The government is closing pubs in England from yesterday. The money supply in England is about to go down as a result of the government closing pubs in England yesterday.
If you don’t understand that you’re never, ever, going to get money, monetary policy or policies about money right.
So, welcome to the world of Richard Murphy, he of the three professorial appointments in economics. For his claim is that government money is the only money we’ve got. Government makes money, we use it, we’ve no choice in using it because government demands that taxes be paid in that money.
This is wrong factually, in that you can pay taxes in Britain in euros – not UK government created money – and you can do so in art works, piles of notes and letters and papers if you’re famous enough and so on. These not being government created money but they’re entirely acceptable in lieu of it for tax payments.
As to why this insistence Murphy – sorry, Professor, Professor, Professor Murphy, to be Germanic about it – wants to be able to claim that Modern Monetary Theory is the cure for all our ills, even to the point of curing climate change, so everything thus has to be about government created money. More of it will make us richer, less of it will cure inflation, really, everything can just be done by playing with money.
This is not so. Sad but there it is, it ain’t.
Pubs being a useful example of why not. For those not blessed with a winning lottery ticket in life it is the norm in an English pub for those who know each other to drink in rounds. Credit, even to the point of just running a tab with the barman for the evening, has historically and culturally not been the norm, even to the point of being illegal at times. A group who know each other – even if the knowing is just to the point of just drinking in the same part of the same pub a couple of times a week – will tend to drink in those rounds. One person buys the group of five drinks, sup up, then the next of the five buys the next round of five and so on until five drinks have been had, each of the five has paid for five drinks.
Varied social habits accompany this. Birds may or may not be included in those who must buy. A bloke accompanying a bird might buy two rounds even. Asking for a double on someone else’s round isn’t proper, unless everyone is drinking doubles all around. There’s a bit of a culture surrounding this.
One of which is that of course no one is expected to sink five pints every time they pop out for a quick one. “I’m just having the one” is an accepted reason for not accepting the offer of a drink. For the acceptance is part of the joining the round. Having two or three then going is fine. Maybe you’ve not bought your round yet but you’ll pick up next time when roughly the same group is there. Or, if you have then again others will pick up when they see you next. Things tend to work out in the wash.
And it’s very definitely known who doesn’t stand their round when it is their turn and social approbation is significant. No one will ever say anything but everyone knows and acts upon it.
OK, so that’s a bit more about English boozing habits than you wanted to know. But look at what has happened there. We’ve just had money creation. Money being, as David Graeber managed to get right, just a manner of recording debts. So, we’ve debts there. Maybe they only exist for a couple of hours as the round takes its five paces. Maybe they last until the next meeting as those who duck out of this one pick up the next.
But we’ve got credit creation there, we’ve got money creation. Which does mean that government isn’t the only creator of money in our economy. Which is what kills the current bright idea from our Tre Professore.
Pigovian taxes are placed on products, such as alcohol and tobacco, which generate ‘negative externalities’ (in those examples for public health). They are primarily intended to reduce demand, rather than to raise revenue—even if they do that too.
Just an aside here, the Pigou part of these specific taxes is the excuse, not the reason. We tax the snot out of tabs and booze because we can tax the snot out of tabs and booze. The demand with respect to price is inelastic meaning we can raise lots and lots and lots of tax money out of what people will still buy as it becomes more expensive.
On the subject of whether buying a round creates money or not here is Richard Murphy:
Modern monetary theory (MMT) says the government creates all our money – either itself through its own spending, or indirectly through the banks that it licences.
In both cases the money is made by making a loan – and repayment of the loan cancels the money that is created.
We’ve just created money without the government, haven’t we?
But the main proposal:
This would however be an FTT of a type previously very rarely used. It would be imposed on financial flows through all bank accounts in an economy, without exception. The charge would be on both debits and credits, with the deliberate intent of reducing scope for evasion. And the tax should be designed to be significant in overall amount, acting as a possible replacement for other taxes such as payroll and social-security charges, for example, which are such an impediment to employment now.
This FTT should be significantly progressive. As the flows through the bank accounts under the control of a person increased, so would the charge. Those with average or low incomes would expect very low rates to be levied upon them. It would even be simple to make the rate negative for some, as a means of delivering income support. In contrast, those with very large financial flows would expect significant charges.
It would be appropriate for any individual to link all the accounts they had under common control for the purposes of their charge being assessed. So, for example, a person should not have to pay an FTT charge when making a payment to their mortgage account, transferring savings or paying a credit-card bill. Instead, the charge should arise when real interaction with third parties took place.
Deciding how a person and their household were related might be an issue for this purpose; equally it could be an instrument for delivering social support. Transfers into and out of the country, even to related accounts, would however always be charged. Put all this together and this would become an effective and progressive tax on consumption.
The charge would also need to be applied to business accounts, and again some progressivity could be appropriate: support for smaller businesses could be implicit in rates charged. And businesses should not object, especially if they were relieved of some of their social-security costs. The issue of cash usage would have to be considered: it would be a legal necessity to require that cash sales and purchases were declared for tax purposes, to prevent abuse.
This starts from that point that we all only use government money. Given that that is wrong – as the pub example shows – the proposal fails from the get go.
Even if it did work there are some undesirable effects here. Internal to a business transfers are clearly not going to be so taxed. Excellent, we’ve just provided a massive incentive for vertical integration in business then. Instead of a chain of suppliers where money crossing the borders of each company is taxed the move will be to own the entire supply chain so that there is only the one taxing point, that final sale to the consumer. Who is, obviously, going to be outside the business. Quite why we want to encourage gigantism in business is unknown.
But now think more widely. We are not limited to government money, either in cash or through banks, as our pub example shows. Sure, in that one the money going over the bar for each round can be taxed. But that concept, that the creation of a debt, an obligation, is money creation is what kills the idea. For if we’re not limited to government money then the taxation of the exchange of government money is easy to avoid, isn’t it?
We could, say, run a ledger with those we trade with frequently. Tot up the back and forths and only pay over the balance at some agreed date. Or retreat to barter. Or, the ledger, get a few friends, as in a round, and net off transactions until we settle just that outstanding balance. Or, even, expand our network of ledgers to as wide a group as we wish. At any significant tax rate – more than fractions of a percentage point – it would be worth people setting themselves up as a clearing house for such debts. Very much like a bank clearing cheques in fact – it’s just that not using government money as the unit of account, as we’re all entirely free to do, means no tax.
That is, the very proposal to tax the use of government money will drive out the use of government money. An obvious point really, given that we always do get less of whatever it is that we tax. So obvious that it entirely escapes the man with three professorships in economics, presumably on the grounds that he doesn’t know much economics.
The real lesson at the end of this being the view it gives us of British academia. Or, of course, that Murphy never gets a round in, or doesn’t know enough people to join one.