Theoretical simplified tax system

[gendoikari]

First we start by defining the variables we will be using

W= An individual households yearly income
C= Total Taxable Corporate Profits
G= Total Government Expenditure
K= Break-line income of the top 50% of wealth
A=average Household income
N=number of households
T= total taxes paid by individual household
P= Percent of W paid
R= Co-efficient of economic restitution
E= Co-efficient of Government expenditure precentile
Y= corporate Tax rate.

We now state the continuous Tax Code Equation

http://a8.sphotos.ak.fbcdn.net/hphotos-ak-snc6/207398_903480755491_33024362_42367655_6432987_n.jp g
Here we can clearly see that once an individual makes a certain number of times the average income, they will be paying the coefficient of government expenditure, E.

Now, we start by finding the unknown co-efficients.

http://a3.sphotos.ak.fbcdn.net/hphotos-ak-snc6/216917_903478085841_33024362_42367574_2537197_n.jp g

We now find R. This is a bit more complicated as it is as variable as we want, which is why we choose K as it is, more on this later. For no we can find R by setting K equal to W. That is,

http://a8.sphotos.ak.fbcdn.net/hphotos-ak-snc6/216917_903478080851_33024362_42367572_865435_n.jpg

We now set this percent equal to E, to solve for a fair tax that will never have any individual paying more than E if they are under the top 50% of wealth controllers.

http://a6.sphotos.ak.fbcdn.net/hphotos-ak-snc6/216917_903478070871_33024362_42367571_3215248_n.jp g Dividing by E yeilds,

http://a4.sphotos.ak.fbcdn.net/hphotos-ak-snc6/216917_903478065881_33024362_42367570_3442261_n.jp gSolving for R we find,

http://a5.sphotos.ak.fbcdn.net/hphotos-ak-snc6/216434_903476578861_33024362_42367528_8157369_n.jp g

now remember where we said that the definition of K was important, well here is where this comes in. We know that K is the wage earned by the least wealthy earner who controls that part of the top 50%, and we know that A is the average houshold income. What this means is that when R=1 The top half of the controlled wealth is in the hands of the top 50% of housholds. That is K=A, means that every houshold earns the same income. And while this is not necessarily a good thing in and of itself it shows what R really is, and that is an indication of the distribution of wealth, basically a middle line indicator. and when R goes up, wealth distribution gets more distributed to the wealthy, and when it goes down it gets more distributed to the lower class. Another effect of R, is that when R=1, That is to say that, K=A, and W=k, that EVERYONE will pay P=E as their percentage.

Now we move on to actually balancing the budget.

we know that the corporate tax revenue is easy to find as C*Y. However the total tax revenue is a bit more complicated. We must here make a decision, what is a fair tax. Well IMO, p=E is the maximum fair tax on an individual human, but due to the equation, the lower wage, that is when K=/=A, those who own the lower 50% will not being paying a total of E as the total bracket percent. This revenue can be found however as,

http://a6.sphotos.ak.fbcdn.net/hphotos-ak-snc6/216434_903476573871_33024362_42367527_826352_n.jpg

Where http://a4.sphotos.ak.fbcdn.net/hphotos-ak-ash4/216434_903476568881_33024362_42367526_6657768_n.jp g is the number of people who have wage W

The revenue for the upper half is more easily found with a single Tax percentage as,

http://a2.sphotos.ak.fbcdn.net/hphotos-ak-ash4/216434_903476563891_33024362_42367525_4754104_n.jp g

Corporate revenue is easier still as

http://latex.codecogs.com/gif.latex?C*Y

Settin these equal to G to find a balanced budget we find that,

http://a8.sphotos.ak.fbcdn.net/hphotos-ak-ash4/216434_903476558901_33024362_42367524_6785196_n.jp g

with a little knowledge of math we can turn the sum into an integral to yield,

http://latex.codecogs.com/gif.latex?G=C%2AY+%28%5Cint_%7B0%7D%5E%7Bk%7DT%2AN _%7Bw%7Ddw%29+%5Cfrac%7BA%2AN%7D%7B2%7D%2AE

However, this also has the side effect of giving corporate incentive to rais wages, after all if when A goes up both their taxes and the Y go down.

as you can see, this is a formula that WILL balance the budget, streamline taxes, and most important of all will CUT TAXES when the budget is cut automatically. How much you cut from the budget is on you, but the more bloated the budget the higher the taxes.

[ellipsis]

Moved to economics.

[gendoikari]

any thoughts guys?

[Lynx]

Source (http://mmtwiki.org/wiki/National_accounting_identities_and_the_sectoral_ba lance_approach)

(S – I) = (G – T) + (X – M)

The sectoral balances equation says that total private savings (S) minus private investment (I) has to equal the public deficit (spending, G minus taxes, T) plus net exports (exports (X) minus imports (M)), where net exports represent the net savings of non-residents.

Another way of saying this is that total private savings (S) is equal to private investment (I) plus the public deficit (spending, G minus taxes, T) plus net exports (exports (X) minus imports (M)), where net exports represent the net savings of non-residents.

All these relationships (equations) hold as a matter of accounting and not matters of opinion.
A balanced budget implies that G - T = 0. Given a trade deficit, where X - M < 0, the left hand of the equation must also be < 0, thus S - I < 0.

In other words, in the presence of a trade deficit, a balanced budget would reduce savings and investment of the private sector and cause further harm to the economy. Be careful what you wish for!

Also - taxes do not fund anything. Their purpose is to reduce the money supply (in case of demand pull inflation) and to encourage/discourage economic behavior (eg. discourage smoking)

p.s. (G - T ) = ( S - I ) - (X - M ) may be easier to evaluate

[gendoikari]

Source (http://mmtwiki.org/wiki/National_accounting_identities_and_the_sectoral_ba lance_approach)

A balanced budget implies that G - T = 0. Given a trade deficit, where X - M < 0, the left hand of the equation must also be < 0, thus S - I < 0.

In other words, in the presence of a trade deficit, a balanced budget would reduce savings and investment of the private sector and cause further harm to the economy. Be careful what you wish for!

Also - taxes do not fund anything. Their purpose is to reduce the money supply (in case of demand pull inflation) and to encourage/discourage economic behavior (eg. discourage smoking)

p.s. (G - T ) = ( S - I ) - (X - M ) may be easier to evaluate

I smell capitalist horseshit economics unless by S-I you mean the total amount of currency in a given nation. in that you are correct however, not having a balanced budget leads to far grater consequences. and globally the equation is balance automatically without the over printing of currency.

[RichardAWilson]

Have you heard of the crowding-out effect? A balanced budget would lead to more savings and private sector investing because money which is otherwise borrowed by the public-sector would be freed for the private sector, thus leading to lower interest rates. Nonetheless, the crowding-out effect doesn't work in a depressed economy where individuals and institutions are hoarding money because lower interest rates won't be effective at inducing business spending and investing. The Clinton Admin. provided an illustration of balanced budgets benefiting the economy and the Hoover Administration provided an illustration of how attempting to balance the budget can be counterproductive.

http://en.wikipedia.org/wiki/Crowding_out_(economics)

The Reagan Administration provided the perfect example of how deficit-financing can undermine the private sector. Even though the Reagan imbalances could be attributed to Supply Side Tax Cutting, each dollar in tax cutting was matched with a dollar in increased governmental borrowing. On the whole, the effect was to reduce net savings.

As such, business spending in relation to GDP was lower than the Post-War Average and long-term interest rates were higher than would have otherwise been the case.

Conclusion

Higher marginal tax rates, assuming they contribute to a balanced budget, can have a net positive effect on national savings and private investing.

However, during an economic downturn where individuals and businesses are inclined to hoard instead of investing, the opposite could occur.

[gendoikari]

Yeah but deficit spending the way we've been doing is unsustainable. For one the money put back into our economy to keep us ... well i'm going to use thermodynamic principals here. To keep us at a certain mole level of dollars that money has to come from somewhere, and that means either borrowing or printing. Printing more, causes inflation. and borrowing well. ... we have to borrow from someone with a surplus.... and guess who that is... the ones with more exports than imports. I.e. in a simplified form china would be selling us the widgets and then give us the money back to make our net imports -exports = 0. and you know what that's how it works in a global society as well where the coffers fill for the entire world.

Fucking economics and your non conservative principals.

[RichardAWilson]

I couldn't think of a better time to borrow from the Chinese than when the 10Y Bond Yield has fallen to 2.4% :thumbup1: and over a fifth of the working age population can't find a job. Did I mention that we're going to need to make $2.2 trillion in investments to maintain our infrastructure over the next decade?

Trade imbalances aren't bad if they're caused by meaningful investing (I.e. business spending, infrastructure and human capital).

The problem has been that we've been borrowing and spending too much on gas-guzzling automobiles, big suburban homes, name brand clothing, tax reductions for the rich and Imperial Wars in Iraq and Afghanistan.

[gendoikari]

well if you want to get technical budget deficits aren't bad either. it's all illusionary math anyway based on faith. as long as the people believe, it works. Which seems a lot to me like walking on eggshells with your future. but then again I don't make policy, i just pay my taxes.

[RichardAWilson]

I subscribe to the Keynesian Logic that running a fiscal imbalance during a downturn is sensible to revive the economy and balancing the budget during an expansion is the sensible means of controlling consumer spending, reducing inflation and stimulating business and capital spending.

Deficits are pro-demand and balanced budgets and surpluses are pro-supply.

During a recession, you need more demand and during an expansion, you need a growing supply.

[Lynx]

S - I is the private domestic sector. If there is a balanced budget and a trade deficit, S - I must be < 0 or in deficit. If people wish to save in spite of a balanced budget they will need to cut spending and investment, or go more into debt. This does not bode well for economic recovery.

The US almost always runs deficits. It is sustainable, because sovereign governments are currency issuers. Check these numbers (http://mikenormaneconomics.blogspot.com/2011/08/total-govt-debt-issued-since-1998-225.html).

It takes real resource constraints to trigger inflation. In a recession, consumption and production are below maximum capacity. Wage pressures are virtually non-existent. And this time we are in a balance sheet recession, with the private sector trying to pay down its debts. If there is excess money supply in comparison to the amount of goods and services available for purchase, we are not seeing that money flooding into the real economy.

China doesn't spend or exchange all of its dollars, so the only option left is to invest it. (They are running a peg, they need to keep some foreign reserves just in case.) They're not getting a high yield on their US investment, but it is better than nothing.


1. The natural rate of interest is zero. As the government deficit spends to match the savings desires of the private sector, reserves accumulate in the banking system. Without government bonds to act as a reserve drain, then the supply of reserves will push the overnight lending rate to zero.

2. The 'loanable funds' theory is garbage. The current thought behind austerity is that government spending is 'crowding out' private investment, that as the government spends it pushes *up* interest rates, which raises the costs to access 'capital'. And we can plainly see that based on point 1 this is completely false. Deficit spending is the one and only mechanism that allows for net financial assets to accumulate in the private sector.
The above quote is taken from this article (http://marketthoughtsandanalysis.blogspot.com/2011/08/why-deficit-spending-and-creative.html).

[malcom]

I have a hard time seeing how what you wrote simplifies taxes (but your algebra chops are impressive)! A SIMPLE tax system would be to just have the government state what it will spend and divide that by GDP. That will give you the tax rate that everyone should pay on all their income.

If the government wants to spend $3 trillion and GDP is $15 trillion:
3/15 = 20% tax rate

The entire tax code can then just be 1 line: "Tax rate for 2012 is 20%."


If you want a progressive tax rate, then just have a flat 50% tax, have the government take $3 trillion out of it for itself and then divide the remaining funds equally among all tax payers.

50% * $15 trillion GDP = $7.5 trillion Tax Revenue
$7.5 trillion - $3 trillion govt take = $4.5 trillion left over
$4.5 trillion / (100 million full-time workers + 35 million part-time workers) = $20k per part-time worker & $40k per full-time worker

So if you make $50k, you would pay $25k in taxes but get a $40k rebate.



Also - taxes do not fund anything. Their purpose is to reduce the money supply (in case of demand pull inflation) and to encourage/discourage economic behavior (eg. discourage smoking)

Taxes do in fact fund government and do not affect the money supply at all. Your statement above is not correct.

[Lynx]

Taxes do in fact fund government and do not affect the money supply at all. Your statement above is not correct.
Correction: taxes do not fund the federal government or the level of government that is the currency issuer. Money must first be created and spent before it can be taxed back. It cannot be the reverse.

Non currency issuing governments (provincial, state or municipal level, or EU countries like Greece) are in the same predicament as the private sector. They must balance their budgets over the long run, or risk default.

G - T = deficit (if positive) or surplus (if negative)
accumulated deficits (flow) = national debt (stock) = money supply

'Vertical' money creation increases the money supply while taxes reduce it. Transactions within the non-government sector (currency users) is referred to as 'horizontal' money. It can lead to booms and busts, but not long term inflation.

A balanced budget would be a pro-cyclical disaster for the US and countries who are running trade deficits. It would be worse than what has been enacted so far under the guise of austerity.

[malcom]

Correction: taxes do not fund the federal government or the level of government that is the currency issuer.

That is still incorrect. Taxes do fund all levels of government, including the federal government. And the federal government does not create money, the federal reserve bank does when it makes certain loans.



Money must first be created and spent before it can be taxed back. It cannot be the reverse.This is also incorrect. Money in the money supply circulates forever and every time it passes from one hand to another, it is recorded as income and it is charged a tax. Taxes have NOTHING to do with money creation.



accumulated deficits (flow) = national debt (stock) = money supplyThe first part is correct but national debt does NOT equal the money supply (if it did it would be coincidence only). If everyone eventually paid all their debts and never took out another loan, the money supply would not be zero.

If you buy a Treasury bond to lend the federal government money to finance its debt, when the government pays you back, you get to obviously keep that money. It isn't deleted from the money supply.



'Vertical' money creation increases the money supply while taxes reduce it.Taxes have nothing to do with the money supply, and they do not reduce or increase it.

[Die Neue Zeit]

Correction: taxes do not fund the federal government or the level of government that is the currency issuer. Money must first be created and spent before it can be taxed back. It cannot be the reverse.

Non currency issuing governments (provincial, state or municipal level, or EU countries like Greece) are in the same predicament as the private sector. They must balance their budgets over the long run, or risk default.

G - T = deficit (if positive) or surplus (if negative)
accumulated deficits (flow) = national debt (stock) = money supply

'Vertical' money creation increases the money supply while taxes reduce it. Transactions within the non-government sector (currency users) is referred to as 'horizontal' money. It can lead to booms and busts, but not long term inflation.

A balanced budget would be a pro-cyclical disaster for the US and countries who are running trade deficits. It would be worse than what has been enacted so far under the guise of austerity.

Comrade, I see you're studying Chartalism further than I have been (what little monetary theory I've read into is Chartalist)! :thumbup1:

[Lynx]

That is still incorrect. Taxes do fund all levels of government, including the federal government. And the federal government does not create money, the federal reserve bank does when it makes certain loans.
Another excerpt (http://marketthoughtsandanalysis.blogspot.com/2011/08/why-deficit-spending-and-creative.html):


-- Why does the US Government Issue Bonds? History of Bond Issuance, Self-Imposed Debt Ceiling Constraints, Reserves, OMO, and QE

As was detailed above, US Government bonds 'fund' absolutely nothing. They are not a 'burden' to anybody, and are nothing more than the accumulated net savings of the Non-Government sector. So then, what to bonds 'do'?

They allow the Federal Reserve to maintain its target short term rate. Deposits within the banking system create reserves. A bank manager has a few options with what to do with those reserves, after using a portion of those reserves to ensure balances are cleared and other maintenance activities, and to maintain reserve requirements (and it is worth noting that many banking systems in other countries have no reserve requirements at all). They could let it sit in the vault as cash (earning no interest). They could keep it on account at the Federal Reserve (which relatively recently now earn a mere 25 bp, they earned 0 for a very long time before that). They could lend the reserves overnight (at an interest premium) on the interbank lending network to banks that require reserves to meet requirements. Or one of the few options beyond that is the purchase of US Government bonds. Reserves are not lent out. With the purchase of the bonds the banks are able to earn more interest in a very liquid asset (the US Treasury market is by far the biggest on the planet).

This is how this manifests in the current system: The Federal Reserve has a mandate to maintain short term interest rates consistent with its policy goals. If the banking system has a system-wide deficit of reserves relative to requirements, then competition overnight on the interbank network will drive up the short term interest rate. The Fed reacts to this by buying US Treasury bonds on the open market and prints reserves (out of thin air) in exchange for those bonds. The result is a system wide increase in reserves and a system wide decrease in the amount of US Government bonds (an asset swap). This allows the Fed to put a cap on the short term interest rate relative to its policy goals. On the flip side, If the banking system has an excess amount of reserves relative to requirements, then competition overnight on the interbank network will drive down the short term interest rate. The Fed reacts to this by selling US Treasury bonds from its portfolio on the open market. The banks trade their reserves in exchange for the bonds. The result is a system wide decrease in reserves and a system wide increase in the amount of US Government bonds (again, nothing but an asset swap). Since the Fed is the entity that 'printed' those reserves to begin with, they disappear 'into the ether' when they are returned to the Fed's balance sheet.

For more on OMO and QE (which is functionally identical to OMO) and the role reserves play in our financial system (and dispelling the myths of the Money Multiplier), see here, here, and here

Here is are the key points about US Government bonds:

1 ) The US Federal Government spends (via the US Treasury) by crediting private sector bank accounts at the Federal Reserve
2) There is a Congressional constraint that all US Federal Government spending be matched by Government Bond sales
3) There is a 'debt ceiling' associated with the size of outstanding Government bonds
4) Both 2 and 3 are self-imposed constraints with historical origins and neither are an operational constraint to Federal Spending
5) The US Federal Government is monopoly issuer of the US Dollar, is the source of all Dollars, and can never 'not' have Dollars
6) From 5, the US Federal Government can never become 'insolvent' in terms of honoring US Dollar denominated obligations. The only way it cannot honor its Dollar denominated obligations is if it *willingly decides* not to pay them. This is another self-imposed constraint, not an operational one
7) Net Federal Government spending (spending in excess of taxation) creates net deposits which creates net reserves in the banking system. An increase in reserves pushes down the overnight lending rate. The Federal Reserve maintains control of its target overnight rate by selling US government bonds from its portfolio (via OMO) to ensure demand for reserves (the overnight interest rate) matches its target policy rate.

When all these points are considered, it becomes obvious that the US Government bond market:

a) Does not *fund* anything (It did under a convertible currency standard but does not under a fiat currency floating exchange rate standard)
b) Provides the non government sector with interest income which the US Government will always be able to provide since it is monopoly issuer of the US Dollar
c) Has relevance in the US Monetary System to facilitate liquidity management operations.

That's it.

Bonds serve no funding purpose now. They serve a place in the very convoluted process of OMO to drain reserves in order to allow the Central Bank to hit its target rate. But this could be much more easily accomplished by simply paying a remuneration rate at the target rate on all reserves. They are absolutely unnecessary to the functioning of a fiat currency system.

Another excerpt (http://marketthoughtsandanalysis.blogspot.com/2011/02/one-of-smartest-comments-i-have-read.html):

The way that net reserves in the banking system change is through Congressional spending.

The Treasury is the only party that can create money 'vertically' within our banking system. Treasury spending is the only transaction in which there is no corresponding liability. I am not talking about Treasury bond issuance here. Like I said above, Treasury bonds 'fund' nothing. When the Congress wishes to spend, they authorize the projects and direct the Treasury to spend. When the Treasury spends, it simply spends. It doesn't wait for 'bond revenues', it doesn't wait for 'tax revenues'. Both of this concepts had applicability under a Gold Standard. They have absolutely no applicability in a fiat currency system.

When the Treasury spends, money is created out of nothing. There is no asset swap. The Treasury either credits private bank accounts directly or issues checks that transact through the banking system. The result is a net increase in reserves. When the Treasury taxes, the result is a net decrease in reserves. In no way do taxes 'fund' anything in a fiat currency system.


The first part is correct but national debt does NOT equal the money supply (if it did it would be coincidence only). If everyone eventually paid all their debts and never took out another loan, the money supply would not be zero.
If the national debt (government sector) were reduced to zero the money supply would be zero. That's not to say there would be no counterfeit bills floating around.

If you buy a Treasury bond to lend the federal government money to finance its debt, when the government pays you back, you get to obviously keep that money. It isn't deleted from the money supply.
The bonds you invest in are an asset swap. Government spends 10k, sells 10k worth of bonds. At maturity, you receive face value of your bond plus interest. But the 10k of spending has not been offset. Only taxes can offset it. This results in money creation.

Comrade, I see you're studying Chartalism further than I have been (what little monetary theory I've read into is Chartalist)!
You introduced me to this topic :)

[Vladimir Innit Lenin]

well if you want to get technical budget deficits aren't bad either. it's all illusionary math anyway based on faith. as long as the people believe, it works. Which seems a lot to me like walking on eggshells with your future. but then again I don't make policy, i just pay my taxes.

I think this needs to be corrected.

A certain level of deficit is okay. Now, I don't really come up with methodologies for people like S&P or Moody's, but obviously there's a fluidity as to where that point lies, depending on where people like S&P believe that there is (for governments) less than a 100% chance of said government having the ability to make a margin call on all its debts at any point in time t+1.

[malcom]

Chartalism is complete nonsense. It is not an accurate description of how the US banking system works. Citing random blog posts on the internet doesn't change that fact.


The bonds you invest in are an asset swap. Government spends 10k, sells 10k worth of bonds. At maturity, you receive face value of your bond plus interest. But the 10k of spending has not been offset. Only taxes can offset it. This results in money creation.

And it makes you draw these incorrect conclusions.

You lend $10k to the govt. You pay taxes to govt. A portion of those taxes pay back your loan. No money has been created. Money is just switching between your hands and the govt's.

[Lynx]

Chartalism is complete nonsense. It is not an accurate description of how the US banking system works. Citing random blog posts on the internet doesn't change that fact.
I'm not going to do your homework for you. Read Scott Fullwiler's work if you wish to learn how the US banking system works in detail.

You lend $10k to the govt. You pay taxes to govt. A portion of those taxes pay back your loan. No money has been created. Money is just switching between your hands and the govt's.
Your 'loan' sits in an account until it is swapped back. The money created by the treasury expands the money supply. When only part of it is offset by taxes, you have deficit spending. It would take a budget surplus to remove the difference.

[malcom]

I'm not going to do your homework for you. Read Scott Fullwiler's work if you wish to learn how the US banking system works in detail.

No thanks. I prefer to get my information from legitimate sources like textbooks. There is a reason why you won't find chartalism is any textbook. :)



Your 'loan' sits in an account until it is swapped back. The money created by the treasury expands the money supply. When only part of it is offset by taxes, you have deficit spending. It would take a budget surplus to remove the difference.So you are saying when you loan the govt money, they don't actually use it?! Instead of using the money you lent them, they stick it into an account and then use some unknown, secretive process that the Treasury has to just print new money. And then they use this newly created money instead of your loan!?!

[Kotze]

For the most part the misunderstanding seems to come from the meaning of the term government. In Chartalist usage government includes the central bank.

[Lynx]

No thanks. I prefer to get my information from legitimate sources like textbooks. There is a reason why you won't find chartalism is any textbook. :)
Textbooks are not sacrosanct, they can contain errors. You would do well to question some of this mainstream dogma, especially when it fails to predict events like the Great Financial Collapse.
Heterodox economics is usually ignored by the mainstream establishment, or is claimed to have been debunked, as was the case with Marx. Did that put an end to the debate?
Chartalism/MMT will have its day, as it is one of the economic schools of thought that did predict the GFC.

So you are saying when you loan the govt money, they don't actually use it?! Instead of using the money you lent them, they stick it into an account and then use some unknown, secretive process that the Treasury has to just print new money. And then they use this newly created money instead of your loan!?!
If the matching debt is issued after the fact (ie. the actual spending), then your money is not lent out. It makes no difference either way. If the government borrows your 10k, then spends 10k and eventually collect 6k, they still pay you 10k plus interest at maturity. A private citizen or business cannot do this - they cannot pull money out of thin air to make up the shortfall.

What secretive process? Men and women are told to enter numbers on a keyboard. In other departments, computers are programmed to credit large numbers of accounts with the appropriate amounts. All of this activity is accounted for, to the penny.

[Lynx]

For the most part the misunderstanding seems to come from the meaning of the term government. In Chartalist usage government includes the central bank.
The central bank is part of the government sector. Commercial banks are part of the non-government or private sector.

[malcom]

Textbooks are not sacrosanct, they can contain errors.

To say that textbooks completely misunderstand how the banking system works is so absurd.



You would do well to question some of this mainstream dogma, especially when it fails to predict events like the Great Financial Collapse.Economics does not claim to be able to predict when future events happen. Only quacks do.

But they do claim that business cycles are a regular part of a free market economy. Nobody who studies economics is surprised that we had a recession and an asset bubble.



Heterodox economics is usually ignored by the mainstream establishment, or is claimed to have been debunked, as was the case with Marx. Did that put an end to the debate?A lot of what Marx said turned out to be wrong. Debating does not give you the right to your own version of the facts.



Chartalism/MMT will have its day, as it is one of the economic schools of thought that did predict the GFC.Like I said, only quacks claim to be able to predict the future.

Chartalism will have its day on the same day astronomers claim the sun revolves around the earth.



If the matching debt is issued after the fact (ie. the actual spending), then your money is not lent out.What matching debt? If you buy a $1000 treasury security, you are really lending the govt $1000. There is no matching debt issued.



It makes no difference either way. If the government borrows your 10k, then spends 10k and eventually collect 6k, they still pay you 10k plus interest at maturity. A private citizen or business cannot do this - they cannot pull money out of thin air to make up the shortfall.That is not how it works. If the govt is short $4k, they borrow that $4k by selling $4k in treasury securities at an auction to people like you, me and China.

They can also borrow from the FED and the FED can create new money to loan to the treasury or member banks.

But the govt debt does not equal the money supply. And the govt doesn't borrow 100% of its money by creating new money. And taxes don't affect the money supply. And if the govt paid off all its debt, the money supply would not be zero.

[Kotze]

@malcom: Have you heard about Chartalism before and can you describe that model in your own words?

[malcom]

@malcom: Have you heard about Chartalism before and can you describe that model in your own words?

I have not heard of it. I'm just responding to what was posted here.

[Lynx]

To say that textbooks completely misunderstand how the banking system works is so absurd.
Economic textbooks routinely misrepresent how the banking system works. There are economists who don't understand monetary operations.

Economics does not claim to be able to predict when future events happen. Only quacks do.
According to mainstream quacks the GFC should not have occurred. Financial innovation, deregulation, was deemed to be good; fraud was deemed impossible.

But they do claim that business cycles are a regular part of a free market economy. Nobody who studies economics is surprised that we had a recession and an asset bubble.
Some of the mainstream quacks claimed that the business cycle was dead. Some still do, insisting that government continues to distort market mechanisms with social spending, regulations and minimum wage laws.

A lot of what Marx said turned out to be wrong. Debating does not give you the right to your own version of the facts.
A lot of mainstream theories turned out to be wrong, yet that doesn't stop apologists for the status quo from continuing to push the same failed policies.

In any field of inquiry, as soon as you have an inconsistency or a failure to predict real world events, the theory or model must be revised.

Like I said, only quacks claim to be able to predict the future.
Then all economists are quacks. They don't have the luxury of claiming how the economy works without making predictions based on those claims.

Chartalism will have its day on the same day astronomers claim the sun revolves around the earth.
Mainstream economics is analogous to claiming the Sun revolves around the Earth. This needs to be corrected.

What matching debt? If you buy a $1000 treasury security, you are really lending the govt $1000. There is no matching debt issued.
For every dollar spent, a dollar worth of securities must be sold. This is a voluntary constraint followed by the government for on-budget items.

That is not how it works. If the govt is short $4k, they borrow that $4k by selling $4k in treasury securities at an auction to people like you, me and China.
Treasuries are issued to match spending. Since 1998, 229 trillion worth of debt was issued, and 215 trillion was redeemed. That leaves 14 trillion outstanding. Borrowing cannot extinguish that 14 trillion.
If no 'securities' had been issued, the debt would be the same.

They can also borrow from the FED and the FED can create new money to loan to the treasury or member banks.
Yes, through OMO and QE. Yet many people mistakenly believe that QE is equivalent to printing money.

But the govt debt does not equal the money supply. And the govt doesn't borrow 100% of its money by creating new money. And taxes don't affect the money supply. And if the govt paid off all its debt, the money supply would not be zero.
When the government is a monopoly issuer of currency, the entire money supply is created out of thin air. This is by necessity. A non-barter economy requires a medium of exchange, in this case, fiat currency or "net financial assets".

[Vladimir Innit Lenin]

For the most part the misunderstanding seems to come from the meaning of the term government. In Chartalist usage government includes the central bank.

But some countries, such as the US, have a private central bank which has little to do with the machinations of government.

[malcom]

But some countries, such as the US, have a private central bank which has little to do with the machinations of government.

The US Federal Reserve is not private. The chairman is appointed by the president, their profits are given to the US treasury and they are accountable to the Treasury.

[malcom]

Economic textbooks routinely misrepresent how the banking system works. There are economists who don't understand monetary operations.

It is impossible to have a rational conversation with someone who thinks banking textbooks and the bankers and economists who are trained from them don't know how banking really works, but some obscure guy on the internet does.



According to mainstream quacks the GFC should not have occurred. Financial innovation, deregulation, was deemed to be good; fraud was deemed impossible.That is not the mainstream opinion of economists. And even if it was, it does not make your understanding of banking correct.



A lot of mainstream theories turned out to be wrong, yet that doesn't stop apologists for the status quo from continuing to push the same failed policies.What we are debating is not the merit of economic policies, but rather how banks work in the US. What you claimed about how banks and taxes work is wrong. It is not debatable. It is just not how it works.



Then all economists are quacks. They don't have the luxury of claiming how the economy works without making predictions based on those claims.We have a complete and total understanding of how plasma tvs work. But nobody can predict the precise day they will break and stop working.



For every dollar spent, a dollar worth of securities must be sold. This is a voluntary constraint followed by the government for on-budget items.That is just not how the government works. They get revenue from taxes, fees, tariffs AND borrowing. Their revenue does not come from just borrowing.

[Vladimir Innit Lenin]

The US Federal Reserve is not private. The chairman is appointed by the president, their profits are given to the US treasury and they are accountable to the Treasury.

How are they accountable to the treasury?

In any case, the Treasury Secretary isn't even elected him/herself!

Who owns the Fed?

[Lynx]

It is impossible to have a rational conversation with someone who thinks banking textbooks and the bankers and economists who are trained from them don't know how banking really works, but some obscure guy on the internet does.
Modern Central Bank Operations (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1723198)

Comprehensive coverage of MMT can be found at Bill Mitchell's blog (http://bilbo.economicoutlook.net/blog/).

You can google Bill Mitchell, Randy Wray, Scott Fullwiler, Warren Mosler and others to find out who these 'obscure guys' are and what they are writing.

That is not the mainstream opinion of economists.
I suppose then that deregulation of financial markets and dismantling of social programs was mere coincidence?

We have a complete and total understanding of how plasma tvs work. But nobody can predict the precise day they will break and stop working.
Their imprecise (in reality, erroneous) predictions are the basis for policy recommendations that just happen to coincide with the interests of the ruling class. No predictions = no paycheck.

That is just not how the government works. They get revenue from taxes, fees, tariffs AND borrowing. Their revenue does not come from just borrowing.
I never said they did. What you can't seem to comprehend is that
a) deficits ( G > T ) are 'created money' (preferred term is 'net financial assets')
b) the issuance of debt to the public is a voluntary constraint and irrelevant to the running of deficits.

Think of it this way: if the government were running a budget surplus ( G < T ), they would still be 'required' to issue a dollar of debt for each dollar of spending.

[malcom]

How are they accountable to the treasury?

All their profits go to the treasury. The board is appointed by the president of the US, which has to be approved by congress. They must report to congress. And they are regularly audited by the GAO.



In any case, the Treasury Secretary isn't even elected him/herself!The vast majority of federal employees are not elected. It would be impractical to elect millions of people. But that doesn't make the government private.



Who owns the Fed?The same people who own congress.

[Vladimir Innit Lenin]

All their profits go to the treasury. The board is appointed by the president of the US, which has to be approved by congress. They must report to congress. And they are regularly audited by the GAO.


The vast majority of federal employees are not elected. It would be impractical to elect millions of people. But that doesn't make the government private.


The same people who own congress.

Congress is owned by Wall Street, and therein lies the flaw in your theory, comrade.

Alas, the BoE is similar now, too, though the Fed has always been a shady 'arms length' organisation.

Accountable, on paper only. In reality it's not really accountable to democracy at all.

[Die Neue Zeit]

All their profits go to the treasury. The board is appointed by the president of the US, which has to be approved by congress. They must report to congress. And they are regularly audited by the GAO.


The vast majority of federal employees are not elected. It would be impractical to elect millions of people. But that doesn't make the government private.


The same people who own congress.

Right and wrong. Wrong in that the Federal Reserve is an association of various private banks in the US. Right in terms of their lobby $$$.

[malcom]

Right and wrong. Wrong in that the Federal Reserve is an association of various private banks in the US. Right in terms of their lobby $$$.

The federal reserve is an association of 12 banks. None of them are private.

Their profits are given to the treasury, the board is appointed by the president of the US, which has to be approved by congress, they must report to congress, and they are regularly audited by the GAO.

[Rowan Duffy]

It is impossible to have a rational conversation with someone who thinks banking textbooks and the bankers and economists who are trained from them don't know how banking really works, but some obscure guy on the internet does.

This sentiment is exactly the reason that pseudo-science has repeatedly taken hold in human societies. You can not evaluate the quality of a theory by the strength of the institutions that support it.

If we were to take the same approach to questions of celestial bodies, the catholic church would be obviously correct, and some crazy Pole should be ignored as far from the mainstream. We look back now and wonder how such absurd theories such as geocentrism could have been held, despite evidence, for such long periods. The answer is in your statement.

The only suitable antidote to falling for pseudo-science is to ruthlessly excise those theories which are neither explanatory nor predictive. The cure for pseudo-science is not appeal to authority but a consistent scientific methodology. While you think you are safe in promoting the mainstream, you are in fact arguing in favour of the pseudo-scientific approach.

Mainstream economics has won itself the dubious distinction of being the "science" most infiltrated by such unpredictive and unexplanatory theories. The reason that this is so is due to the value of such theories to the ruling class.

This relationship between theory and the ruling class is not merely conjecture. The increase in monetarist theories was promoted in universities in the US very directly during the Reagan administration for purely political reasons, and you can see the increase in prestige that it gained.

The chartalist approach allows us to make predictions. For instance, while bankers were going around claiming QE and QE2 would increase liquidity the chartalists were saying it was nonsense. Who is right? The Monetarist prediction is falsified by all available evidence.

If you continue to hold with a theory which is falsified the least action one must take is to patch the theory for regions in which it is shown to be false. The fact that monetarism's only value should be in the ability to explain such phenomenon leaves it as a theory with no applicable region. That is, it is 100% pure pseudo-science.

EDIT: I should mention that it's likely that many bankers do not hold with the monetarist theory, however, they do often claim to. A good example is QE, where the prescribed behaviour was to dump enormous amounts of assets into the coffers of bankers. Can you see why they might agree with the theory?

[malcom]

This sentiment is exactly the reason that pseudo-science has repeatedly taken hold in human societies. You can not evaluate the quality of a theory by the strength of the institutions that support it.

Yes you absolutely can if those institutions are based on science. And in America in 2011, information makes its way into textbooks after being subjected to the scientific method.

So the opposite of what you are saying is true. Pseudoscience does not come from textbooks. It comes from obscure people on the internet who claim to debunk textbook info.



If we were to take the same approach to questions of celestial bodies, the catholic church would be obviously correct, and some crazy Pole should be ignored as far from the mainstream.You think modern textbooks in America are equivalent to church dogma? lol



We look back now and wonder how such absurd theories such as geocentrism could have been held, despite evidence, for such long periods. The answer is in your statement.So all the pseudoscience and incorrect ideas like geocentrism comes from textbooks and not from obscure people on the internet promoting ideas that have not been through the scientific process?

Come on, you can't be serious.



Mainstream economics has won itself the dubious distinction of being the "science" most infiltrated by such unpredictive and unexplanatory theories. The reason that this is so is due to the value of such theories to the ruling class. You cannot compare theories about what is best (which is largely subjective and which economists do not obviously have a consensus on) and facts about how banks work!

There is no objective, scientifically proven way to run an economy. There never will be and economics does not claim that there is.

But the way our current banks work can be explained as objective facts with 100% certainty.

[Rowan Duffy]

Yes you absolutely can if those institutions are based on science. And in America in 2011, information makes its way into textbooks after being subjected to the scientific method.

The point is that they have not been subjected to the scientific method and in the face of their falsification, they provide us with no defense. They have failed.



So the opposite of what you are saying is true. Pseudoscience does not come from textbooks. It comes from obscure people on the internet who claim to debunk textbook info.

MMT and chartalism is far less fringe then you are trying to claim.




You think modern textbooks in America are equivalent to church dogma? lol

They absolutely can be. In fact, creationism has been in text books in America as well. So has Freudian psychology and the plum pudding model of the atom and any number of other theories. Science can not function without a healthy level of skepticism and you are showing entirely too little.



So all the pseudoscience and incorrect ideas like geocentrism comes from textbooks and not from obscure people on the internet promoting ideas that have not been through the scientific process?

Come on, you can't be serious.

Pseudo-science is capable of taking root anywhere from the highest institutions of learning to the most fringe astrologers. The key to determining the difference is, as I have stated, the methodology we use to evaluate the quality of theories.



You cannot compare theories about what is best (which is largely subjective and which economists do not obviously have a consensus on) and facts about how banks work!

There is no objective, scientifically proven way to run an economy. There never will be and economics does not claim that there is.

There is not, but we also have to raise the bar of our theories from being purely about personal preference. The monetarists advocate a policy which did not produce the results that their model should have resulted in. They must be called to account for this explanatory failure.



But the way our current banks work can be explained as objective facts with 100% certainty.

The direct functioning of banks is demonstrably more accurate in chartalist models. This is a fact. I suggest you learn a bit before you continue assuming that the models that you find in textbooks are actual reality.

[Die Neue Zeit]

The only suitable antidote to falling for pseudo-science is to ruthlessly excise those theories which are neither explanatory nor predictive. The cure for pseudo-science is not appeal to authority but a consistent scientific methodology. While you think you are safe in promoting the mainstream, you are in fact arguing in favour of the pseudo-scientific approach.

And of course be ready at all times to provide explanatory and predictive theories (yoo-hoo, Academic and New Left Marxism).

[gendoikari]

Hey guys, nice discussions going on, I'd like to make a correction in the equation for E it should be the reciprocal of what is there, that's a typo I forgot to account for.

also be careful about calling things out as pseudo science when talking about economics, it's mostly pseudo math and voo doo science to begin with.

[gendoikari]

Also someone pointed out that K is abiguous. what K is, is if you took those that control the top 50% of wealth and put them in order in terms of income, the one on the bottom's wage would be K.

[Vladimir Innit Lenin]

Sorry I wasn't clear. I understood the definition of K, I was just pointing out that using the actual figure 'K' was somewhat ambiguous, given its dual definition as Capital as well.;)

[Lynx]

Bill Mitchell on why Paul Krugman needs to update his textbook (http://bilbo.economicoutlook.net/blog/?p=15722).

[Die Neue Zeit]

^^^ And I posted a comment just now on his Digression section. :)

[Ben Compton]

Randall Wray has started doing a weekly primer for Chartalism/Modern Monetary Theory. It's here (http://neweconomicperspectives.blogspot.com/p/modern-money-primer.html), on their New Economic Perspectives blog.

[Die Neue Zeit]

Great blog. I'll try reading it over the weekend.

[Vilhelmo]

as you can see, this is a formula that WILL balance the budget, streamline taxes, and most important of all will CUT TAXES when the budget is cut automatically. How much you cut from the budget is on you, but the more bloated the budget the higher the taxes.


Why would you ever want to make a balanced budget a policy goal?
Without Federal deficits there can be no net private sector savings.
A balanced budget means the government first spends money into the economy & then collects it all back up in taxes leaving the economy bereft of money.
Without ever running a Federal deficit banks wouldn't be able to lend & the payment system would collapse.

The state of the Federal budget should NEVER be a policy goal.
Rather policy should reflect the state of the real economy of production & consumption.