, and because we like to help with emotional support wherever we can, if you do happen to be a plutocrat and feeling a bit guilty, maybe want to do something right for once in your life, let me just say, that funding grass roots economics podcasts is a great way to feel good about yourself, and you can become a supporter of our show via www.patreon.com/MMTpodcast and there is a link in the show notes. Support starts at $1 a month which is 82 British pence and that gives you early access to all our episodes and access to patron-only question and answer episodes, and it really does help keep the show going and put food on the table. And as a service to corrupt political insiders, we also accept large, one off donations in brown paper bags if you need to get rid of any cash that might become incriminating evidence! Message me for rendezvous details!
Anyway, whatever your status in this wonderful thing we call an economy, thanks for listening and sharing and recommending us to other people. Let's dive in!
Hello, welcome one and all to the MMT podcast. I'm here with Patricia Pino, hi Patricia…
Patricia: Hi Christian, how are you?
Christian: I'm very good thank you very much. And we are joined by a very special guest this week, Professor of Economics, author of Understanding Modern Money, the book that started it all I think, it's an honour to welcome Professor L. Randall Wray. Thank you so much for joining us, Randy. So we usually ask our guests how they came to MMT, and it always comes down to something like, 'oh and then I read L. Randall Wray, and that changed everything….', so I'm really interested, how did you come to be cognisant of these ideas we now call MMT? Can you pinpoint a moment that changed your thinking, or was it a more gradual process?
L. Randall Wray: Well, I mean, there was a very important moment, and that is when Warren Mosler came on the Post Keynesian network, and I believe it was January 1996, and he writes pretty short posts, maybe there were two or three of them that set out his main ideas and the one that grabbed my attention was that bond sales are a reserve drain, they're not a borrowing operation. Stephanie Kelton and I, happen to have the same money and banking teacher and he drilled down what she said to us. So I had seen that before, when the government spends, bank reserves go up, when the government taxes, bank reserves go down. When bonds are sold, bank reserves are debited. So I knew that, but I just never thought of it that way, that the government is not borrowing - and it doesn't matter whether the central bank sells the bond, or the Treasury sells the bond, the functional impact is exactly the same. So Warren said it's part of the monetary policy.
That changed my view and that was the most important thing. Virtually everything else that has been incorporated within, I would say the Kansas City, UMKC and Levy Institute version of MMT, virtually every other piece was there, it just had not been integrated. So the job guarantee - I had heard my Professor, Hyman Minsky talking about, he called it 'employer last resort', probably by 1982 I heard that; I was always, I guess, in Stephanie's terminology, at least a deficit dove, although I had already written a piece, I think, maybe 1990, where I was joking around, but I said, let's abolish taxes - we don't need taxes for spending, okay?
Now of course, we do need taxes - we need taxes to drive money and I had also heard from Minsky, probably 1983, both of these ideas are in his book that came out in 1986…
Patricia: So, you have a book called Why Minsky Matters, which has become a kind of, a very important book for anybody interested in MMT, as you were saying, he had all these ideas before MMT came along. At the same time, they weren't joined up as a coherent whole, what was missing from that? Maybe you can elaborate on why Minsky mattered in terms of financial instability and the whole credit crisis that we had?
Randy: Yeah, so that's the whole book!
[Laughter]
Patricia: Yeah, in two minutes!
Randy: You know, it's very hard to tell whether Minsky himself had put it all together in the way that we do. So, sectoral balances, that notion I was exposed to with Wynne Godley, in an early mid-90s, when he was at the Levy Institute; he had come a few years before, but we really didn't interact. So by the mid-90s, it's very clear that Minsky, he always had the notion there, but he didn't write it out like Wynne did. I think some aspects of the relation between what he called employer of last resort, and the fiscal policy space for the government, maybe it wasn't quite worked out as well, but he did say things like, you know, once we abandoned the gold standard, the government can afford full employment, and only the national government can afford it, because only the national government can have a perfectly elastic demand for labour, which just means that you can hire everybody that shows up.
So he understood that, but I think in my own mind, it wasn't clear how the government spends and why is it true the government can't run out of its own money. People would say, well, they can just print money, but we know that isn't the way the government spends. They don't just print up paper money and spend that. So we didn't really know how the government spent, and all of that was worked out from beginning of '96 - exactly when things happened it's hard to know - but from that January '96, by spring of '97, we were having panels at conferences among the job guarantee and in order to have a panel at conference, you have to submit the proposals many months in advance. So anyway, by late '97 really all the pieces were there because my book came out in '98. We were circulating all the draft chapters among everyone, I worked very closely with Warren, and Warren is another guy who is hard also to tell, does Warren actually have all of this worked out in his own mind? Because we were going along and doing a piece at a time, in retrospect I think he did, I think it was all there, it was a matter of me putting it together.
So for both Warren and Minsky, it's hard for me to know how clear it was in their minds. Probably it was clear, but it took me a while to put it all together.
Christian: At last night's seminar, MMT and the Green New Deal, that's what it was all about, at one point you said a great thing - you were correcting one of the other panelists and you said, we never say deficit spending, and I guess you were implying there is no special category of government spending known at deficit spending. Could you say more about that?
Randy: Yeah. Some people think that if the government is going to deficit spend, it uses some different procedure, like printing up paper money, okay? And if you go back 200 years, that is the way governments did it, or they cut tally sticks, or they stamped coins and they spent them into existence. But after we created central banks, and the US was very, very late in doing that, Sweden and the UK, England, had their central banks since the 17th century, so 200 years before us, but in any event, if your central bank is essentially the bank of the government, which is what they all are, the spending always goes through the central bank.
If you look at the way the government spends today, it always takes the form of the central bank credits bank reserves, and the private banks credit the accounts of the recipients of the government spending. There is no other way to spend. I mean, literally, that is the only way that they can spend. So it doesn't matter if you end up with a deficit, a surplus, or a balanced budget at the end of the year, you will have spent exactly that way.
The second point is, at the time you spend, you have no idea whether your budget will end up being in surplus or balanced at the end of the year. In fact, you don't even know at the end of the year; the accountants have to work through the data several times over many months and revise what the budget was, right? And so, it becomes very clear you couldn't have anticipated that and said, well, we'll need to spend this other way because we are going to end up with a deficit. It just does not happen that way. So we don't say 'deficit spending'. You can end up with a deficit, but you don't deficit spend.
Christian: Got it. Just back into the origins of the Bank of England, I think I heard somewhere you mentioned that the King had defaulted on tally sticks, could you say more about that?
Randy: Well, first we need to back up. What is a tally stick? What was it used for? Everyone believes that in the old days the Kings would stamp coins, gold and silver, spend those into existence. If you bought an ounce of gold to the government, maybe it was stamp ten coins and it would pay you for the gold using eight of those and the sovereign would keep two coins out of the gold that you had brought in, and spend those. That's called Seigniorage.
And so those coins supposedly are valued by the amount of gold in them and the only way for the King to get more coins is to increase the Seigniorage, saying, well, from now on, I'm only giving you seven coins, I'm only going to give you six… If the King tried to cheat and melt those two coins down and put base metal in them and tried to get four coins out of it, supposedly the population would figure it out quickly and the value of coins would go down. This is generally false. This is not the way the King spent.
But the way that most spending by the Crown was finance, was through tally sticks. Even in America, we remember this term - raise the tally, just meant that you tell the Treasury or the Exchequer to go out and find hazelwood trees and cut tally sticks, and you would put hash marks in them; a wider one could be £1 and a really wide one, say £20, and you'd cut the hash marks across the stick and then you'd split the stick into a stock and stowe, of course, we still use those terms. And the Exchequer would keep one half of the stick and issue the other half in payment.
So this was how the Crown could pick up horses and wagons or whatever else the Crown wanted, and the seller would keep their half of the tally stick. And at tax time, the Exchequer would go out and I guess in England, they used red chequered tablecloths and spread them on the ground and the village would come in to pay the taxes and the Exchequer would have brought the King's half of each tally stick, they would match them together to make sure no one counterfeited; the way you would counterfeit is to add extra hash marks to claim that they were higher denomination.
So anyway, that is how they spent and when the King received back the other half of each tally stick, he would just burn them, so the King would always burn the revenue. That is the way that the King spent. There is really no reason why a Crown would default on the tally sticks because they were paying the taxes, you bring them in, you burn them all, but the King decided to just default and refused to accept them, I suppose because they wanted to get coins, and maybe even foreign coins, in tax payments, so they decided I'm not going to accept my own, essentially, liability, in payment of taxes. And then, of course, you're not going to trust them anymore. Why would you take any liability if he's going to refuse to accept them back in tax payments?
So you know, that's fundamental to driving the currency. The reason you will take the King's liabilities because he won't take them back. If the King says, no, I'm not going to take them back, the banks actually had to get together, to create a special bank, called the Bank of England, that would finance the Crown because nobody else wanted to accept these liabilities. Not everyone would accept the Bank of England notes, because they were very used to accepting bank notes, and so the Bank of England would issue the notes and take the King's debt, and I guess the King had to give up a lot of power to make this arrangement that they would trust him.
Patricia: So I've seen lectures where you actually… Well, this whole story about tally sticks is important in terms of the origins of MMT because you have papers about the alternative view of the origins of money, and how that defers from the barter story that we are typically given, and I saw a lecture where you actually showed an image of pieces of archaeology that they found from hundreds of years ago, if not thousands of years ago, and one of them resonated with me because in Peru, they have archaeological findings of rope with knots called 'keepers' and nobody, until recently, nobody knew what they were about, and recently they've realised that they're almost like Excel spreadsheets, you know, keeping track of different things, and that kind of resonated a lot with your explanation of the origins of money. Can you tell us why that difference is so important between barter and the MMT origins?
Randy: Well, it comes down to how you view the nature of money. The Robinson Crusoe story, even the people who present this, no one believes that this is what happened, but the idea is Robinson Crusoe meets Friday on the island, and barter's inconvenient because you need a double coincidence of wants - Friday has to have what you want and you have what he wants, and that's nice, so you can do the exchange, but what happens if today you don't want what he has, but he still wants what you've got. So they settle on using some third commodity as the medium of exchange.
And so the Austrian perspective is that there was some evolution, maybe at the beginning they used bananas, but they go rotten and there's the story of the Yap Islanders who used these huge stone wheels that take six or eight really strong guys to lift them up and carry them around, so gradually over time they settled on precious metal because you only need a small amount, they're easier to carry in your pocket, and gold, never rusts, it's a noble metal, never changes its form, and you can make extremely small quantities of gold. So the idea is that money is just some commodity and that commodity itself is valuable for some kind of use, that views money as something that has intrinsic value.
Then you have to get to, well, okay, there was a gold standard but we went off that 100 years ago, so how can you explain the monies that we use now? Well, in some sense they're illegitimate, because they don't have any value and it's just based on trust in the government. There is something wrong with that and just flooding the country with more of this, is going to debase its value even more because it has no intrinsic value, and so you see in effect money is being problematic and you've got to really carefully constrain the government, because government's love nothing more than to destroy the country. So it's all tied up in this view of money and the origin story is just to drive it all home. It's not that we literally believe that story, it's just that it's very useful for building up this fear.
The alternative is that it comes out of debt and all human societies that we've ever come across or uncovered through archaeology had the notion of debt. In tribal society, there are all sorts of kind of debts, and we know that even apes had notions of indebtedness. If your chimpanzee cousin helps you, that cousin will keep in their mind that you owe me. So the next time I'm attacked, you've got to step in, and if you don't, you didn't pay your debt, and you'll never be trusted again. So we know that it's not just humans that have this notion.
But money is a very particular kind of debt. It's measured in an abstract unit of account, probably apes can't do this, and probably early humans didn't do it either, so there's no evidence of this in tribal society, that we have a single measuring unit that we can measure a very wide range of heterogenous things - goods but even services; we can keep track of these and even today, point to anything and you can tell me the value in dollars or pounds.
Even human lives are in the dollar unit; you can go to Court and sue, and they take out a table and they can tell you what that human life was worth, right? And actually a Professor at Cambridge who was an expert on currency, Grierson, who hypothesized in the early '70s that it probably required civilisation to have authorities that could get together and settle on a money of account in which we measure debts, and he thought that probably this came out of the wergeld tradition, which is the debts for injuries that you perpetrate on others. So to prevent blood feuds, all tribal societies that we know of, had something like this tradition, where if you hurt somebody, you and your family will owe the victim's family and in tribal society you would have a different thing that would be delivered depending on what the injury was. So it could be a pig for something, it could be a cow for something else, it could be a bushel of corn for a lesser infraction and it could be death - an eye for an eye. So they would have a long list, and they would have a designatory member who would remember what it was.
But with the development of some kind of upper class, the unit of measurement became uniform; so we measure all of these kind of debts in a single money of account and we can invent writing to keep track of these things, so it doesn't all have to be in somebody's mind, and that seems to be where money came from and also writing - writing wasn't invented by poets, it was invented by accountants keeping track of money debts; the earliest records are always of money. So it seems that they both had the same origin and it probably is the lives of civilisation that did that and the authorities, maybe in the beginning, shared the fines that were repaid in restitution of the debts, but gradually over time we became civilised so that all of the fine goes to the authority and the victim gets nothing!
Christian: Sure, so just to bring it up to date, we've got this system now where money is spent into existence by an issuer, it always was that way, now we are using computers and not bits of wood; you sometimes get this still in the British MMT community - people pop up and go look, this only applies to the US - the British Central Bank, it's a whole different system so it would be good to get you on the record! [Laughter] Probably won't be the last time we'll have to do this, but it would be good to get you on the record and get a comment on that?
Randy: Yeah, well it's pretty silly because any sovereign authority, obviously it can be democratic - it doesn't have to be a king - democratic authority with the rise in democracy can impose taxes; I mean, I see elected representatives in democracies vote for the taxes and then impose the obligations on the population, and start an authority's issue what is used to pay taxes.
So just as a counter-example, let me give you, 'Early America'. So if you go back to the American colonies, these were not Edgemonts - these were tiny little colonies; they may have had big views of themselves and their future, but this was not a global power. They were prohibited from issuing coins by the British Crown, of course. The British Crown wanted them to use British coins because they wanted these colonies to export products to Britain and then Britain would send coins to the colonies. The problem was the colonial governments didn't have enough revenue to function, so they hit on the idea of printing paper money, which was a loophole, because there was no prohibition on paper notes, there was a prohibition on coins, we had no banks at the time so we had no banking notes, but the colonies said, let's print out notes.
So Farley Grubb, the Historian who has written papers recently, he went back through the records and what he found was, every time they passed a law - we had 13 colonies and all of them did some form of this - every time they passed a law, they authorised the issue of say, 10,000 Virginia pounds - we didn't use dollar, we used pounds - at the same time, they would pass another law to impose a redemption tax and they used that term, 'redemption tax' laws. They were expected to raise about 10,000 pounds over the next three years, so when the colonial government was ready to spend, they would print out the notes and they would buy what they want. And then at tax time, those notes come back in tax payment.
What did the colonies do with the tax revenue? Well, exactly the same thing that the King did with the tally sticks - they burned it. So they kept careful records, so Farley Grubb was able to see exactly how many they burned. Typically they burned 3/4; 3/4 of the paper money they'd issued came back in tax and they burned all of it. Every note they got, they would burn. It was redemption. So what is the purpose of a tax? It's redemption. We use the term 'revenue' which comes from French, then English, revenue means 'return to', so we say tax revenue - return to. What returns? The currency you spent. What do you do with it? You burn it. If it's coins, you melt them down and restamp them, if it's paper notes, you just burn them, if it's tally sticks, you burn them, if it's clay tablets, you break them. So that's what you've always done with revenue - governments do not spend revenue, they never have. Revenue is for redemption. It is to remove the currency from circulation. Of course, you need the tax, but no one would take the currency, so from inception you have to have the tax. But then the purpose of collecting it is to get it out of the economy, because they were worried about inflation. That's how you stop inflation - you burn all the notes.
Christian: This leads nicely into - I saw you give a talk online and you say, taxes guarantee the state's currency as value, but it doesn't guarantee what that value is going to be. Could you say more about what does determine the value of currency in MMT?
Randy: So yeah, this was going back to the Tudors, so obviously paper money doesn't have any intrinsic value, and when coins were issued, they were worth whatever the King said they were worth in tax payments - it didn't matter how much gold was in it. If the King said, this was worth 10 pounds, it's worth 10 pounds, and same with the notes. So that will determine how much of the tax liability you can retire, by presenting the paper note or the coin. But what will determine a value? You can be sure that they're going to have some value, and they'll be worth at the pay houses, whatever the King says their worth, but that doesn't necessarily tell you what they'll be worth in the markets.
So, basically, what determines the value of currency is, what do you have to do to get it? So if the King flies helicopters, drops bags of money into everybody's yard, it takes you 10 minutes to find it, get it out of the bag, a bag of money is going to be worth about 10 minutes of labour time, because that's all it took you to get it, and now you can go pay your taxes. Okay, so in terms of purchasing power, it's not going to have much value, and if the King is just dropping paper money, he's not going to get much work out of you. On the other hand, if the King says that you have to work 100 days for a bag of money, it's going to be worth 100 days of labour. It will be what you have to do to get it. In a very simple economy, maybe a purely imaginary one, where the only way to get it is to work 100 hours for this bag of money, then it's going to be very fair what determines it.
Now in the real world, of course, we have heterogeneous labour, some labour is paid more than others, and we have alternative ways of getting money. So typically, rich, developed countries have some kind of welfare system, so that's an alternative way to get it. Some people propose a basic income guarantee, where we just give everybody $50,000 on January 1st. So those are all alternative ways of getting money and some of those don't require very much effort. If you get a basic income guarantee, you've got to go to your mailbox and take out the cheque and you've got $50,000 - it's worth two minutes of labour time. But on the other hand, presumably there would still be some people working, otherwise there's no output to buy anyway, so we are going to have a mix of some people working to get money, some people are just going to the mailbox to get money, and you know, there's going to be some kind of an average of having money determined by all of this. So the real world is more complicated than the simple model, where everybody has to work an hour of labour to get 10 pounds.
Christian: So it's fair to say, it's kind of a matrix of all these prices paid by government, basically?
Randy: Yes. And obviously the government buys a lot more things than just labour…
Patricia: I hear MMT as well discuss the power of supply monopolies - does that effect the value of the currency, for example, if we had a single private energy producer who sold energy to everybody? Presumably, they would have a lot of power in setting what that money is worth, or what you need to do to get it?
Randy: Yeah, and so if you have the water monopoly, give water or they die of thirst, then yeah, you could pretty much set the price at whatever you want. Some people would object - in my country we don't have any taxes but people still want money and generally the reason is something like that, because the state has monopolised, say the water supply, or the energy supply, and they set the price of that; they've got to earn the state's currency in order to get the energy or the water, not necessarily have to have tax, you just have to have whatever it is you have to submit in order to get the water.
Patricia: So setting the price on something that is essential, is effectively a way of taxation, other than the one to which we are accustomed, which is imposed by law or by force, effectively, but they're both forms of coercion. I think this is what I'm hearing.
Randy: Yeah. I mean, thirst is a good coerce. Keeping your head on your shoulders - a head tax!
[Laughter]
Randy: When you lose your head, it's pretty coercive.
Christian: We'll be giving people ideas if we go down this route any further, but…
[Laughter]
Patricia: Yeah.
Randy: But, it can work in an authoritarian state, it can also work perfectly well in a democratic state and if you look at history actually, the more democratic states can get away with more taxes and a bigger share of GDP. If you compare, say, the Scandinavian nations before they went neo-liberal, they had very high tax rates and the population imposed it on themselves. So the government was a huge part of the economy, it's just not necessarily true that it's the more coercive authoritarian states that can have higher taxes. If you get voluntary cooperation and people buy in - we're all in this together - a really democratic state can probably have a much bigger government sector and much higher tax rates than an authoritarian state.
Christian: This kind of goes into a problem that we encounter in MMT, which is you're talking about those high tax rates, and projecting into the minds of the people paying those taxes, and of course, they're like, we've got a great welfare state, we look after each other and that's why we're paying these taxes. And of course, when the MMT lightbulb goes on, the first thing you want to tell people is, the government are lying to you when they say they've run out of money, and in fact, taxation doesn't fund the spending, and as soon as you break the link for some people, they are then in this mode of, I just can't get on board with that, because I really thought that I was providing for my fellow man and I like the collectively provisioned world that we live in. So I don't know if you had any comment about that?
Randy: Sure. What you are doing is, you're releasing the resources that we need to fulfil the public purpose. So what the population wants the government to do is a political question. If you look at the world's successful capitalist countries, the size of the government, national government, varies from 20% of GDP to 50% of GDP and they seem to work alright. So I'm thinking of the United States and France; United States and Japan are both at the very small government end of the range, and then France at the large government end of the range, and you can say they work tolerably well. So clearly you could have a smaller government, or a bigger government, it depends on what you want them to do.
Once you've decided on the size of the government, you've got to free up the resources so that they can mobilise them. So the purpose of the tax is to free up resources. So I'm playing my part by giving up, say, 40% of my income so that I'm not commanding those resources. If I kept all of my income and used all of it to mobilise resources just for me, and we all did that, then there's not enough left for the government to use to fulfil what we say is the public purpose.
So once we've decided, yeah, we want the government to supply a health care system for everybody, then we have got to free up the resources for them, and usually that's going to mean that we are going to have to have taxes. We can do it through patriotic saving, I think history shows that's not good enough. We can do it through charitable giving…
Patricia: By patriotic saving you mean voluntary saving?
Randy: Yeah… War bonds, are an example. It doesn't have to be war, we can have peace bonds too. I believe in what we have decided the government ought to do, I believe in that, so I'm going to give up my income by buying bonds or paying taxes or postponing my consumption. So for the Green New Deal, this is a ten year effort probably to get the Green New Deal underway, and all of us have to… Well, everyone above, who's not living in poverty, has to give up something; we've all got to reduce our own consumption in order to release resources for the Green New Deal, and so we can try voluntary saving but history shows people would like to do it but they need a little bit more compulsion in order to really give up enough. That's what the taxes do.
Christian: So that brings us to your MMT and the Green New Deal work that you've done lately; you did a policy brief with Yeva Narsisyan, Can We Afford a Green New Deal and then your guys also wrote a paper called How to Pay for the Green New Deal, based on Keynes' How to Pay for the War and what I remember from it, is you favour deferred consumption rather than taxation which is a permanent lowering of the spending power of workers, could you say more about that?
Randy: Yeah, I mean, it really is built on Keynes. This was… Keynes' preferences made sense to us, so these were Keynes' preferences too. Now World War 2 was a much bigger effort. The US government went to 50% of the economy, I don't know what the British government did, probably even bigger than that. So we had to move 50% of all of our resources to the government sector and Keynes said, patriotic saving is good, let's do it, but it's not going to be nearly big enough to release resources for the war effort. Taxing, well, the problem is that, you know, we'd like to say let's tax the rich. Well, you don't want their money, what you want them to do, is reduce their consumption and Keynes' goes through the calculation and says, we can't release enough resources just by taxing the rich because the bottom 80% of the population accounts for most of the consumption, so we've got to get them to reduce consumption, not just the rich. So we have to tax the non-rich too.
But he said, we don't want to tax poor people, they're already struggling and they're going to struggle a lot more when the war starts because we are going to have to take away resources - we have to feed the army, and everyone is going to have to tighten their belts, and they're also going to be losing their sons and their daughters and when, of course, they were bombed, we were … lots of people are going to die, so there's already going to be too much suffering, so we can't put it on the low income people. We actually need to increase the income of the people at the very bottom and then we've got a huge range of people above that, who have to reduce their consumption, so we will use taxes. But if we tax working class person, they lose that income forever, maybe we can lower the taxes after the war, but they've lost the income during the war. So we should also use postpone consumption, and what we will do is, tell them they're going to have to tighten your belt now, but we are going to give it back to you after the war is over.
Keynes proposed, essentially, bonds. We are going to give you bonds now and at the end of the war, you can cash those in and consume. In the United States, we used bargaining between the government, the labour unions, and the firms to postpone consumption in the form of, after the war you are going to get decent retirements and health care. So that was the reward that was for reducing consumption. At the end of the war at least the union workers got that, they also got wage increases at the end of the war. So that was how they postponed consumption.
Christian: And that led us into what they call the Golden Age of Capitalism, I guess. So with your How to Pay for the Green New Deal paper, where do you set that threshold above which we need to limit the spending power of these people? Where do you set that?
Randy: Fortunately taking the best estimates we could find, the demands of the Green New Deal are not very great. Because of the peculiar way we do health care in the US, going to Medicare for all, actually releases lots of resources. I can't give you the exact numbers that are in the paper…
Christian: No, we will link to it in the show notes so people can see it for themselves.
Randy: …so if we release 4% of GDP by going to Medicare for all, and freeing up resources that are now just completely wasted, this private insurance scheme, that provides enough resources for a lot of the Green New Deal. Now there are some uncertainties about whether the resources are appropriate for that, okay, so it could be a little worse than what we're saying, we are going to free up resources by completely going off fossil fuels so those resources can be moved over again, are they all perfectly suitable? Probably not, it will take some retraining and it will be a learning curve and so on, but the net demand on resources is probably going to be well below 5% GDP - that's not a lot. Before the coronavirus, we probably could have done 5% GDP, when that was […] consumption, but we need 5% GDP over the next 10 years. So just to be cautious we said, yeah, we probably should postpone consumption and let's do it in the form of a temporary increase of our social security tax that is for Medicare.
So in the US, workers pay a tax for their retirement and they also pay a tax for their healthcare that they get at age 65, so we are going to put a temporary surcharge on that, and the reason is because, remember Cane said, you will postpone consumption of the majority of your population, and the Medicare tax, hits the majority of the population. So we'll be slightly reducing their consumption, freeing up some resources and reward them with a better retirement. After 10 years the thing will be fully phased in, over the next 10 years a lot of baby boomers are going to be retiring, we would be gradually phasing in a better retirement for them as compensation for postponing consumption - that was the idea.
Patricia: One of the things I really like about the GND - Green New Deal - is that it doesn't actually, you know, as opposed to the war where we were dedicating so many resources to what was pretty destructive activity, the Green New Deal is actually about providing ourselves with a better standard of living; it doesn't make a distinction between human beings and the environment as such. It considers us an integral part of it and therefore it considers mental health, access to nature but quality housing etc, as integral parts of an environmental effort. So I think as opposed to the war where it was more of a, let go of some personal privileges and consumption in order to dedicate ourselves to simply defending what we already have, it's more of a self-enriching effort, which is great…
Christian: It reminds me of something that Warren Mosler said on interview once about, we can dig the Panama Canal or we can blow it up! [Laughter] Both of them will stimulate aggregate demand. [Laughter] One will actually be laying track for the future, building something that won't go away and it will actually make things better for everybody…
Randy: I think that the coronavirus pandemic shines a light on a lot of things; the Green New Deal I think even much more appealing before, because now it's becoming more obvious that we will never go back to normal, and we shouldn't want to go back to normal, which is what we were already saying; we don't want to perpetuate what we have, and the Green New Deal will give us something much better than what we have.
Now, when we also throw in pandemics, because there are going to be many more pandemics - the next one could be very much worse than this one - so the idea we need to retain what we've got is becoming less and less appealing to people. As this pandemic goes on, it's exposing all the problems with the economy and society so we need fundamental change and the Green New Deal was already going in the right direction.
Patricia: Yesterday in the conference as well, there was a question posed about finance, and earlier we were talking a little bit about Minsky, is there room for financial institutions to issue bonds or … our green financial instruments, do they have any role in a Green New Deal or should they be eliminated? What would your view be on that?
Randy: I don't see anything wrong with supporting private initiatives too. Because of the nature of the challenges, the national government has to play a huge role so if we are talking about giving up fossil fuels in a country like the United States, because it's so vast, there is no way the private sector can do this - we have to completely redo the whole energy grid and it has to be planned on a national scale. The national government has to play a major role. But, yeah, I don't see anything wrong with making finance more affordable for private effort. So we've done some of that with solar panels, I built solar panels in my yard with subsidies, so nothing wrong with that, but the planning has to be national and the most important projects have got to be national projects.
So I don't support things like carbon taxes - the market caused this problem, the market is not the solution. Forget the market. We don't want to tax polluters, we want to eliminate pollution. It doesn't make sense. The people who sell carbon tax say it will raise a lot of revenue. So what? I mean, if it raises revenue, that means it failed because the idea of carbon tax raises no revenue - we don't want any carbon emissions.
So it's completely confused; first because the market can't be the solution, don't look at the markets, market solutions are the wrong solutions, and second, we don't need the finance, we need to stop the pollution. So I don't support those kind of proposals but again, I don't see anything wrong with government subsidising private opportunities.
Christian: What you just said leads on to this nicely, actually. At the 2010 Fiscal Sustainability Conference - I'm going to paraphrase - but you said something like, I don't like the word 'redistribution'. We can always add income at the bottom without having to take it from the top, and the problem is the rich always get the loopholes written in and they've got too much influence, we are not breaking up their power through the tax system. So first of all, I'm sorry if I am misrepresenting you, but if I haven't, I agree with that. And then that leaves me thinking, well, how do we break up concentrations of wealth that are toxic to democracy?
Randy: Well, I think if the problem is that there's too much wealth which gives power to eight people in the world, which is basically, that's the number, the answer is to tackle that directly. You don't link it to, well, we could raise the income of the poor, if we raise the tax of these eight people. Why would you link those two? Let's raise the income of the poor and let's go after the top eight.
So Elizabeth Warren in the campaign, I went to her website to see her proposal for the wealth tax; One of the selling points was that, don't worry rich people, you will still be rich - you will be a little bit less rich, but you're barely going to feel the pain. My response is, why bother? The goal of taxing the rich is to eliminate richness, so if it's not painful, you've failed. You need to make it extremely painful. You need to remove the wealth. You need to destroy all of it.
So the danger is power. It's, yes, there is a problem with their consumption; the consumption tends to be heavily polluting and all of that, so you know, we can ban activities, we can eliminate fossil fuels but the problem is political power, economic power, a handful of people who direct policy and who subvert democracy. So you've got to eliminate that power probably means that you can't have billionaires, so the billionaire tax, the goal - should be one goal, which is, eliminate billionaires. There shouldn't be billionaires.
I'm sure what I said was the problem is once people become billionaires, it's very hard to take it away. So if you look at the US tax code, two reporters went through the tax code and they found several thousand individual items in the tax code that they could track exactly who that was written for. There are thousands of them!
Patricia: They're just buying legislation basically!
Randy: Yeah, it was so specific, they could identify the one individual that that tax code was written for, Barlett & Steele are their names, Philadelphia Enquirer. So anyway, that's the problem. Once they've already got the wealth, very hard to take it away. I say, let's try. I'm not confident we can do it - but we can make it much harder to continue to accumulate wealth. That you can do. It's easier to prevent something from happening than trying to undo it once it's already happened, so we need to go after the monopoly powers, which are now largely in tech and finance.
So those are the two areas where we have to go after it. So in one case, it's patents and just getting more of the power and being able to wipe out the competition. And the other is just the huge rewards that can be paid by financial institutions and what they get away with doing - at least borderline fraud, usually just outright fraud - that allows them to make outrageous profits and then reward top management. And stock buy-back options, that happens every quarter all through corporate America, so you need to tackle that, you need to tackle the stock buy-backs by their firms in order to stop the inflammation of wealth, because that's where it comes from. It doesn't really come from Andrew Carnegie building stock - that's not where it comes from.
Christian: No, we've got to get Rohan Grey out there writing some more legislation!
[Laughter]
Patricia: Yeah, he's got to catch up with it.
Christian: You have to go and confiscate this stuff. Like you say, the proponents of taxing the rich, already they're going, don't worry, you know, it's not going to hurt you, so only confiscation is going to work.
I went on Twitter like, maybe a couple of weeks ago, and just sort of, posited, how much is too much? If we could enact a law that was like, anything above 'x'…
Patricia: Confiscate it.
Christian: …just take it away. They just delete it and now, this is how rich you're allowed to be. People have a really hard time saying what 'x' is, they hate to do it. I went crazy and said, let's say £5 million. Hardly anybody liked that! But most people agreed 1 billion is too much.
Patricia: Well, any number is better than no number, isn't it?
Christian: But like you say, we are not getting to it with taxation anyway, but given that the government doesn't need our tax to pounds to spend, we are just using the taxes to drive the currency, limit the spending power of the private sector fight inflammation and we can boost aggregate demand by bringing VAT and income tax way down, but a clean sheet of paper - this is a huge question - what is the fairest taxation system as you see it, all things being equal?
Randy: Well, you probably want more than one kind of tax. Thinking about the environment and all that, I proposed a long time ago, a cubic foot of dwelling space tax; cubic because that increases really quickly with the volume inside your house which is correlated with the energy that is being used to heat it or cool it. So I think that it's good for the environment, it encourages people to think in a different way - instead of the big mansions, thinking of smaller houses and you can get breaks for energy efficiency, apartment complex', things like that. So reducing the space occupied by the housing also would be advantageous. A bigger problem in America is the urban sprawl, trying to concentrate, trying to make the communities more inhabitable so you're not in a car all the time dragging around, things like that. So I think that that's probably the kind of tax - and I know the Georgists like property taxes because one way to accumulate a lot of wealth is to have the value of the land go up and you get to capture that and the Georgists argue that basically society that generates rising property values and why shouldn't an individual or individual firm reap all those advantages. So it sort of fits in with that one. I think that's a pretty good one. I'm not against sin taxes could change behaviour. You could use taxes to encourage behaviour so you can have tax subsidies for solar panels and things like that.
In the US we use highway taxes, for the Federal Government, of course, you don't need the revenue, that's not the purpose of the Highway Tax, it's to apportion the resource used to build big superhighways so people can drive really fast and so truckers can reduce the cost of trucking stuff long distance. You know, they should pay for it. There's always a trucker lobby for the bigger highways, so that they can displace the trains, so if they really want the highways, we should really tax them high, make it more competitive for more efficient means of transportation.
I can see these kinds of use taxes also as fulfilling a public purpose. Not that the government needs the money, but it does make people pay and you show that you're willing to pay for it and okay, maybe it's in the public interest to build the big highways. Airline taxes too, and airport taxes - do you really want to fly around? Okay, then you should pay up.
Christian: Okay, well, thank you so much for being so generous with your time, Randy.
Patricia: Thank you.
Randy: Thanks a lot.
Christian: Okay, thanks a lot everybody. Bye!
Patricia: Bye!
[Music]
That was the MMT podcast with Patricia Pino and Christian Reilly. Don't forget you can support the show through Patreon starting at $1 a month and get early access to all our episodes and Patreon only episodes. You can do that by going to www.patreon.com/MMTpodcast. You can also find me on Twitter @MMTpodcast and you can find Patricia on Twitter @patricianpino and you can email us at mmtpodcast@outlook.com.
Editing and post-production was by Damian Coldwell.
Thanks for listening.
[End of Transcription 01:03:45]
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