Taxes can’t check- this ignores decades of accumulated financial wisdom and ignores institutional constraints

(Warren, Fellow of the Institute for Applied Economics, Global Health, and the Study of Business Enterprise at The Johns Hopkins Krieger School of Arts and Sciences, , Fall)

Government spending increases the money supply, and the payment of taxes reduces it. Much of a central bank’s monetary activities are undertaken to neutralize the liquidity shocks of the mismatch of the timing of government spending and receipt of revenue — so‐​called defensive operations. MMT wants to use taxation to manage the money supply rather than for government financing purposes. MMT wants to shift the management of monetary policy from the central bank to the treasury. In doing so it ignores the accumulated wisdom on the difficulty and undesirability of doing so. Some critics of MMT fault it for its explanatory simplification of consolidating the central bank and treasury on the grounds that it doesn’t reflect existing legislation giving central banks operational independence (it certainly doesn’t fit the eurozone with the ECB and 19 separate governments in the system). But this criticism misses the real point. If it were desirable to remove the existing barriers to central bank monetary financing of the government, it could be done. The relevant question is whether this way of thinking about and characterizing monetary and fiscal policy produces a more insightful and useful approach to formulating fiscal/​monetary policy. Does it justify shifting the responsibly for monetary policy from the central bank to the treasury? Should taxes be levied so as to regulate the money supply rather than finance the government (though it would do that as well)? I have only reviewed the articles cited here and they do not address the traditional arguments that have favored the use of central bank monetary policy over fiscal policy (beyond automatic stabilizers) for stabilization purposes. Would MMT replace setting an interest rate target with something else — such as a money supply target — as the basis for its monetary policy–driven choice of taxation? I assume that MMT would continue to support the basic principles of good taxation when making monetary policy adjustments to tax revenue (Coats 2013). If tax revenue is a tool for managing the money supply and inflation (rather than financing government), what principles or models would guide tax policy? How would the government manipulate the sluggish adjustments in tax revenue to smooth over the monetary shocks of government spending and revenue mismatches? None of the challenges of the use of fiscal policy as a countercyclical tool (flexible timing, what the money is spent for, and so on) established with traditional analysis have been neutralized by the MMT vision and claim of extra fiscal space. In fact, as we will see below, despite their advocacy of fiscal over monetary policy for maintaining price stability, MMT supporters have little real interest in and no clear approach to doing so as they prefer to centrally manage wages and prices in conjunction with a guaranteed employment program. The existing arrangements around the globe (central banks that independently execute price stability mandates and governments that determine the nature and level of government spending and its financing) are designed to protect monetary stability from the inflation bias of politicians with shorter policy horizons — the time inconsistency problem (Kydland and Prescott 1977). The universal assignments of responsibilities for monetary policy and for fiscal policy to a central bank and a treasury or finance ministry are meant to align decisionmaking with the authority responsible for the results of its decisions (price stability for monetary policy and welfare‐​enhancing levels and distribution of government spending and its financing for fiscal policy). It is the sad historical experience of excessive reliance on monetary finance and the costly undermining of the value of currencies that have led to the worldwide movement to central bank independence. MMT ignores that history and its lessons. The establishment of central bank operational independence in recent decades is rightly considered a major accomplishment. MMT advocates bring great enthusiasm for more government spending especially on their guaranteed employment and Green New Deal projects, which will need to be justified on their own merits. MMT’s way of viewing money and monetary policy adds nothing to the arguments for or against these policies. Its enthusiasm for printing money and borrowing increase already present dangers to the monetary stability so important for economic growth. Former Treasury Secretary Larry Summers recently denounced MMT for ignoring this inflation risk (Summers 2019).