Wednesday, October 09, 2019

MMT Misconceptions part 3a (taxes)

Finally, Doug Henwood's essay, Modern Monetary Theory Isn’t Helping, gets to the crux of the biscuit, taxes and government revenue.

Misconception: Taxation transfers resources
MT’s lack of interest in the relationship between money and the real economy causes adherents to overlook the connection between taxing, spending, and the allocation of resources. We have [all sorts of bad things] because the public sector is starved for resources. Taxing takes those resources out of private hands and puts them into public ones, with at least the potential for them to be spent on more humane pursuits.

Long sigh. This is a complicated and persistent misconception. It's complicated because economics is complicated; it's persistent because the illusion that taxes transfer resources serves the interests of the capitalist class.

Please bear with me as I draw an extended analogy.

Consider an ordinary automobile. One way (certainly not the only way) to think about a car is to divide it conceptually into the physical system, the user interface, and the control system. The physical system consists of the engine, which physically makes the car go, the tires, which physically turn the car, and the brake pads, which make the car slow down and stop. The user interface is what you, the driver, use to control the car: the gas pedal makes the car go, the steering wheel makes the car turn, and the brake pedal makes the car stop. Finally, the control system connects the user interface to the physical system. Pushing the gas pedal down (U) causes a cable to open the throttle in the carburetor, which sucks more gasoline and air into the cylinders, (CS) and the car goes faster.

This is more or less what MMT does (or at least how I read MMT): divide the economy the same way as above. The physical part, the real economy, comprises factories, workers, capital, natural resources, etc. The user interface is money our ordinary experience of money, receiving a paycheck, spending money to buy stuff, paying taxes, etc. The control system is the banking system, including the central bank and the Treasury, which connects our ordinary experience of money to the real economy.

There are a lot of other useful ways to divide the economy, and a lot of other economic topics worth studying; MMT scholars choose to focus mostly on the control system, i.e. the banking system. Moreover, they claim to have discovered (or advanced our understanding of) how the control system works; moreover, they claim the control system does not work the way capitalist economists tell us it works.

(These claims are either true or false. If they are true, they are true even if we don't like that they're true; if they're false, they are false even if we want them to be true. It is instructive that Henwood never analyzes whether or not MMT scholars' claims are true or false, only that they are undesirable, and MMT scholars are ugly and their mothers dress them funny. Of course, I think Henwood is fractally wrong.)

Back to the car analogy. Max Max has a turbocharger on his V8 Interceptor. He has a pull switch installed on the gear shift lever that engages the turbocharger. He pulls the switch and the car goes faster. We would justly consider someone misguided who objected, "Max can't just push a button and make the car magically go faster. Pushing on the gas pedal makes the car go faster." We would consider them willfully ignorant if, when we tried to explain, they retorted, "Don't confuse me with all that 'physics' and 'engineering' bullshit. I know how a car works, and you make it go faster by pushing the gas pedal. If we could just push a button and make the car go faster, then why can't we just put in a button that makes the car go 1,000 miles per hour? Checkmate atheists engineers!"

Henwood makes the same mistake by confusing taxes (user interface) for resource transfers (control system) and exhibits the same willful ignorance by dismissing MMT scholars nerdy wonks talking about boring and mathy topics like accounting and finance. Henwood already knows how the economy works. I mean, he's at least skimmed "Wage Labor and Capital"; what more do we need to know?

In the next installment, I'll dig more deeply into what economists teach undergraduate economics students about macroeconomics (I am an expert in this topic, or at least a professional, because I am paid to do just that) and how Henwood badly mangles even conventional macroeconomics; I will follow with the changes that MMT scholars (as I understand them) propose to conventional macro.

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