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Comment by hpoe | Hacker News Reader

So I recently had a realization that the money the US government spends has absolutely no relation to the money the government receives they can spend whatever they want in any quantity they want.

The only barrier is inflation; however that instead means that taxes at the federal level have nothing to do with income or revenue but only inflation control. So the IRS should be the Internal Inflation Control Service.

I am still working on the full implications of that understanding but it has definitely changed the way I look at things.

EDIT: Updated to make clear I am discussing the US government, not governments in general.

EDIT EDIT: To make clear I think this is a bad thing, it is a lever that the more powerful in society have the ability to pull, in order to move wealth from the lower class to themselves as inflation is generally only positive for the asset owning class.

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While an interesting perspective, this is inaccurate.

The US government has more leeway than most other countries in the world to spend higher amounts. There is a theory that has not been accepted by a majority of economists (Modern Monetary Theory) that governments can spend without impact.

The counter theory (which I prescribe to) is that the US government has more leeway to increase their debt burden higher than most countries as a function of being the global reserve currency (and having a long track record, federal reserve separated from political power and a mostly functioning democracy). That has given a bit more tolerance to their higher debt load as well economists have forever underestimated the end point at which that would create problems (also they misunderstood the benefits the US had accrued as a function of aforementioned features of the Union). We are still within the tolerable range. However this misstep by economist has created space for MMT to get traction amongst those who do not understand the economy but need a mechanism to finance their ideas. I believe it can work for a little while but it certainly gets closer to a dangerous situation.

Higher inflation (~>4%) just erodes the power of our dollar and increases costs throughout the supply chain.

The IRS has nothing to do with monetary supply, they only collect taxes on behalf of the people of the country. Monetary supply is controlled by the Federal Reserve and is completely separate.

Based on your comments about the IRS/monetary supply I believe this you should do a full read up on how our monetary system works (not being rude, just want educated conversation here and don't want you to fall victim to poor sources of information/conspiracy theories).

It is true that the US gov can print and spend whatever it wants, but that ability will only last as long as the dollar is the global reserve currency. Confidence can be broken very quickly.

Confidence can be ... enforced.

(looks in the direction of an aircraft carrier)

> Confidence can be ... enforced.

Not at the scale of a planet, especially when the US is neither the economic nor the military powerhouse it once was.

The US is still the comparative military powerhouse of the planet in every way but raw troop count.

A nation can launch a nuke from a carrier, a silo, a submarine, a mobile platform. Those aren't used right now, obviously.

Carrier groups are the current state-of-the-art for regional modern warfare. They aren't for invasion, but are useful for activity suppression and area control (derived from air superiority). The US has 11 nuclear powered aircraft carriers with 2 more on the way. The next largest fleet is China with 2 + 3 lesser ships they call carriers (but they are more like troop carriers, battleships, depending on how you want to classify them) with 2 more aircraft carriers on the way.

The US has the biggest military budget by far. Also the most aggressive.

> The US has the biggest army by far. Also the most aggressive.

Fat lot of good it did them in Afghanistan, Iraq and Vietnam.

They don't have the military power to occupy Europe in the event the ECB decides to offload its dollar reserves and buy oil in Euros, never mind the will to do so.

> The US has the biggest army by far.

No, it doesn't. Active military China and India are bigger. Active + Reserve military, China, India, Russia, Taiwan, and Vietnam are bigger. Active + Reserve military + Paramilitary, North Korea and Vietnam are bigger.

Sorry I had to clarify that I meant in terms of budget, not headcount.

The US still has a ridiculous amount of weaponry that can cause a lot of destruction even when wielded poorly.

So said every empire in history that ruined themselves economically before declining militarily.

Really? Other than attacking some microscopic nobody what can you do to any decent size military power without getting bloody nose in return?

Because we can borrow money at an interest rate lower than inflation. Most other countries with a AAA credit rating can also, even if they're not on USD.

But this is a result of the pandemic and shouldn't be taken as a direct indicator of economy health. We haven't had something of this magnitude in almost 100 years, and so far we've fared MUCH better than the 30s.

> because we can borrow at an interest rate lower than inflation.

I don’t think you understand what it means for the inflation rate to be above the return rate of promissory notes, but the only incentive to buy such notes is to prop the system with the belief this is temporary—otherwise, by definition, you are just throwing money away (sans considerations of ownership).

> and so far we've fared MUCH better than the 30s.

There was an entire decade between the Spanish influenza pandemic and the beginning of the depression - it's not obvious to me why we should already presume to have mastered economic effects that trailed the historical "equivalent" by a decade

> we've fared MUCH better than the 30s.

Didn't it take years to feel the effects of the 1929 crash (just as it _may_ with our current crisis), and didn't FDR's Keynesian economic polices actually make things worse, albeit while providing hope of recovery to those affected? What might have actually got us out of that decade long slump towards the end?

I am also hopeful that it won't be as bad this time around, and who's to say since we're all still in the middle of this.

This is a super odd comment.

The way the fed control interest rates is through it’s buying of federal debt (through “new” dollars). We can borrow cheaper than inflation because the feds just print new dollars.

And during the 30’s the strategy was not “spend our way out” but rather “cut back spending”. Different strategy so not sure why you’re saying we’re doing better - that would imply the same strategy is working better?

No, the US gov has been on this spending trajectory since well before the pandemic.

> But this is a result of the pandemic and shouldn't be taken as a direct indicator of economy health.

I don't follow the logic here. Suppose a pandemic wipes out 50% of the world population. The economy would collapse. You wouldn't say what you said if that happened.

The health of an economy is affected by real world occurrences, it is in fact nothing more than a measure of the aggregate cumulative things happening in the world. A shock is a shock no matter what causes it, crises are crises precisely because something unexpected caused them.

Most of the developed world doesn't use the usd as a reserve currency, it may he popular among failed states or developing countries but not by far for developed nations.

USD still dominates foreign exchange reserves:

https://data.imf.org/?sk=E6A5F467-C14B-4AA8-9F6D-5A09EC4E62A...

No bank can operate on the international market without USD. Therefore the US can impose any regulation it wants on those banks. Look at the two largest banks in Switzerland. UBS and Credit Suisse both use the USD as their primary currency. Not much Switzerland left in those two banks other than their location.

So what happens when your currency is no longer a reserve currency? After all, currencies don't exist in a vacuum.

Are you not then highly constrained in your currency creation ability? I would think there might be disastrous implications for foreign trade, upon which the U.S. economy is extremely dependent.

Additionally, does this not imply a significant shift in private property rights (possibly to the degree of being unconstitutional)? MMT seems to imply near complete control of the economy of by a central authority.

Is there not a major problem with the timing and syncing of inflation (money creation) and deflation (via taxation)? The velocity of transactions and thus the velocity of inflation seems to be far, far greater than the velocity of tax transactions. What's more, our ability to measure inflation is very slow, incomplete, and politicized. There is also no consensus on how to do it. For evidence of this, just go look at the different published inflation numbers and dig into what does and does not get included and the measurement methodologies.

> So I recently had a realization that the money the government spends has absolutely no relation to the money the government receives

This might be true in the short run, or even over one lifetime that started in in the 1940s, but it may not true in the long run. Ray Dalio has some interesting thoughts on short and long term debt cycles and their relation to money.

While this is not totally false, this way of understanding monetary theory, 'Modern Monetary Theory' is not accepted by economics.

While conceptually it is not false, many of the conclusion this school builds on this is not very accurate.

It is much better to separate fiscal and monetary. The monetary policy has one job, the fiscal policy has another.

The monetary policy should be based on rules and targets, and not just be in the hands of politicians to crank up spending whenever they feel like it.

There is a reason this was separated in the first place.

In addition to inflation control, if you accept the classic story that “we tax so we can spend” is wrong (for the US at least, perhaps also to some degree for other currencies with monetary sovereignty) then I feel we need to consider that taxation and expenditure are tools of not just monetary but social policy.

For instance, how does taxation play a role in keeping the most productive people in society producing, motivated, and feeling like they’re getting fairly rewarded, without them say checking out for “less challenging” work or making enough to retire early?

I suspect at some level, consciously, intuitively, or perhaps just accidentally (and the US seems a bit exceptional here to e.g. Canada, UK, Australia, NZ) that housing policy is similarly supported by an idea that the productive middle class and upper working class are kept as active participants in society by some sort of debt-fuelled hedonic treadmill. From what I understand other sources of debt (student debt, new cars etc.) play a greater role in the US.

This is of course in addition to and balanced against all other monetary sinks / rents, e.g. utility bills, literal house rent, health costs etc.

And being a dynamic system, it’s hard to model outcomes, e.g. would cutting income taxes liberate workers to put a bit extra away and perhaps invest extra hours in overtime or a side gig, or would it just serve to give temporary wage pressure relief to companies who are already refusing to fairly pay workers while allowing easier wealth extraction by rent-seekers?

I find it a bit interesting we aren’t having more discussions about employment vs capital taxation, especially now that we’re seeing both escalating (rich getting richer) and broadening (a wider class of “rich” getting richer) inequality. I suspect historically there was little awareness/interest in your extremely wealthy growing their portfolios, but it becomes a bit more interesting when there’s eg a lottery around “the bank of Mum and Dad” or simply which specific year you were born (relative to eg the GFC) fuelling extremely different outcomes for people with otherwise similar backgrounds, capability, class, and contributions to society.

" the most productive people "

How are you defining productive here?

Good question.

Something like “produces the most highly valued outputs per hour of worked input” which should roughly correlate with wages with the assumption that if those inputs are easily interchanged then there will be more competition and the output value will fall. I’m sure there are good exceptions, but I’m not sure they’re material to the argument that taxation to some degree influences social mobility and participation.

Perhaps I’m also considering situations in which there is a close link between labour and output, and where those outputs are deemed necessary for society (eg doctors, tradespeople), even where perhaps there may not be high productivity multipliers in the same ways there are at somewhere like Netflix.

So in my mind I’m thinking what role is taxation playing to keep electricians, plumbers, doctors, and software developers working for as long as they can without retiring (ie maximising their consumer value without compromising their productive value).

I’m trying to put aside a value judgement about what I feel taxation policy _should_ be doing around this subject, but broadly I feel there’s a modern lens of alienation here in which control of means of production is perhaps less important than control of means of consumption.

For anyone trying to google: this is modern monetary theory.

AKA, “wishful thinking”.

This is actually a big part of Modern Monetary theory: From the wikipedia page

  ...the primary risk once the economy reaches full 
  employment is inflation, which can be addressed by 
  gathering taxes...

MMT is the climate change denial of economics. No one in the mainstream believes it to be true.

I think you're correct in the vacuous sense that money is fungible. Investors who purchased US treasures ("the debt") don't care whether they're getting taxpayer dollars or dollars that on paper exist because we minted a trillion dollar coin. They got dollars either way, and what they care about is how valuable those dollars are ("inflation")

But in this MMT world, tracking US debt is still valuable (think of it as a measure of how much money was printed, which correlates through some unknown economic function to inflation).

Either way, all the bad things that happen with printing money can be reframed as "bad because inflation" if you want them to. E.g. we print infinite money to pay off debts denominated in foreign currencies, which blows out the exchange rate and results in hyperinflation; yep, that's an inflation problem, check!

Debt is the backbone of society and post-feudal national power.

In this era in the US, inflation is the only meaningful form of taxation, as the ability of the national government to explicitly tax is essentially gone.

>"as the ability of the national government to explicitly tax is essentially gone."

Where did it go? Last time I remember I still pay taxes

There's really one big variable and it's interest rates. In the 70s stagflation era, we had very high interest rates. Government debt came with a heavy dose of debt service. Currently rates are super low. We can accrue way more debt and still not be burdened with a lot of interest payments. Debt service as a percentage of GDP is about half of what it was in 1991 and trending downwards:

https://fred.stlouisfed.org/graph/?g=HHdA

Your Realization is call MMT, it is a terrible theory of economics and will likely be the downfall of the US Dollar and other Fiat Currencies if it continues to become more popular

It seems like it would be borderline impossible politically to raise taxes at a time when inflation is high.

It's not that simple in the US. They currently have this thing where there's a legal limit on how much the federal government can borrow, and it takes an act of Congress to raise it. So there is also a political barrier to borrowing more money.

Inflation is also positive for those in large amounts of debt since their debt is “worth less”.

But it becomes harder to take on new debt as lenders require higher interest rates and are generally more selective with loans.

Printing money is one way to get inflation.

The 2021 supply chain disruption is another. Goods can't be purchased in the quantities people want them, so the ones that are available become more expensive.

Its almost as if the US an run a trade deficit with these US dollars and demand 'tribute' from the exporter nations and they can't do much about it.

Have you read Kelton's “The Deficit Myth“

That only applies to the US, most countries has to balance their budget.

Not really. Most of the countries run a budget with a huge deficit or debt.

USA is not even in the top 10 when you look at the debt by GDP ratio.

https://worldpopulationreview.com/countries/countries-by-nat...

EDIT: Just so clarify, first list on the linked page is irrelevant, scroll down to the list of countries ordered by debt to GDP ratio.

Being eleventh out of almost two hundred countries suggests that "most of the countries", as you're saying, are better at balancing their budget than the US, not the opposite.

No, I didn't say anything about who is “better”, I just said that most of the countries run huge deficits and have huge debts, which is what the list shows.

Whether that debt is at 100% or 50% of the GDP doesn't really matter, both are huge by my definition.

> Whether that debt is at 100% or 50% of the GDP doesn't really matter, both are huge by my definition.

"Whether I'm being paid $100k or $50k doesn't really matter, both salaries are huge by my definition."

I'm quite sure that international lenders don't look at it this way.

> https://worldpopulationreview.com/countries/countries-by-nat...

What is really interesting in this list is not the top of it, which, like another comment noted, contains mostly places you wouldn't want to live in, but rather the bottom (ie countries with tiny debt to gdp ratio).

It's a strange mix of basic hellholes (countries that no one wants to lend money to), and some of the highest standard of living in the world (Switzerland, etc...).

Why? Most countries are also currency issuers. The major exception is the Eurozone, and those countries can still run deficits.

Because the US Dollar is the predominant world reserve currency, and has continued to be through several significant shocks to the system. In 2008 it looked like the EU had a chance to significantly adjust that balance in favor of the Euro, but the EU went down the austerity path in handling member states problems, which slowed their recovery, and made the US Dollar still the least bad option on the table.

Because of this dynamic, the rules end up being different for countries like the US. I wish more economic research went into this end of things to try to study the boundaries and nuances of this altered reality. But, instead we're still stuck interacting with the world mostly through the lens of neoclassical models. Which, if I'm being frank, are basically to economics what the lobotomy was to neurology.

> So I recently had a realization that the money the US government spends has absolutely no relation to the money the government receives

You're correct.

As a matter of fact, it has gotten to the point where I believe the US could do away with taxes entirely and borrow the entire budget ... it wouldn't make much of a difference.

I remember that came up in my income tax class in law school. I don't remember if the professor suggested it as an interesting thing to consider, or if it was in some of the optional supplementary reading he recommended (if so, most likely Chirelstein's book on federal income taxation [1]).

Suppose under a conventional tax system there is some total W available and the government takes 10% of that in taxes. Then you end up with the government has 0.1 W and everyone else has 0.9 W.

The government ends up with 1/10th of the money, and people's purchasing power is reduced by 10%.

If instead of taking 10% of W, the government prints new money equal to 11.11...% of W, increasing the total money to 1.111... W, you end with the government has 0.111... W and everyone else has W.

As with the conventional taxation case, the government ends up with 1/10th of the money, and people's purchasing power is reduced by 10%.

It is just that the 10% reduction in purchasing power comes from prices rising instead of money being directly taken, but at the end of the day it means pretty much the same thing as far as how much you can now buy goes.

The big plus for this approach is that it is ridiculously simple. No need for filings or dealing with collections and handling tax evaders.

A big minus is that constant significant inflation is pretty damned annoying. Merchants have to keep updating prices, employers have to keep raising wages, and you have to keep dealing with larger and larger amounts.

It also probably wouldn't reduce bureaucracy as much as you might hope. Many of the things governments currently encourage or discourage through tax deductions, tax credits, and tax penalties they would still want to do. They'd just have to change to grants and fees/fines.

Still, it is an interesting idea to think about.

[1] https://www.amazon.com/Federal-Income-Taxation-Concepts-Insi...

It would make a huge difference in certain areas.

First it would function as a flat tax, not a progressive one, assuming everyone holds dollars. But they don't, disproportionately wealthy people hedge against dollars with other assets and poor people don't, so practically it would function as a regressive tax.

Unless poor people catch on and stop holding dollars. This would lead to a demand crisis with the currency. Remember, the only way a government can effectively dictate the currency of an economy is to create artificial demand for it by requiring taxes be paid in it. Without that, and with a highly inflationary currency, people will dodge "taxes" by simply not holding dollars.

The relationship between government revenue and spending has a broken relationship, yes, but the conclusion is that at this point the government taxes to keep demand for the currency and to massage certain numbers, in particular the inflation rate, deficit and employment numbers, to maintain faith in the economic system. It doesn't actually need the money, but it does need to take the money.

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