More importantly, inflation and taxes are, in many ways, simply two sides of the same coin. Those governments without access to tax revenues can instead “debase the coinage”. Supporters of MMT claim this will never happen, yet history suggests otherwise: after all, it has been a tried and tested policy of kings and queens over hundreds of years. Too often, those with access to the printing press are prepared to take undue risks in the hope that “this time it’s different”. Still, imagine for a moment that governments embrace MMT. Imagine too, as MMT proponents suggest, that control of the printing press is taken away from unelected central bankers and given to “accountable” elected fiscal representatives. Would we be any better off?įar from it. Giving elected representatives the keys to the printing press is the equivalent of giving a gambling addict the keys to the casino. For many politicians, the primary objective is to remain in power. As such, they will too often be incentivised to pursue instant gratification at the expense of longer-term stability. In the early-1970s, the UK embarked on what became known as the “Barber boom”, thanks to the efforts of Conservative chancellor of the exchequer Anthony Barber to engineer an election victory in 1974. As it turned out, the Tories lost and, two years later, the UK ignominiously had to accept a bailout from the IMF. Central bank independence provides a useful bulwark against such behaviour.
Emerging markets often end up resorting instead to devaluation, default or inflation. In anticipation, borrowing costs spike. Put simply, the risk of government default in the face of an adverse economic shock is lower than for other would-be borrowers.Īdmittedly, there are limits, dictated largely by the political capacity of a government to raise revenues in difficult circumstances. A government can.Īrmed with this knowledge, creditors are understandably willing to accept mostly lower returns on government bonds than on other investments. A worker receiving a pay cut cannot force others to make up the difference. In the real world, however, taxes are crucial. The fundamental difference between government finances and those of companies and households is not access to a printing press but, instead, the coercive power to raise taxes. A company making a severe loss cannot reduce that loss by imposing taxes on everyone else. A government can. Taxes may serve other purposes - the redistribution of income and wealth, the discouragement of “sinful” behaviour - but, in the world of MMT, they serve no useful macroeconomic role. As such, all their spending could, in principle, be financed via the creation of cash. As Stephanie Kelton notes in her book The Deficit Myth, governments with access to a printing press are “currency issuers” (exceptions include, most obviously, members of the eurozone).
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