March 8, 2018

How MMT fools the ninety-nine-percenters

Third comment on Simon Wren-Lewis on ‘The dangers of pluralism in economics: the case of MMT’

Blog-Reference and Blog-Reference

One of MMT’s wake-up shocker slogans is: Taxes Don’t Fund Gov’t spending. This is operationally true, of course, but raises false expectations. What is sold as a benefit for the ninety-nine-percenters turns out to be a benefit for the one-percenters. MMT policy is false/misleading because MMT theory is false, more specifically, MMTers do not know how the price- and profit mechanism works.

In order to go back to the basics of economics, the elementary production-consumption economy is for a start defined by three macroeconomic axioms (Yw=WL, O=RL, C=PX), two conditions (X=O, C=Yw) and two definitions (profit/loss Q≡C−Yw, saving/dissaving S≡Yw−C).#1

It always holds Q+S=0 or Q=−S, in other words, the business sector’s surplus = profit equals the household sector’s deficit = dissaving and, vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. This is the most elementary form of the macroeconomic Profit Law. This Law refutes the MMT profit theory. So, strictly speaking, MMT is scientifically dead already at this point.

Money is needed by the business sector to pay the workers who receive the wage income Yw per period. The workers spend C per period. Given the two conditions, the market clearing price is derived for a start as P = W/R. So, the price P is determined by the wage rate W, which has to be fixed as a numéraire, and the productivity R. This is the macroeconomic Law of Supply and Demand.

The average stock of transaction money follows as M=κYw, with κ determined by the payment pattern. In other words, the “quantity of money” M is determined by the autonomous transactions of the household and business sector and created out of nothing by the central bank. The economy never runs out of money.

Now, the government starts deficit spending. Economically, it does not matter much for what purpose. The money, which is created by the central bank, is simply handed over to a social subgroup which fully spends it.

Government spending is denoted by G. The new market clearing price is now given by P1=(C+G)/X which translates into P1=P+G/RL, that is, there is a price hike which depends on the amount of the government’s deficit spending G. If G is small in relation to total output O=RL the price hike is almost imperceptible. There is NO such thing as inflation if the deficit is repeated period after period. The elevated price P1 remains constant. However, the debt of the government vis-a-vis the central bank rises continuously. This can go on for an indefinite time.

MMT is right, taxes are not required to fund government spending and debt does not matter for the time being. However, that does not mean that the wage income receivers are not taxed. The price hike reduces the real quantity Yw can buy, that is, the wage income receivers are taxed in real terms in proportion to G without realizing it.

What about the one-percenters? With total expenditures C+G and unchanged wage income profit is now equal to government deficit spending and rises from zero to Q=G.

Due to stealth taxation and the Profit Law which says that Public Deficit = Private Profit, deficit spending/money creation is always a bad deal for the ninety-nine-percenters. The amount of public debt reminds the people how much tax they have eventually to pay. MMT policy ultimately benefits alone the one-percenters.#2

Right policy depends on true theory. MMT is proto-scientific junk, just like Walrasianism, Keynesianism, Marxianism, Austrianism, and Pluralism.

Egmont Kakarot-Handtke

#1 For the detailed description see ‘How the intelligent non-economist can refute every economist hands down
#2 For the full-spectrum refutation of MMT see cross-references MMT *