All government spending is done by “printing money”, at least in monetary sovereign countries like the US, UK, and other countries issuing their own cureencies. The government is the monopoly issuer of the currency and cannot run out of it, just like the scorekeeper of a baseball match cannot run out of points. Taxes are also not for funding the government, but for removing momey from circulation, precisely to curb inflation. (Also to drive the value of the currency by making people demand it to be able to pay their taxes).
Thus “printing money” isn’t in itself inflationary, as long as the newly created money is spent on something where there is excess production capacity.
The question for the government is never “can we afford it”, but rather “are the real resources there to achieve it”.
Yeah, this is the common MMT definition of money, I think.
Another way to think of it is that all money is IOUs. This one’s a bit hard to wrap your head around, but it works.
Start with government spending. A mail carrier walks through sleet and hail to deliver mail, a service they’re doing on behalf of the government. The government says “thanks for all that work, I owe you” and gives them a pile of IOUs in the form of dollars. Whenever the government receives a good or a service from a person or a company, it gives them an IOU in exchange.
Going back to the mail carrier, their work day is done, so they stop off at a supermarket. They grab some milk and some sausages and go to the cash. Now, maybe it would be possible for the mail carrier to do some kind of work in exchange for the groceries. Maybe advise them on how to ship things efficiently, or maybe just help stock shelves. But, it’s much easier just to hand over some IOUs. So, they hand over some of the IOUs (dollars) they got from the government. Now, the government owes the supermarket, rather than the mail carrier.
So, the store keeps doing business. It collects a bunch of IOUs from various customers, and issues a bunch of IOUs to its suppliers. When tax time rolls around, the store has a whole bunch of IOUs (originally from the government, but given in by various customers). Since the store owes the government for things like providing police to keep things secure, the FDA for keeping the food safe, and so-on, it effectively “cancels” that debt by almost ripping up the IOUs. Well, really, it hands the IOUs back to the government and allows the government to rip them up.
So, you can see the whole economy as the government issuing IOUs as spending. Those IOUs enter the economy and flow around, and people want to hang onto them because they know that in April the governments going to come around to settle things. Tax time is basically a point where people who didn’t do any work directly for the government can say “Yeah, I didn’t do any work for you, but I did give that mail carrier some milk and sausages, and he handed over your IOUs, so I’m giving those to you now”. And the government says “Yep, fair enough”. It collects the IOUs and rips them up, and the whole thing starts over.
In the past, this actually used to be a lot more explicit. When you could exchange your US dollars for gold, the idea that it was an IOU for the gold was a bit more explicit. These days we don’t need the gold. It’s an IOU not for gold, but for work done.
It took me a while to get the idea that money could be debt / IOUs. But, when I thought of government employees doing things for the government and getting given IOUs it clicked.
That all makes it much easier to understand the flow of IOUs through the economy, and much easier to understand how taxing destroys money. It’s the government ripping up IOUs that it itself issued to its own workers (or suppliers or contractors or whatever).
Thus “printing money” isn’t in itself inflationary
Your conclusion doesn’t follow from what you said.
Inflation is merely the change in subjective value of a currency over time. Inflation goes up when people want more money for the same stuff.
If the government creates money to fund something, that pulls resources (employees, production, etc) from other parts of the economy, increasing the costs of the remaining resources since there’s less available. That’s inflation.
The Covid stimulus packages are a fantastic example of this, because it directly resulted in more money chasing fewer goods (less production). There would’ve been inflation anyway since net production decreased, but the stimulus package exacerbated it. A significant amount of the inflation we saw recently was a mix of COVID supply chain disruption and Trump and Biden’s stimulus bills.
Excess production is deflationary, but that doesn’t mean printing money to cover isn’t inflationary, it just means you can counter deflation from one source with inflation from another.
The question for the government is never “can we afford it”, but rather “are the real resources there to achieve it”.
Sure. But at that point we’re not talking about inflation anymore. If the government really wants something, it can get it, but that will have consequences. The question is whether it’s a net benefit, and how to fund it:
a hidden tax through printing money (inflation)
direct tax - income tax, capitation tax, etc
indirect tax - sales tax, tariffs, etc
Each option has consequences, and generally speaking, you get less of whatever you tax, if the tax is high enough.
Please, multiple studies were done about the causes of the recent wave of inflation and they determined that the vast majority of it was a result of greedy corporations taking the opportunity to boost their profits.
Modern Monetary Theory is complete BS, look at Argentine, Venezuela, and Turkey to see why monetary policy shouldn’t be political
There’s little more consistent in this world than corporate greed, and corporations didn’t suddenly decide to be more greedy in 2020 and 2021.
For 1, talk to any respected economist and they’ll tell you MMT is a popular minority view but far from mainstream and very much riddled with criticism.
Ball and colleagues conclude that the rise in the ratio of job vacancies to unemployment contributed almost a third of the rise in core inflation of 2.0 percentage points over a 12-month period. The 2.0-percentage-point increase in inflation explains about half the rise in core inflation, climbing from 2.3 to 6.9 percent (total increase of 4.6 percentage points). And finally, they found that the main contributors to the headline inflation shocks were energy prices (2.7 percentage points) and a backlog of work (1.7 percentage points).
Backlog of work is a nice way to say people weren’t producing, but were still spending. And energy prices spiked because of the recovery (energy consumption dropped during COVID and recovered when restrictions were lifted}.
In my analysis, inflation mostly came from the government’s $5 trillion in COVID and post-COVID deficits. The government essentially sent people $5 trillion with no plans to pay the money back. People tried to spend it, driving up prices. The Fed eventually raising interest rates made inflation come down a bit faster than it would have otherwise, but it was going to go away on its own anyway. There is no magic momentum to inflation. Stop pushing, and it stops.
For example, the Federal Reserve was far too late identifying inflation in its early days, choosing to frame it as transitory. As a result, the Fed kept interest rates too low for too long. Congress was guilty of massive spending increases, which caused demand to surge. In short, an artificially induced demand and a drastic shortfall in supply were the culprits in creating inflation.
Those aren’t cherry picked either, they’re the top sources when I search for causes of inflation, and is a mix of government, academic, and “mainstream” financial analysis.
From what I’ve read, here’s what seems like the most credible explanation:
COVID happens and governments issue stay at home orders, cutting production and energy use, resulting in supply chain disruption (esp in the car industry, demand for cars dropped off a cliff during COVID)
Reduced energy demand reduces fossil fuel prices, so production reduces
Stay at home orders spark consumer demand for things to do at home (electronics, home renovation, etc), and stimulus money fuels this demand
Supply can’t keep up with 3 because of 1, so prices surge (direct consumer impact, but mostly localized)
Return to work spikes demand for energy, causing energy prices to spike (major component of inflation) as production ramps back up
Corporations didn’t increase prices because they all of a sudden decided to screw the consumer, they increased prices because demand went up (people had more to spend) and supply was limited. If corporations are jacking up prices, it’s not because they decided to be greedy (they’re always greedy), it’s because something changed that allowed them to change prices.
Look, I don’t doubt that some of what you outlined had a role in inflation. But unlike you, I think that absolving corporations of blame here is the real copout.
Your last paragraph makes it sound like the poor, innocent corporations didn’t have a choice and were forced to crank their profits up when they saw a $$$ opportunity, because what else were they to do in the middle of a pandemic ravaging the country? Poor angels!
I’m not making a value judgment here, I’m merely talking about how economics works.
The whole purpose of a corporation is to generate profit, and to do that it needs to convince customers to buy from them. If there’s sufficient competition, corporations may appear to be acting “good,” but that’s only because the profitable option benefits customers.
Yes, profit and inflation are linked, but it’s important to understand both what allowed increased profits (in this case supply disruption) and the consequences. From your article:
A spike in profit margins contributed significantly to inflation in the early part of the pandemic recovery, and likely contributed to even more persistent inflationary pressure by helping spur a countervailing rise in nominal wage growth.
It’s not just profits, but real wage growth. If you’ll remember, there was a labor shortage during and just after the pandemic, which led to workers demanding increased pay. Fast food jobs, for example, typically paid $8-9/hr in my area, with “better” chains (the ones for whom better customer service was their competitive advantage) offering $12/hr. During and just after the pandemic, $12 was the normal fast food wage, and the “better” chains jumped to $15+. My state still uses the federal minimum wage ($7.25/hr), so it’s not legislative action, but shifts in wage expectations that resulted in wages going up, which justifies the higher prices for fast food (fast food is incredibly price competitive).
Continuing on with your source:
instead of suppressing wages, they raised prices. If this episode increases public support for measures that constrain excess corporate power, that would be good even if it has little relevance for inflation in the future.
Both prices and wages are sticky, especially in less competitive industries. But prices do come down relative to inflation over time, provided the market is competitive enough. Look at car prices, they were sticky until well after supply returned to normal because demand for cars remained high, but now car prices are largely back to normal, relative to inflation, because it turns out higher volume is usually better than higher margins.
The same pattern will happen to eggs, but even faster because the cycle time to bring getting a new batch of egg laying hens is comparatively short (5-6 months from hatching to producing eggs), and the customer purchase cycle is rapid.
To understand what’s going on, we need to understand why corporations could get away with increasing prices:
Supply was constrained due to global supply chain factors; if your competitors all sell out, people will come to you and your higher prices (also why scalping works)
People had extra cash (stimulus, less activities outside)
Production costs increased due to shortages (lots of great excuses)
Yes, they cranked up profits when they saw an opportunity. I don’t see that as “bad,” I see it as expected. Corporations exist to generate profits, so if life gives you lemons (supply chain disruption), you make lemonade (increase margins on the supply you have).
What I do see as “bad” is corporations getting away with violating the law with essentially a slap on the wrist. There are two main ways to fix bad corporate behavior:
stiff competition
lawsuits
And when the first fails, the second just isn’t sufficient to actually change behavior, since fines are merely a cost of doing business. Raising prices itself isn’t illegal, colluding with competitors absolutely is, and the penalties need to more than account for the profit from colluding.
[…] pulls resources (employees, production, etc) from other parts of the economy, increasing the costs of the remaining resources since there’s less available.
That is why I specified that there needed to be excess productive capacity for whatever they are buying. As long as the economy is not at full employment, the government isn’t bidding up the prices with its spending.
At full employment though, you are absolutely right.
That doesn’t really exist in most developed countries. The US, for example, has about a 4% unemployment rate, which is pretty healthy. There will always be some people out of work for various reasons, so a relatively small amount of unemployment is pretty healthy.
If you have excess productive capacity, you probably have some systemic issues in your economy, and more government spending probably isn’t the right solution (e.g. FDR’s jobs programs didn’t fix the Great Depression).
It’s going to be a tradeoff, and spending more is rarely “free.” That money comes from somewhere, either directly from your pocket from a tax, or indirectly from your pocket from inflation.
There actually isn’t such a thing as a “natural rate of unemployment”, so all of those 4% are part of the excess productive capacity.
There will always be some people out of work for various reasons
If those people are unemployed simply because their previous contract expired a bit before their new one started (frictional unemployment), then I agree it is totally unproblematic. If it is because there aren’t enough jobs going around (structural unemployment), it isn’t.
That money comes from somewhere
All money in monetarily sovereign countries come from government spending: It is spent into existence by the central bank marking up the reserve accounts of the banks of the people and businesses it pays to. The money in circulation and saving is simply the difference between total government spending and revenue. It is important to realize the order of operations here: The governments has to spend before it can tax, or else there wouldn’t be any money to tax.
There actually isn’t such a thing as a “natural rate of unemployment”
I never claimed there was, I only claimed that 4% is right around ideal.
It seems somewhere between 3-6% is a good range. If you drop too low, you get inflation due to wage inflation (workers demand more pay) outpacing regular inflation (more money chasing the same number of goods -> inflation). If you go too high, you get do deflation due to reduced demand.
That’s why monetary policy tends to town tighten with lower unemployment (cool off the labor market), and it tends to loosen with higher unemployment (encourage investment and therefore job creation).
That said, this is a simplistic view of monetary policy, and employment is merely one of many factors central banks look at.
The governments has to spend before it can tax, or else there wouldn’t be any money to tax.
That’s only true if you lump monetary policy with “government spending.” In the US, the Federal Reserve is largely separate from the rest of government, so it makes little sense to combine them in your simplistic explanation.
The ideal scenario is that government spending matches receipts, meaning there’s a plan to pay for all spending. If there’s a deficit, monetary policy needs to step in to issue debt to fund the gap, and that’s inflationary. If there’s a surplus, monetary policy needs to step in to buy back debt, which is deflationary.
They’re absolutely related, but the perspective you seem to be talking from tends to justify deficit spending: “we can always just expand the money supply.” That works until it doesn’t, such as with Venezuela, Argentina, and Turkey. That’s a large part of why the Federal Reserve is independent, and why giving the legislative wing (or worse, executive wing) of government direct control over monetary policy is so dangerous.
Totally agree. The intial tax liability declared in a currency has the purpose of creating demand for the currency so that people, either directly or indirectly, want to work for the government to get the money they are issuing.
This effect is probably most import when the currency is first created, but at the same time also the most important function of tax: It is what goves the money its value.
But then we’ll go on and say stuff like “taxpayer money”, “how are we gonna pay for that”, or “our grandkids are gonna have to pay back the national debt”.
The pursuit of a “balanced budget” is one of the most successful bits of propaganda ever.
All government spending is done by “printing money”, at least in monetary sovereign countries like the US, UK, and other countries issuing their own cureencies. The government is the monopoly issuer of the currency and cannot run out of it, just like the scorekeeper of a baseball match cannot run out of points. Taxes are also not for funding the government, but for removing momey from circulation, precisely to curb inflation. (Also to drive the value of the currency by making people demand it to be able to pay their taxes). Thus “printing money” isn’t in itself inflationary, as long as the newly created money is spent on something where there is excess production capacity. The question for the government is never “can we afford it”, but rather “are the real resources there to achieve it”.
Yeah, this is the common MMT definition of money, I think.
Another way to think of it is that all money is IOUs. This one’s a bit hard to wrap your head around, but it works.
Start with government spending. A mail carrier walks through sleet and hail to deliver mail, a service they’re doing on behalf of the government. The government says “thanks for all that work, I owe you” and gives them a pile of IOUs in the form of dollars. Whenever the government receives a good or a service from a person or a company, it gives them an IOU in exchange.
Going back to the mail carrier, their work day is done, so they stop off at a supermarket. They grab some milk and some sausages and go to the cash. Now, maybe it would be possible for the mail carrier to do some kind of work in exchange for the groceries. Maybe advise them on how to ship things efficiently, or maybe just help stock shelves. But, it’s much easier just to hand over some IOUs. So, they hand over some of the IOUs (dollars) they got from the government. Now, the government owes the supermarket, rather than the mail carrier.
So, the store keeps doing business. It collects a bunch of IOUs from various customers, and issues a bunch of IOUs to its suppliers. When tax time rolls around, the store has a whole bunch of IOUs (originally from the government, but given in by various customers). Since the store owes the government for things like providing police to keep things secure, the FDA for keeping the food safe, and so-on, it effectively “cancels” that debt by almost ripping up the IOUs. Well, really, it hands the IOUs back to the government and allows the government to rip them up.
So, you can see the whole economy as the government issuing IOUs as spending. Those IOUs enter the economy and flow around, and people want to hang onto them because they know that in April the governments going to come around to settle things. Tax time is basically a point where people who didn’t do any work directly for the government can say “Yeah, I didn’t do any work for you, but I did give that mail carrier some milk and sausages, and he handed over your IOUs, so I’m giving those to you now”. And the government says “Yep, fair enough”. It collects the IOUs and rips them up, and the whole thing starts over.
In the past, this actually used to be a lot more explicit. When you could exchange your US dollars for gold, the idea that it was an IOU for the gold was a bit more explicit. These days we don’t need the gold. It’s an IOU not for gold, but for work done.
Totally agree. I am definately an MMTer myself. The mailman example is very good, by the way.
It took me a while to get the idea that money could be debt / IOUs. But, when I thought of government employees doing things for the government and getting given IOUs it clicked.
That all makes it much easier to understand the flow of IOUs through the economy, and much easier to understand how taxing destroys money. It’s the government ripping up IOUs that it itself issued to its own workers (or suppliers or contractors or whatever).
Your conclusion doesn’t follow from what you said.
Inflation is merely the change in subjective value of a currency over time. Inflation goes up when people want more money for the same stuff.
If the government creates money to fund something, that pulls resources (employees, production, etc) from other parts of the economy, increasing the costs of the remaining resources since there’s less available. That’s inflation.
The Covid stimulus packages are a fantastic example of this, because it directly resulted in more money chasing fewer goods (less production). There would’ve been inflation anyway since net production decreased, but the stimulus package exacerbated it. A significant amount of the inflation we saw recently was a mix of COVID supply chain disruption and Trump and Biden’s stimulus bills.
Excess production is deflationary, but that doesn’t mean printing money to cover isn’t inflationary, it just means you can counter deflation from one source with inflation from another.
Sure. But at that point we’re not talking about inflation anymore. If the government really wants something, it can get it, but that will have consequences. The question is whether it’s a net benefit, and how to fund it:
Each option has consequences, and generally speaking, you get less of whatever you tax, if the tax is high enough.
Please, multiple studies were done about the causes of the recent wave of inflation and they determined that the vast majority of it was a result of greedy corporations taking the opportunity to boost their profits.
Also: https://en.wikipedia.org/wiki/Modern_monetary_theory
For 1, talk to any respected economist and they’ll tell you MMT is a popular minority view but far from mainstream and very much riddled with criticism.
For 2, blaming corporations is an absolute copout. Here’s the US BLS’s official statement on the causes of inflation:
Backlog of work is a nice way to say people weren’t producing, but were still spending. And energy prices spiked because of the recovery (energy consumption dropped during COVID and recovered when restrictions were lifted}.
Here’s a discussion with John Cochrane about inflation causes, and he argues the main cause is stimulus spending because the government had no plan to fund it:
Here’s a Forbes article about it:
Those aren’t cherry picked either, they’re the top sources when I search for causes of inflation, and is a mix of government, academic, and “mainstream” financial analysis.
From what I’ve read, here’s what seems like the most credible explanation:
Corporations didn’t increase prices because they all of a sudden decided to screw the consumer, they increased prices because demand went up (people had more to spend) and supply was limited. If corporations are jacking up prices, it’s not because they decided to be greedy (they’re always greedy), it’s because something changed that allowed them to change prices.
Look, I don’t doubt that some of what you outlined had a role in inflation. But unlike you, I think that absolving corporations of blame here is the real copout.
Your last paragraph makes it sound like the poor, innocent corporations didn’t have a choice and were forced to crank their profits up when they saw a $$$ opportunity, because what else were they to do in the middle of a pandemic ravaging the country? Poor angels!
https://www.epi.org/blog/profits-and-price-inflation-are-indeed-linked/
I’m not making a value judgment here, I’m merely talking about how economics works.
The whole purpose of a corporation is to generate profit, and to do that it needs to convince customers to buy from them. If there’s sufficient competition, corporations may appear to be acting “good,” but that’s only because the profitable option benefits customers.
Yes, profit and inflation are linked, but it’s important to understand both what allowed increased profits (in this case supply disruption) and the consequences. From your article:
It’s not just profits, but real wage growth. If you’ll remember, there was a labor shortage during and just after the pandemic, which led to workers demanding increased pay. Fast food jobs, for example, typically paid $8-9/hr in my area, with “better” chains (the ones for whom better customer service was their competitive advantage) offering $12/hr. During and just after the pandemic, $12 was the normal fast food wage, and the “better” chains jumped to $15+. My state still uses the federal minimum wage ($7.25/hr), so it’s not legislative action, but shifts in wage expectations that resulted in wages going up, which justifies the higher prices for fast food (fast food is incredibly price competitive).
Continuing on with your source:
Both prices and wages are sticky, especially in less competitive industries. But prices do come down relative to inflation over time, provided the market is competitive enough. Look at car prices, they were sticky until well after supply returned to normal because demand for cars remained high, but now car prices are largely back to normal, relative to inflation, because it turns out higher volume is usually better than higher margins.
The same pattern will happen to eggs, but even faster because the cycle time to bring getting a new batch of egg laying hens is comparatively short (5-6 months from hatching to producing eggs), and the customer purchase cycle is rapid.
To understand what’s going on, we need to understand why corporations could get away with increasing prices:
Yes, they cranked up profits when they saw an opportunity. I don’t see that as “bad,” I see it as expected. Corporations exist to generate profits, so if life gives you lemons (supply chain disruption), you make lemonade (increase margins on the supply you have).
What I do see as “bad” is corporations getting away with violating the law with essentially a slap on the wrist. There are two main ways to fix bad corporate behavior:
And when the first fails, the second just isn’t sufficient to actually change behavior, since fines are merely a cost of doing business. Raising prices itself isn’t illegal, colluding with competitors absolutely is, and the penalties need to more than account for the profit from colluding.
That is why I specified that there needed to be excess productive capacity for whatever they are buying. As long as the economy is not at full employment, the government isn’t bidding up the prices with its spending.
At full employment though, you are absolutely right.
That doesn’t really exist in most developed countries. The US, for example, has about a 4% unemployment rate, which is pretty healthy. There will always be some people out of work for various reasons, so a relatively small amount of unemployment is pretty healthy.
If you have excess productive capacity, you probably have some systemic issues in your economy, and more government spending probably isn’t the right solution (e.g. FDR’s jobs programs didn’t fix the Great Depression).
It’s going to be a tradeoff, and spending more is rarely “free.” That money comes from somewhere, either directly from your pocket from a tax, or indirectly from your pocket from inflation.
There actually isn’t such a thing as a “natural rate of unemployment”, so all of those 4% are part of the excess productive capacity.
If those people are unemployed simply because their previous contract expired a bit before their new one started (frictional unemployment), then I agree it is totally unproblematic. If it is because there aren’t enough jobs going around (structural unemployment), it isn’t.
All money in monetarily sovereign countries come from government spending: It is spent into existence by the central bank marking up the reserve accounts of the banks of the people and businesses it pays to. The money in circulation and saving is simply the difference between total government spending and revenue. It is important to realize the order of operations here: The governments has to spend before it can tax, or else there wouldn’t be any money to tax.
I never claimed there was, I only claimed that 4% is right around ideal.
It seems somewhere between 3-6% is a good range. If you drop too low, you get inflation due to wage inflation (workers demand more pay) outpacing regular inflation (more money chasing the same number of goods -> inflation). If you go too high, you get do deflation due to reduced demand.
That’s why monetary policy tends to town tighten with lower unemployment (cool off the labor market), and it tends to loosen with higher unemployment (encourage investment and therefore job creation).
That said, this is a simplistic view of monetary policy, and employment is merely one of many factors central banks look at.
That’s only true if you lump monetary policy with “government spending.” In the US, the Federal Reserve is largely separate from the rest of government, so it makes little sense to combine them in your simplistic explanation.
The ideal scenario is that government spending matches receipts, meaning there’s a plan to pay for all spending. If there’s a deficit, monetary policy needs to step in to issue debt to fund the gap, and that’s inflationary. If there’s a surplus, monetary policy needs to step in to buy back debt, which is deflationary.
They’re absolutely related, but the perspective you seem to be talking from tends to justify deficit spending: “we can always just expand the money supply.” That works until it doesn’t, such as with Venezuela, Argentina, and Turkey. That’s a large part of why the Federal Reserve is independent, and why giving the legislative wing (or worse, executive wing) of government direct control over monetary policy is so dangerous.
I agree that governments spend money into existence, but I disagree that taxes are merely to curb inflation.
Residents need to contribute some of their productivity to support the services they receive. That’s tax.
Totally agree. The intial tax liability declared in a currency has the purpose of creating demand for the currency so that people, either directly or indirectly, want to work for the government to get the money they are issuing. This effect is probably most import when the currency is first created, but at the same time also the most important function of tax: It is what goves the money its value.
This is such a fantastic summary of the theory of money. Holy shit.
At some level, everyone knows this.
But then we’ll go on and say stuff like “taxpayer money”, “how are we gonna pay for that”, or “our grandkids are gonna have to pay back the national debt”.
The pursuit of a “balanced budget” is one of the most successful bits of propaganda ever.
It’s a bit like saying “we need economic growth”. Doesn’t mean shit to the poor when they don’t benefit from it at all.