Sunday, October 27, 2013

Macroeconomics of democratic communism

Democratic communism uses Modern Monetary Theory. According to Modern Monetary Theory (MMT), the government creates and spends money whenever it needs to, and for whatever real goods and services it wants. It imposes taxes for two main purposes. The first is to give value to currency, and to spread the burden of its demand for real goods and services more broadly in society, and the second is to control inflation. Thus, unlike households, firms, and regional/local governments, the national government is not budget constrained: it cannot run out of money. The national government can, of course, demand so many goods and services from the citizenry as to substantially reduce their economic quality of life, and they can inject enough money into the system to cause inflation, but the government cannot run out of money itself.

Modern Monetary Theorists claim that this is not a normative or semi-normative claim. Instead, they believe MMT is what it means to have a fiat currency, and all the institutional apparatus of nation-states with their own currencies do is implement MMT in a more or less (usually more) opaque and undemocratic manner. Democratic communism makes MMT explicit and open.

The national government creates new money through several different channels. First, it creates money when it demands real goods and services directly for the general welfare of the nation (e.g. pays the armed forces or builds and maintains the interstate highway system). Second, it creates new money when it permits regions and localities to capitalize firms.* Third, as I mentioned earlier, the national government creates new money when it directly provides jobs, as it must to anyone who asks, at a wage sufficient to earn a dignified living.** Finally, the government bank creates new money when it loans money to firms and individuals.

*I suspect that it is inadvisable for the national government to directly capitalize any firm; any firm whose business is truly national in scope probably should be directly run by the national and/or regional governments.

**Jobs programs would probably be operated by local and regional/state governments, but these governments have no discretion as to whether or not to offer jobs, so the national government would probably pay for the jobs directly.

Similarly, there are several ways the national government takes money out of the system. First, obviously, there are direct progressive income taxes on individuals. Second, the national government collects a proportional rent on capital from firms it capitalizes. (The national government does not need to collect direct taxes from firms.) Third, the government collects rent on money loaned (i.e. interest).

Finally, the government can temporarily adjust the money supply by buying and selling bonds, and paying interest on those bonds. Under MMT, these bonds are not a source of revenue; the government is not "borrowing" money to fund its operations. Instead, government bonds just serve as a buffer for the supply of "high powered money" (i.e. cash and checking account money). When there is "too much" money in circulation, the government sells bonds at higher interest rates; when there is too little, the government lowers bond rates to induce people to exchange their bonds for currency. Because the government can always create new money, it can never default (fail to make timely interest payments) on bonds.

The question is not whether a modern national economy should operate in this way; as best we can figure out, this is how a modern economy actually operates. The question is whose hands are actually on these levers: private individuals, anarchically competing against one another and unaccountable to the people, or by the people themselves and institutions with clear and direct democratic control. Democratic communism sides firmly on the latter.

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