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So, here’s a challenge

So, for the record, first of all would they please read these two papers on tax and tell me what I got wrong? One is in the Real World Economic Review and the other in Social Policy and Society Constructive criticism I am happy with.

….

MMT has not developed a coherent theory of how tax fulfils the withdrawal function to control inflation it has prescribed to it,

OK. So, the opening of one of those papers:

Modern monetary theory (MMT) has played an important role in advancing
understanding of the economic function of taxation, including by showing how it acts
to “cancel” government spending as part of a spend-tax cycle.

Good, that is what the theory says.

And yesterday Murphy said:

There is no evidence that quantitative easing has ever caused consumer price inflation, and none that it will. The government could simply create the new money required to tackle this crisis in that case.

In fact, I would argue that it needs to do that. In an inflationary economy, there is a need for new money supply. That is inevitable.

You can see why there might be the smallest leeeetle critique of that plan.

At which point Smurf tells us that:

The first is that tax as a withdrawal function only controls inflation if it is demand pull inflation. We do not have that right now, excepting amongst the products the wealthy buy, and so it cannot be used to control most inflation at present, excepting for the impact that those with high incomes and wealth have.

OK, definition of demand pull inflation:

Demand-pull inflation is the upward pressure on prices that follows a shortage in supply, a condition that economists describe as “too many dollars chasing too few goods.”

Which is exactly what Murph says we have at present – shortages in supply leading to inflation. This is exactly when higher taxation should indeed control inflation.

Then we’ve got this idea that it’s only the stuff the rich buy that has this sort of inflation. What, you mean food, energy? These things? Oh, right.

From the other paper:

We use insights on the money removal, or cancellation function of taxes, derived from MMT

OK.

Now, the critique of The Murph’s latest plan is simply that he’s not standing by his own declared theory. Under MMT tax reduces inflation by subtracting money from the economy. Murph doesn’t want to do that as it would mean, well, taxing folk.

Which is what the Worstall critique of MMT has always been. When it comes time to start taxing back all that cash that was so lovely for the politicians to spend they won’t want to do it. Therefore MMT will lead to inflation.
On the political ground that spending cash is great fun, charging taxes ain’t.

You know, the sorta thing a political economist might grasp?

Tailoring theory to policy in the situations we actually have is intelligent political economy. Sticking to dogma whether useful or not is the exact opposite of that.

Now that’s it’s come time to tax the workers I’ve decided to change my theory.

Exceptional times require exceptional thinking

Murph is indeed an exceptional thinker…..

5 thoughts on “So, here’s a challenge”

  1. I’d missed the central part of the post initially but this is simply unbelievable:

    The first is that tax as a withdrawal function only controls inflation if it is demand pull inflation. We do not have that right now, excepting amongst the products the wealthy buy, and so it cannot be used to control most inflation at present, excepting for the impact that those with high incomes and wealth have.

    Only the rich buy food and energy? What planet is this guy from?

    That said, I am surprised even on comparatively sane forums that people feel the inflation is going to be ‘short lived’ – I’m factoring it in at 20% minimum (real inflation not headline) for the next two years , especially if this war continues….

  2. There’s inflation from a wage-price spiral, when the economy runs too hot and/or the money-printer goes brrr; and then there’s inflation from falling productivity.

    The money-printer did indeed go brrr during Covid; but we also saw considerable destruction of productivity. Raising interest rates switches off the money-printer; but it won’t fix our productivity problem.

    I think that’s what Murphy is trying to say, but he can’t write a coherent sentence.

  3. Andrew M

    Good point – also worth pointing out that someone like Murphy himself (and indeed swathes of academia) are actually negative in terms of their productivity. They are not producing anything of value and indeed their drivel is actually destructive of productive enterprise, as well as encouraging people to engage in terrorist activities (like joining XR/IB/JSO) rather than doing something useful.

  4. And there’s another thing. Assuming the ‘taking money out of the economy by taxation’ thing is applied, it must equal higher tax receipts. Tell me? Which politician is going to able to cancel all that lovely cash rather than just spending it? Or have I missed something?

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