Liquidity Traps, Financing the Green New Deal and Does a JG Require Higher Taxation?
A Response to John Quiggin
MMT, Liquidity Traps, Financing the Green New Deal and Does a JG Require Higher Taxation? A Response to John Quiggin
John Quiggin raises important questions about Modern Monetary Theory (MMT) and its implications for financing large-scale public projects like the Green New Deal (GND) and the potential need for higher taxation with a Job Guarantee. In this response, I will address some of Quiggin's concerns and clarify the MMT perspective on these issues.
Firstly, MMT is not solely based on the assumption that the economy is always in a liquidity trap. Rather, it provides a broader framework for understanding the role of money, fiscal policy, and monetary policy in various economic conditions. MMT argues that monetary policy is not always an effective tool for stabilising aggregate demand and that fiscal policy should be responsive to economic conditions, focusing on achieving full employment and price stability.
As Randall Wray directly stated in his response to Doug Henwood in 2014, "taxes can remove resources from those who have too much, while government spending provides resources to those who have too little. There is no direct balance sheet operation in which the government 'spends' its tax revenues. Therefore, the government can spend without necessarily taxing the rich or anyone else."
Regarding Quiggin's concern that a successful application of MMT would destroy the conditions under which it works, MMT proponents do acknowledge that once the economy reaches full employment, any increase in public expenditure requires a corresponding reduction in private expenditure. They emphasise that the primary constraint on government spending is the availability of real resources and the risk of inflation. As such, they argue that it may be necessary to use various policy tools, including taxation, to manage inflationary pressures when the economy is at or near full employment.
While Quiggin raises some valid concerns, it's important to recognise that Nersisyan and Wray's approach to financing the GND is centred around optimising resource allocation, which includes making better use of unutilised and underutilised resources, as well as redirecting resources from less efficient and harmful uses towards GND initiatives. This key aspect of their methodology deserves careful consideration and appreciation.
In a 2019 conversation with Dean Baker, Wray emphasised that the transition to a green economy and Medicare for All would idle resources currently used in destructive or inefficient ways. The challenge lies in reallocating these resources to more productive uses and retraining and educating workers as needed.
“Taxes can remove resources from those who have too much, while government spending provides resources to those who have too little. There is no direct balance sheet operation in which the government 'spends' its tax revenues. Therefore, the government can spend without necessarily taxing the rich or anyone else.” - L. Randall Wray
The authors argue that financial affordability cannot be an issue for the sovereign U.S. government, and the real problem will be inflation if sufficient resources cannot be diverted to the GND. They suggest implementing anti-inflationary measures, such as well-targeted taxes, wage and price controls, rationing, and voluntary saving. They recommend deferred consumption as their first choice should inflation pressures arise and conclude that it is likely that the GND can be phased in without inflation. However, if price pressures do appear, deferring a small amount of consumption will be sufficient to attenuate them.
The specific policy recommendations made by Nersisyan and Wray, such as well-targeted taxes, wage and price controls, rationing, and voluntary saving, should be understood as a set of tools that can be employed to address inflation and resource allocation challenges in a context-dependent manner.
The actual implementation and duration of these measures would depend on the specific economic conditions and policy goals at the time, and they could potentially be transitional rather than permanent solutions.
So, while Quiggin raises some valid concerns about MMT's implications for financing large-scale public projects and the potential need for higher taxation to support a Job Guarantee, it is important to understand that MMT provides a broader framework for understanding the role of money and fiscal policy in the economy.
MMT advocates acknowledge the need for a balanced approach to government spending, with attention to both resource constraints and inflation risks.
Moreover, they do not shy away from the potential necessity of taxation and other policy tools to manage inflation and redistribute resources when the economy is at or near full employment.
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