Taxes, and the Parable of “Turning Litter Into Money”

By Lambert Strether of Corrente.

Since April 15, tax day, has just past, and tax reform is part of the national conversation, I thought it would be helpful to bring forward this parable on how taxes work from Warren Mosler, who runs Mosler Economics and is a central figure in the Modern Monetary Theory community[1]. (The material that follows comes from the Fiscal Sustainability Conference, organized in 2010 as a counter-conference to a Peterson Foundation-supported Fiscal Summit, as described by Joe Firestone.)

First, here’s the video. You only have to listen to the first 2:58:

And here is the transcript:

[WARREN MOSLER:] The question is, “How do you turn litter into money?”

So, I take my business cards out here, and these are twenty dollars a piece, if anybody wants to buy any. No? Any takers? No? Okay. [00:00:19]

All right, well if anybody wants to stay after and help clean up the carpet and tidy up the room, I’m going to pay one per hour. Or five per hour, or whatever, one per hour. Anybody want to stay and help? Okay, not a lot of takers. [00:00:30]

Then I add one more thing: Look, there’s only one way out of here and there’s a man at the door with a nine millimeter machine gun. Okay? And you can’t get out of here without five of my cards.

Now things have changed. I’ve now turned litter into money. Now, you will buy these, you will work for these things if you want to get out. The man at the door is the tax man and that’s the function of taxes. Stephanie [Kelton] talked about how taxes do it. But you can recreate that… [00:01:08]

So, is there an example of a currency that works like that in the real world? I mean, aside from the real world? Why yes:

[WARREN MOSLER:] There’s a currency that’s circulating at the University of Missouri Kansas City that we started way back called the buckaroo because we wanted to replicate a currency for the students to understand National Income accounting and how a currency works and that it doesn’t matter if you are a small open economy and what they did is that you need something like twenty buckaroos a semester to be able to get your grades in the economics classes. [00:01:37]

The way you earn buckaroos is that you can do public service, community service, at some of the local institutions whether it’s the hospital, the police department or helping out locally. And they pay one per hour. Back ten or fifteen years ago, whenever these were started, they were worth… And they were freely exchangeable. So you would have to go earn your buckaroos. You’d have to have twenty of them to pay your taxes, your buckaroo tax. [00:02:09]

But you didn’t have to earn them. You could buy them from other students, you could do work for them. Nobody really cared what you did for them, you just had to somehow get buckaroos to turn in. Just like you have to pay your taxes here and whatever you do to get your money. [00:02:23]

So, the students would go to work and they would earn these things and at the end of the year, the first year, I did the accounting at the Post Keynesian Conference for the buckaroos and it went something like this: The total tax was a thousand buckaroos across the classes. Students came and earned eleven hundred buckaroos. And they paid a thousand for taxes. The School ran a deficit. They spent eleven hundred but they only collected a thousand. Did that affect their credit rating with the rating agencies or anything? Of course not.

I used the word “parable” quite deliberately, because my goal, readers, is to open your minds to a paradigm shift (and not to do a full-fledged, economist-style explication of the history and current operations of the U.S. financial system, which, like juggling flaming power tools, would require more practice time from me than I have right now)[2]. However, if you find Mosler’s parable illuminating, we can glean some additional insights:

(1) Money (“litter”) does not emerge from barter (that is, historically, the “double coincidence of wants” is a crock).

(2) Money need not be “backed by” anything (gold, for example).

(3) The sovereign (whoever controls the “man at the door”) creates demand for the money it issues through taxes.

(4) Taxes do not “pay for” the services the sovereign provides. That is not their function. [3]

(In the news coverage of tax reform, you’ll hear that taxes “pay for” government spending constantly, expressed as a truism.)

Of course, Mosler’s parable is really a thought experiment, and greatly simplified; there are no banks, and there is no financial sector. L. Randall Wray expands on Mosler’s parable and draws out some implications:








* * *

I was inspired or reminded to write this post by this recent summary article from Deutsche Bundesbank, “How Money is Created.” The Bundesbank adopts the MMT view that loans create deposits, writing:

In terms of volume, the majority of the money supply is made up of book money, which is created through transactions between banks and domestic customers… [B]anks can create book money just by making an accounting entry: according to the Bundesbank’s economists, “this refutes a popular misconception that banks act simply as intermediaries at the time of lending – ie that banks can only grant credit using funds placed with them previously as deposits by other customers”.

And in an extended response to that article by MMTer Bill Mitchell (“Deutsche Bundesbank exposes the lies of mainstream monetary theory”) introduces the role of the sovereign:

Banks lend if they can make a margin given risk considerations. That is the real world. If they are not lending it doesn’t mean they do not have ‘enough money’ (deposits). It means that there are not enough credit-worthy customers lining up for loans.

Banks lend by creating deposits and then adjust their reserve positions later to deal with their responsibilities within the payments system, knowing always that the central bank will supply reserves to them collectively in the event of a system-wide shortage.

So, at the end of the day, somebody always has to turn litter into money[4].


[1] As MMTers joke, MMT is neither modern, nor monetary, nor a theory. Branding is hard!

[2] For a very pragmatic, policy-driven discussion, see “MMT on a Postcard.”

[3] The several states are not currency issuers; they don’t print dollars.

[4] “[N]o sovereign issuer of the currency needs to borrow its own currency from its population in order to spend.”

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About Lambert Strether



  1. Marshall Auerback


      1. Dead Dog

        Yes, Lambert, but the lie that we need taxes to pay for nice things is so entrenched, the counter narrative is usually dismissed without thinking about it.
        I’ve seen this many times when I have tried to explain how money works.
        And, there’s many people brighter than me trying to get traction and sunlight on this.
        Thanks for NC’s persistence. I think we get it.

        1. ChrisAtRU

          Always begin by showing them Beardsley Ruml’s article from 1946:

          Taxes for Revenue Are Obsolete

          I’ve found that even the most hardened “tax for spend”-er will give pause. What usually follows is some nosh about Zimbabwe and/or Weimar.

          At this point, I brush out Bill Mitchell’s Zimbabwe for Hyperinflators 101. That precipitates another pause. After this, the protest is commonly that big government would be wasteful if politicians thought that they could just spend on anything and everything.

          I then resort to Randy Wray’s 36th installment of the Modern Money Primer at NEP:

          What Government Ought To Do

          This emphasizes that just because a government can afford to spend, does not mean government ought to spend. Cements the idea that affordability is never the issue.

          If anyone makes it this far with me, they’re usually somewhat convinced, and will seek out more information. Remind people always that the view at the micro level (the individual) is not the view at the macro level (government). I liken this to standing on the earth and sensing through all our human inputs that it is flat, but knowing ultimately that it’s not. It’s really difficult – especially with economics-illiterate politicians and disingenuous economists – to get people to come to grips with the fact that the government is not constrained like they are. But hopefully, the links I’ve posted can help when engaging others in the future.

          If all else fails, remember MMT Is Like An Autostereogram … for some … ;-)

          1. Dead Dog

            They’re great links, I just wish my friends were as inquisitive as I am. I’ll bookmark and persist.

            There is also a plumbing diagram which I found very useful to explain the flows…

            Thank you ChrisatRU

              1. ChrisAtRU

                Yes. That too!

                Don’t wear yourself out. When I was new to MMT, I got into quite a lot of heated debates online and IRL – now not so much. Maybe better to pick your spots sometimes … ;-) Or take a break and read up more on related topics and history … so when those occasions to engage with folks on MMT do arrive, you’re armed with new ideas or sources. Good luck! Thanks for fighting the good fight!

          2. Peter L.


            Thanks for the link to Ruml. Where did you come across it? Are there any particularly interesting references to this article you’d recommend?


            1. ChrisAtRU

              I suspect I must have come across it at NEP … probably this installment.

              There are so many gems in that article. I’d go section by section. It’s a really wonderful articulation of the “why”.

              – The US is sovereign nation whose currency is not convertible to any commodity
              – The Government is thereby “free of the money market” (title of the third section)
              – The real purpose of taxes is as an instrument – fiscal/public policy (What Taxes Are Really For, the fourth section)
              … and on and on.

              A search for his surname at NEP reveals a trove of articles. I’d go through those to gain insights into how his paper is referenced to strengthen MMT arguments.


              1. Peter L.


                Thanks for your response! I find these “older” references quite interesting and illuminating.

                Those links are useful. Glad you posted them.



          3. Clif Brown

            Thanks for the links, again proving that NC is the place to come not only for the essays but for the comments (often essays as well).

        2. Lambert Strether Post author

          > the lie that we need taxes to pay for nice things is so entrenched

          One more way that conservatives and liberals are both subsets of the set of all neoliberals.

          And the left should not, must not be.* The real issue is fiat currency, but putting fiat currency under small-d democratic control. And even Sanders, though he hired Stephanie Kelton, doesn’t want to stick his neck out on this.

          NOTE * The left seems to confuse taxing the rich with raising revenue. Not so! It’s good to tax the rich (1) to prevent or impede the development of an aristocracy of inherited wealth, (2) to prevent the rich from buying the State with their loose cash, and (3) for the benefit of the children of rich parents, whose great wealth (and greed and arrogance) often causes their children suffering.

    1. cnchal

      So, what really gives money it’s value is the currency issuer’s gun pointed at your head.

      1. skippy

        It might suggest making sure the issuer is not run by a bunch ridged ideologues immune to evidence or favoritism to a segment of society.

        1. cnchal

          That is the rub. The currency issuer seem to issue a lot more currency to it’s favored insiders, but that’s why it’s political economy. Peasants be damned and taxed.

          It might be heresy, but I always sensed that the value came from my effort to earn it.

          Now, the insiders that were issued lots more currency change the rules and want stuff to be privatized, and lo and behold, look who has the currency to buy up all the stuff already built and own any new stuff. The government’s gun gets pointed at you for taxes and toll booth enforcement.

          1. Huey Long


            They’ve also been smart enough to keep military and cop pay relatively high to ensure their loyalty, so don’t expect a coup any time soon.

            Cops in NJ routinely make better than 50% above median household income for example, while an E-5 with 10 years in is making less than the national median on his/her base pay, but likely more once housing allowance, free healthcare, and other special pay is factored in.

            1. jimbo

              As Emperor Septimus Severus advised his sons on his deathbed: “Be harmonious, enrich the soldiers, and scorn all other men”

      2. Ptolemy Philopater

        This is also reflected in International payments. As Paul Krugman has stated the dollar is backed up by the US military. Witness what has happened to leaders that have tried to institute an alternative payment system, Saddam Hussein, using the Euro to pay for oil. Muramar Ghaddafi, trying to create a Pan African bank and currency.

        Now it is Russia, China and Iran under threat by the US military not for Syria, not for the Ukraine, but because they are trying to create an alternate international payment system. This is also the reason that no countries except the chosen few are allowed to have nuclear weapons. The fact that the Russia and China do have nuclear weapons have allowed them to pursue an alternate payment system without suffering the fate of Hussein and Ghadafi, so far.

        Ask yourself, why Korea, why now? To pressure China. This is also why the US rejected John Maynard Keynes bancor which would have punished trade imbalances. The US now enjoys huge trade imbalances with no consequence because the dollar is the world reserve currency and not the bancor. This also explains why it is in the interest of the US empire to be in a perpetual state of war, instability causes demand for the “safe” dollar. If the bancor were the international reserve currency it might be possible to end this perpetual state of war. Fat chance.

        1. Ptolemy Philopater

          There is a great danger that the neo-con Dr. Strangeloves have convinced themselves that they could win a a first strike nuclear war, “decapitating” Russia and China. The development of hyper-sonic nuclear weapons are the means to this end. These monsters need to be exposed and “decapitated” themselves. The planet is in extreme danger from these desperate maniacs. The talk of decapitating North Korea’s leadership is perhaps the prelude to all of this. They are so close to the neo-feudalism they crave, yet so far away.

      3. Gary Goodman

        In order for “money” — the stuff of modern commerce — to exist, taxation is a requirement. If Govt agreed to limit itself by enforcing a rule on itself that it will exchange scarce shiny rocks for money-notes at a fixed exchange rate, the Govt would then NEED tax revenue .. but need it for a balanced budget, lest they run out of the gold they promised.

        The difference is that Govt ONLY taxes in the currency it issues. Theoretically, if a person never conducts commerce in that state currency, he/she owes no taxes. But who wants to live like that, denying oneself the use of the Govt’s service of common currency?

        Some people today, in the black market economy, may be forced to trade sex for rent or even food, or sex for a job, or engage in other black market activities such as swapping or selling illegal drugs.

        In 1932, with a massive shortage of bank credit money AND conservative govt austerity (insufficient fiat spending) which was maybe just starting to turn around under FDR’s New Deal spending, not yet war-prep spending, in some parts of the USA like Washington State, people had to pay fines with barter, by bringing potatoes, flour, and/or live chickens to court for traffic tickets. This was illustrated in a documentary on Ford and the V-8 engine.

        The currency issuer’s “gun” is a kind of metaphor — yes, tax collection is imposed, not voluntary, but it’s NOT necessary that EVERY currency user pays taxes, or at least not much directly, though probably via some purchases from large corporations.

        Michael Hudson also explained an obscure benefit of a 92% *marginal* tax rate in the 1950s — companies had incentive to plow excess earnings into wages, employee benefits, vacation pay, even island resorts, education, investments in expanding production, and such, instead of just spooning all the cream off the top.

        Hudson also pointed out that high taxes on real estate speculation counteracts market pressures to inflate real estate and speculative gains on debt-derived assets, like in the 2000s.

        Treasury Secy Andrew Mellon, under ultra-conservative Coolidge, stated that people who do hourly or salaried work for a living, whose income vanishes in sickness and old age, *should* pay NO or very little taxes. Mellon stated this mostly as a moral argument, but there’s also the pragmatic argument, that such taxes on wage labor incomes (incl sales taxes and FICA) do *directly* reduce overall consumer spending power, penny for penny, for people that spend every penny they earn to survive.

        On the other side of Mellon’s “coin” was “rentier” income, dividends and gains that are earned by people “in their sleep” per Mellon. This includes people like the Mellon family. He believed that these forms of wealth and income *should* be taxed. This includes buying land and waiting for it to appreciate in value when the Govt or private entity puts through a road or train, or when some other outside influence boosts the value of otherwise unimproved property.

        Note, that cheap gold is, by definition, promised to rich people, those who HAVE surplus savings to purchase govt’s gold. Also, since the Govt need adds to market demand for gold, that action artificially (there’s that term about “statism”) boosts the market price. This is one part of a subsidy to investors. Then, the Govt is subjected to speculators, who seek an automatic gain by buying discount gold at fixed govt prices, then owning it or selling it for higher market prices.

        This understanding was explained in repetitive details by wannabe lawyer/anarchist Lysander Spooner in the 1800s. Spooner explained why Govt should never FIX a market price on gold or stamp gold coins with a face value — that value is always wrong. Gold coins will therefore be melted down for decoration, defeating the purpose of coins. Or Govt will have to impose anti-market criminal penalties on gold-coin debasement or destruction, turning the gold standard regime into an analogue for the War on Drugs, where natural incentives created by prohibition are punished by prohibition, creating higher incentives to take risks.

        Gold is fine for trading as unmarked bullion, as a market commodity, just like any other commodity, be it metals, sugar, oil, pork bellies. Spooner was opposed to an artificially determined Fixed Exchange rate price. Ironically, this libertarian anti-gold argument by Spooner is featured on Mises dot org.

    2. Vatch


      Yes, I agree with this statement. The first time that a unit of money is used, it is created by the monetary authority, and it does not come from taxes. But I do not agree with assertions that taxes do not fund any government spending. After that money has been created, it circulates, and it does not have to be created anew. So when that money is returned to the government in the form of taxation, that tax money allows the government to continue spending in the future.

      The first time that money is spent by government, that spending is not funded by taxes. All subsequent government spending of that money is funded by taxes. The only government spending that is not funded by taxes is government spending that increases the money supply. In the United States, the majority of federal spending is funded by taxes. Not all federal spending, just most of it.

      1. Neil Wilson

        What if everybody saves most of what they earn rather than spending it – because they have to save up to cover retirement due to a lack of sensible social security.

        Does that then stop the Federal level continuing to buy things as required for the public purpose.

        It doesn’t does it.

        So if there is no control function to taxes on the Federal government they cannot be said to be ‘funding’ the Federal government. The implication of ‘funding’ is that the banking term is misinterpreted as the general term and that a lack of funding will stop the operation. That doesn’t happen.

      2. Gary Goodman

        Private spending occurs. Private saving occurs. This includes foreign savings, typically saved in a form of dollars called Treasury Securities.
        Govt spending occurs. Govt taxation occurs.

        The *logic* of the argument is that since the private sector MUST have state currency to pay taxes, tax payments cannot logically be the *source* of said currency.

        If the Govt were to enact Paul Ryan’s and (ironically named) Freedom Caucus goals, they would be reducing the net money supply, year by year, until zero net money remained in circulation OR in savings. Then there would be zero net savings and one person’s wealth would literally have to come from other people’s poverty or negative wealth … debt.

        With govt net spending, it is possible for currently $20 Trillion in financial wealth to be privately owned, without a matching corresponding $20 Trillion in private liabilities or debt, because the Govt is taking the negative position (so to speak), by issuing net liabilities … aka Dollars, vs wealth which can only arise from other people going into debt.

        So note, “wealth which can only arise from other people going into debt” — and financial gains that can only arise from others’ financial losses — *is* the goal of conservative austerity nuts, no matter which political party.

        Pragmatically, the Paul Ryan and Freedom Caucus and Tea Party goal of paying down the national debt with persistent Govt surpluses, could not function very long without completely destroying Capitalism, which is *required* to have continuous financial growth just to remain viable and operational, to not collapse in a wave of bankruptcies.

        I mentioned the Henry Ford V8 engine video above — not only did people have to pay court fines with live chickens in some parts of the country, in 1932, but Ford spent millions of investment dollars to open a stunning new plant in Washington State, specifically designed for new common cars with the new cast block V-8 engine, then weak sales from lack of money forced Ford to shut down that new plant, permanently.

        Think of the effort and man-hours, the engineering and planning as well as construction — real resources — which were completely wasted and thrown away, due to insufficient Dollars to buy cars. If Henry Ford blamed “Jews” for those financial and fiscal problems, instead of blaming Congress and lack of MMT systems and understanding at the time, no wonder he became an honorary Nazi. Ford’s losses were staggering, and it was still Ford’s show, he hadn’t then been forced out as CEO by a corporate board or by “bankers”.

        Again, it’s illogical like it would be to say that since the Earth reflects some Sunlight energy and some must be radiated back into space to the Sun, therefore the Earth is a partial source of Sunlight and heat, which the Sun uses to produce more energy.

    3. David Barrera

      You are confused. The video is for show. Gives you the impression taxes make fiat currency possible. Remember the tenet of Mosler’s MMT is the possibility to pump unlimited FIAT CURRENCY into the economy and do away with fiscal imposition. The eager high academicians who bought his outline will tell you the monetary outpouring will create a fiat-public sector ending unemployment and low wages, harmonized with a private sector which will be fed by the former… Everyone happy. Mosler’s will reacquired official USA residency again. The top heterodox academicians, grown out of orthodox high echelons, would have prevailed in their field. All this is as of now settled and according to MMTheorizers the only thing left to scrutinize is inflationary concerns

      1. Sue

        If I were the smart personification of capital this could turn into my dream come true. Capitalism with monetization without boundaries.

      2. Gary Goodman

        MMT has NEVER asserted that we could “do away with fiscal imposition”. Quite the opposite. Fiscal imposition is necessary to have a common fiat non-fixed currency, the kind that “works” for modern Capitalism in a nation-state.

        Another way to clarify, if Congress said that taxes & fees were payable with a certain quantity and purity of cat poop, then cat poop would almost instantly become “money”, be used as “money”, and people would start harvesting cat poop like gold miners panning rivers in the 1800s.

        Of course that would be utterly stupid, smelly, and full of terrible bacteria and viruses, but that would be the monetary effect of imposing tax collection in cat poop — a new form of money.

        Modern states don’t take cat poop nor unstable speculative bitcoin. They only accept the form of currency which THEY spend into circulation, and they must tax back only a fraction of what they spend — deficit spending — lest the net money supply be stagnant or decrease. This is terrible for capitalism, which must grow its bottom line, more or less continuously.

        Moreso, when considering the economic factor of being a fully-developed economy and a net importer, money spent on purchasing corp imports doesn’t actually get on a boat and go overseas, but it goes to foreign-held accounts at the Fed, ergo, no longer in circulation to purchase the output and labor of US workers.

        If Govt refuses to sufficiently compensate and counteract this trend — which was created by a combination of corporate, Wall Street pressure, ideology, and Govt diplomacy + war — then the domestic economy MUST decline as Demand declines and GDP declines.

        Trump as President lacks sufficient powers to reverse the flows of Capitalism wrt foreign trade.

        The Tea Party Caucus or Freedom Caucus cannot make US citizens productive AND still be alive and viable as consumers, by reducing current wages to 1920’s incomes of approx $50 per week or less. Nobody could afford to pay rent to live indoors, let alone buy most anything else that’s for sale at current prices. Engineering a total collapse of Capitalism by attempting to run it in reverse — time travel back to 100 years ago in terms of wages & prices — is idiotic beyond consideration.

        How would the existing private credit structure survive? It couldn’t. It amounts to turning a switch off and shutting down US Capitalism and surrendering the entire project to our next largest competitors. I think, heads would literally roll before that.

  2. Kris Alman

    How does this abstract content intersect with “tax fairness” and concentrated income/wealth?

    1. John Zelnicker

      @Kris Alman – Because it exposes the lie that the government “can’t afford” the programs and services that provide support for those in need; i.e., the Social Safety Net (as weak as it is in the US), and to promote the general welfare of the entire population of our country; e.g., by instituting Medicare-for-All.

      Once its value has been initially established by the sovereign by requiring this particular “money-thing” (dollars in the US, pounds in the UK) to be used to liquidate tax obligations, the tax system can be used to promote such things as tax fairness, e.g. eliminating FICA since it is not necessary to fund Social Security, and to severely tax high income and wealth so they can’t be used to distort and control our political system.

      Right now the vast majority of the tax code exists to reward certain activities and to hinder others. In the end, that’s really what all the deductions, credits, fees, etc., are about. Special interests have been successful in getting Congress to mold the tax code to their benefit.

      1. Mel

        “Reward” and “hinder” maybe aren’t to be avoided. A week or two ago somebody posted a link to a Functional Finance paper by Abba Lerner. This paper identified two problems, with their solutions:
        1) Unemployment. Solved by paying people to work, and the state has the money to do this.
        2) Inflation. Solved by taxing away the excess money.

        Which money to tax becomes the operative question in solving Inflation. It would be futile to immediately tax away the wages that were paid to solve Unemployment. It seems to me that some kind of judgment would have to be applied to decide what got taxed.

        1. John Zelnicker

          @Mel – For a first pass, you could start taxing away the unearned rentier income received by the wealthy due to their ownership of land and capital. This is where the excess money is produced. Since they don’t need it to support their families, they use it to distort and influence the political economy, to the detriment of the rest of us. Taxing it away from them can reduce the amount going into the purchase of politicians.

    2. Lambert Strether Post author

      I would say take the focus off “tax fairness” and put the focus on provisioning services (“universal direct material benefits,” like #MedicareForAll).

      Take the focus off the austerity trap of “pay for” and put it on “can do”: Ask ourselves whether we could organize the human and material resouay for” focus — much abetted by career “progresssives” — focused solely on keeping ObamaCare revenue neutral, thereby erasing the question of benefits to society as a whole from the equation.a

      1. Gary Goodman

        Mosler suggested that #MedicareForAll would actually be deflationary, not inflationary, because tens of thousands of administrators would be unemployed, so more tax cuts or more spending, higher deficits, would be necessary to offset the “efficiency” of Single Payer.

        We would need to retrain bean counters to do something more useful, like helping design deployments of solar rooftops, perhaps.

        Mosler was cautious to not say anything pejorative about health care insurance administrators. THEY are not “useless”, they are good smart people, it’s the job they are assigned to do which is functionally useless make-work for the insurance & health “industry”.

    3. Gary Goodman

      Since Mosler tends to be politically conservative — I get this now — he generally advocates Tax Cuts as well as increased — or different — Govt spending. “Net spending” includes reducing tax revenue. But whose taxes?

      Why not both suspend FICA taken out of workers’ paychecks at the first dollar earned, and why not set the Standard Deduction at $40K or possibly $50K or higher? That would meet Trump’s stated goal of simplifying the tax code. At that point, millions more Americans could file an EZ and get everything back, or rather, could keep more withholding each week.

      What’s the downside to that?

      I’ll answer my own question on the downside. People, poor people and former middle class, could possibly become “too rich”. People could have too much spending power. There could be too many jobs — less a problem with the JG program which could train up workers who never had a job or have been unemployed for a long time. This could be actually inflationary, somewhat, vs imaginary inflation phobia.

      If so, counteract. I say, make some educated guesses about income increases and labor markets and adjust as needed. Don’t leave millions with zero legal income or part time crap jobs just cuz there MIGHT possibly be future inflation from too much win (as Trump actually said, we will be winning so much we’ll get sick of winning).

      Another possible set of problems that keeps elites awake at night: People might get too uppity. People may have too much freedom, a lack of depression and desperation in their lives, may have too much personal power, may have too much time on their hands from casual work outside of a 40-hour work week, free time combined with plenty of easy legal income.

      Ergo excessive societal freedoms to “cause trouble” for elite power managers.

      This is like in the late 1960s and early 70s when lots of young people opposed a darn good patriotic war in Vietnam, and had TIME to voice their protest. “An educated proletariat is dynamite” — quote of a Nixon advisor who counseled ending cheap college education. NIxon built more prisons instead.

      People might still join the Army, but for patriotism, not out of desperation for a job and training. That’s a possible problem too.

  3. Salty

    A very useful quote, if you’re in a conversation and someone says the government can’t afford something:

    “The government can run out of money no more than a writer can run out of words.”

    1. JohnnyGL

      So….I’m at a loss for words right now. Is this the literary equivalent of bankruptcy? :)

      Can I get court protection, in the form of a bankruptcy ‘stay’, from those who are demanding that I explain myself???? :)

      Sorry for the bad jokes….couldn’t help it….

  4. flora

    Very interesting and engaging talk. (Don’t be put off by the opening “technical difficulty” pages. Scroll past them.)

    slightly off topic:
    Taxes are, imo, declared a “burden” by the rich and well connected. Ergo, according to the well connected, taxes should most burden the “wrong sort of people” – those who are not rich or powerful or well connected. The well connected should take first from the benefits of the country’s riches and position. The “wrong sort of people” should give up their benefits – SS, Medicare, unemployment insurance – to keep accounts in balance. The “wrong sort” should work tirelessly and sacrifice their future and their children’s future for the increased comfort of the “right sort”.

    Shorter: progressive taxation is a good idea.

    1. Gary Goodman

      I mentioned a $40K standard deduction, above. Not progressive enough? OK, a $60K standard deduction.

      Possible downsides? Inflation and more, as people became “too rich” for their own good and there was too many jobs and not enough unemployed workers. See above for more details.

      Suspend regressive FICA taxes too. Don’t abolish, just in case needed later. Obama did that partially, for a short period.

  5. Left in Wisconsin

    What is critically important in all this is that the federal government is not money-constrained but the states and localities are. Among other things, this calls into question the notion of a continuous politics from local to state to federal. Liberals and left-siders are now getting stick for paying too much attention to the federal level and not enough to the state and local levels, which is a legit criticism. But if the claim, or necessity, is to grow new political leadership from the local ranks, it would really help to develop an articulated politics that makes sense at the state and local level.

    Here in Wisco, Our Wisconsin Revolution is trying to develop a state-level Bernie-worthy political program. But thus far it is a pretty incoherent grab bag, not all that dissimilar from a D-party platform.

    1. Lambert Strether Post author

      > calls into question the notion of a continuous politics from local to state to federal

      Yes. Why #MedicareForAll needs to be at the Federal level. California, with a GDP the size of France, may be able to make single payer pay for itself, since the waste in the system is so egregious, but what happens to them in a downturn when they have to start slashing the budget?

  6. DJK

    All very good but it doesn’t explain the Somali shilling, which circulates and is accepted in genuine (and forged) note form, but without the backing of a government

    1. Senexx

      Additionally, taxes are a sufficient condition to drive a currency. Not a necessary condition.

      Fees, tithes, etc, can just as easily substitute. It is usually taxes.

      Without the circulating foreign currency (if it hasn’t already as I do not know the Somali economic situation) it would likely lead to hyperinflation as the Somali shilling became effectively worthless.

    2. Neil Wilson

      “In December 2015, the generally recognized exchange rate was 6,000 shillings per US dollar.”

      It is a pegged currency to the US dollar. Therefore it is nothing more than a local colony of the US currency area – sort of like Puerto Rico.

      The purpose of taxes is to free up resources for a sovereign state to deploy for the public good. When a state starts deploying resources for the public good then you tend to get a move towards democratic government to manage those resources.

  7. diptherio

    Another connected myth is that coastal state tax-payers fund us fly-over states because we get more federal funds than we pay in taxes and they pay more than they get. But, of course, that ain’t the way it works.

    1. flora

      The coastal states at one time, back in the US v USSR cold war days, saw the central states as their central redoubt in case of the unthinkable happening. Now that everyone* knows the unthinkable can not happen the central states are relegated to useless feeder places. If the unthinkable does happen there’s always New Zealand or Uruguay or someplace for the important people. (How important will they be without the US ?)

      *everyone: Dem nomenklatura .

      1. flora

        I don’t ask the important or well connected to be smart, only that they have a shred of common sense.

        1. Huey Long


          Don’t hold your breath. The problem with the blob’s mandarins is that they believe their own propaganda.

    2. Inquiring Mind

      Can you tease this one out for me? I don’t see how MMT debunks this. Agreed that the coastal states’ taxes are not technically funding the flyover states, but taxes are collected and Federal funds are spent in known amounts.

      If the coastal states don’t receive their share of the deficit spending, then you can still say they are being dis-favored by the Federal Government whereas the flyover states are benefitting, no?

      1. Huey Long


        Keep in mind that a lot of the spending in flyover, especially the portion between the Rockies and the Pacific is for things like massive military bases, dams, and irrigation schemes that directly benefit the elites on the coasts. The “box states” of the Western US are best thought of as colonies of the coasts IMNSHO.

        1. Inquiring Mind

          Good point – the assessment of benefits should zero in on those social welfare expenditures which the flyover states (apparently) use in excess (and which they also allegedly declaim as wasteful Federal giveaways more so than the progressive coastal denizens).

          Of course the southwest SunBelt states probably benefit from Medicare spending due to higher ratio of retirees…which isn’t their fault per se…so maybe this whole line of reasoning doesn’t stand up to scrutiny. Although, Mississippi & Alabama…what’s your excuse?

      2. Lambert Strether Post author

        What do you expect to be deunked?

        Federal taxes don’t fund Federal spending.

        Federal spending is disbursed to those who have the muscle to grab what they can.

        How are these two claims incompatible?

    3. Lambert Strether Post author

      Again, I think it’s better to think of metropolis/colonies than blue/red or even coastal/fly-over…

      Surely the giant lagoons full of hog sh*t, the landfills, the pipelines, the fracking wells, the data centers, and the water supply counts for something? And all the “bank-owned” properties in the crash?

    4. Vatch

      It’s not as simple as coastal states versus flyover states. It’s not even blue states versus red states, although that is closer to the truth, because the Republican states do get proportionally more in federal benefits than the Democratic states do. Here’s a web site with a map that estimates which states get the most, and which get the least. The dark blue states are most dependent on the federal government, and the white states are least dependent, according to the authors. I can’t vouch for their methodology, although I have no reason to doubt it, either. Some people may analyze the data differently.

  8. Huey Long

    This parable reminds me of the Hut taxes imposed on Africans in the British colonies.

    From Wikipedia:


    1. John Wright

      This seems to indicate the Africans ended up being forced to do many tasks they did not want to do.

      I can see the advantages accruing to the colonialists who issued the currency they had made valuable, but how did the Africans themselves benefit?

      One could argue they were worse off.

      1. Gary Goodman

        Tax collection and imposed currency regime can be nasty.

        OR, conceivably, it could be beneficial. Such as the existence of commerce using money.

        Despite my Far Left Wing past interests and ideals, I can see the point. No matter what system, except money-less communo-anarchism (Marx’s final ideal), insufficient money for efficient healthy commerce and investment is a big problem.

        It should be genuine social as well as economic investment, not simply despoiling faster and creating landfills faster.

  9. JustAnObserver

    So … the Bundesbank joins the Bank of England in ‘fessing up to the fact that loans-create-deposits and that most `money’ in circulation is of this form. IIRC this is sometimes called “outside” (debt created) money to distinguish it from sovereign-spent-into-circulation aka “inside” or “high powered” money. Normally they exchange at parity but in a financial crisis this breaks down for at least some of the sources of debt money.

    Anyone willing to predict when the Federal Reserve will have its own MMT moment ? Simpler, binary, version: Will it before or after the US adopts Chip+Pin ?

  10. yenwoda

    Is there a good natural experiment that demonstrates this theory? At a quick glance the trade-weighted dollar index doesn’t seem to track constant-dollar tax revenues but I’m sure there are better comparisons and exogenous factors that doesn’t account for.

    1. reslez

      Refer to Huey Long’s comment elsewhere in this thread about the hut tax, a policy widely used throughout colonized states to create instant, violence-enforced demand for state issued money.

      You mention the “trade-weighted dollar index” but that has pretty much nothing to do with what Lambert discussed in his post. How the dollar fares against other currencies is a complicated, unrelated matter. What you want to look at is GDP + Private Borrowing + Trade Deficit vs Federal spending. They’re an exact mirror.

      From the linked chart:
      Domestic Private Sector Balance: Is the private sector spending more than it earns? That is, are people and businesses going deeper into debt? Or paying it off and building up reserves?
      Govt Balance: Is the federal government running a budget deficit? Is it spending more than it taxes?
      Capital Account: How big is our trade deficit / surplus?

      In a country like the US with a huge trade deficit, there are two things that can happen. 1) The private sector can take on debt to to pay for what it buys from overseas. 2) The economy can shrink (recession). We usually do a bit of (1), but politicians don’t like recessions, so what happens instead of (2) is that the federal government runs a semi-permanent budget deficit, essentially handing out money to the private sector to partially balance out all those overseas goods. This is literally a zero sum game. Either A or B or C, or a combination that adds up to zero.

      Republicans and Democrats who natter on about “putting our grandchildren into debt” and enact austerity budgets are doing nothing useful. What they’re doing with austerity and balanced budget amendments is guaranteeing their grandchildren will live in poverty and penury. It’s financial malpractice on a national scale to the sole benefit of the rich, who would rather crush the economy than suffer the poor to have a few crumbs of Social Security. Most of the rich don’t understand the details. They don’t need to. The system works for them, and all they care about is keeping all their money away from other people. They’ll tell whatever lies are necessary to make the rest of us believe there’s no alternative. Because “deficits”. Poor Trump bought into this line just like Obama, but I don’t think he’s as slick.

  11. David Barrera

    Mosler exercise does not pass a minimum intellectual standard. The business cards and the armed cop are the equivalent to the well-known studies on exchange in late 19th and early 20th centuries. Let’s take the example of the robber, who aiming a gun at me, prompts my handing him over $23 from my wallet. A very profitable exchange for me to the degree that I am purchasing my invaluable life from him for just 23 bucks. But of course, Mosler could have asked five people to literally kiss his ass and the exercise would have worked as well. Now, this type of coercion differs from the compulsion the University of Missouri employs. The latter consists in forcing voodoo-economic assignments on students in order to earn college paper. (Needless to say that some predisposed student-believers would not require of any coercion). The 100 buckaroos is not a University of Missouri Kansas City deficit. The institution prints the 100 buckaroos, yet in substance the students truly issue them and UMKC does not have to carry a deficit… And eventually some real money will appear in so far as the most logical route for the extra 100 buckaroos is an exchange for real greens, which makes me wonder why the University of Missouri creates the conditions, so such a genius-invented-assignment is satisfied by some students by not doing it and simply purchasing it. Credit rating agencies? I will not waste my time commenting on this any further, because the pedagogic validity of Mosler’s exercise is completely groundless even under the simplicity argument.

    1. Lambert Strether Post author

      I’ve read this comment several times, and I can’t figure out what your point is (although I sense a certain subtle animus towards Mosler, so perhaps that is the point).

      Let’s start with “the well-known studies on exchange in late 19th and early 20th centuries.” Too well-known to quote or even reference, apparently, so how does merely mentioning them refute Mosler’s paradigm? Or buckaroos as a test case?

      1. Senexx

        Full of non-sequiturs & I think he’s trying to make a ‘moral’ case. The whole coercion angle.

        1. David Barrera

          On the two posts above:
          1-No moral case. It is the sheer fact that there is not a 100 buckaroo deficit. Mosler is simply wrong. Students can earn as many buckaroos as their wishes, time and endurance allow them to. Therefore UMKC’s printer’s power is to some degree (specially when talking about “deficits”) turned on by the students. For instance I, as student struggling to pay UMKC tuition fees and text books, could do many hours of “community service”-instead of working at the local McDonalds-, and sell my buckaroo surplus (it makes sense now to talk about individual surplus) not only during this academic year but next year. Well-off students purchase buckaroos with dollars, which amounts to no less than purchasing college credits with real greens. No moral case here, other than the true ,real, life-like economics of this program not having much to do with taxation or MMT.
          2-In regards to Mosler, all I know is that he is or was a hedge fund founder and investor with Virgin Islands residence.
          3-My robbery example is one of multiple static exchange identity paradoxes circulating ad nauseam in late 19th, early 20th century economic literature. Very well-known works, i.e.The Philosophy of Money 1907 Georg Simmel or Standehl 1896

          1. Gary Goodman

            There IS what we call a budget deficit, same as Govt net spending “dollars” into existence.

            That’s how business cards go into existence and circulate.

            If Mosler spends more cards than he collects back in tax requirements, then he is running deficit spending, even as he “prints” business cards at near-zero cost just as the Govt creates Dollars.

            This “buckaroo” system is artificial — so is the Govt’s — but the Govt’s is necessary unless one would wish to attempt to have Capitalism without Money, or Capitalism sans Capital.

    2. a different chris

      > I will not waste my time commenting on this any further

      It wasn’t your time you wasted, it was ours. But I can’t help myself:

      > aiming a gun at me, prompts my handing him over $23

      You don’t understand the first thing about this, do you? The *first* thing is to figure out where that 23 bucks (weird number, btw?) came from. There is no robber, there’s a guy who printed the bucks and now needs to vaporize some of them to keep both inflation and income inequality at bay. In a perfect world, being one of the people with 23 bucks at the end of whatever period means you’ve been a winner.

      1. Sue

        Birth & consolidation of fiat money fit the expansion & velocity of circulation. Monetary policy is political policy & helps explain some income inequality.

  12. H. Alexander Ivey

    L. Randall Wray

    More accurately, taxes create a demand for the form by which one can pay the tax. In early revolutionary USA, state taxes had to be paid in silver coin, no other way.

    And taxes does not allow the government to purchase resources, the government can and does, issue money (the same ‘money’ used by people to pay their tax) to pay for what the government wants.

    What taxes really do is to prevent the accumulation of too much money by people or institutions. Or the reverse. The government uses the concept of taxes to either keep some groups from having too much money and hence power, or to ensure that some groups get money and more power. Of course, there is nothing stopping a government from using the money gathered from taxes from enriching itself and making itself too powerful.

    1. Joe Firestone

      Sorry, perhaps you can clarify for me how the views you give in this comment differ from Wray’s, except in the case of your final sentence: “Of course, there is nothing stopping a Government from using the money gathered from taxes enriching itself and making itself too powerful.”

      The MMT view on this is that tax revenue is, from an accounting standpoint, destroyed in the private sector when the Federal Reserve marks down a Treasury Tax and Loan account, and then new reserves are created when the Treasury marks up its spending account at the Federal Reserve. This is a fine technical point, but it is in contradiction with your statement that government can gather tax revenue to enrich itself and is also significant for the MMT view that taxes don’t fund spending.

      In fact, in our system it cannot do that. Instead what it must do is to appropriate the funds (Congress) and then (through the Fed) mark up its own Treasury accounts. Taxes, security issuance and sales, and coin seigniorage, are three tools it uses to get the Fed to mark up its spending account. It needs these tools because, for political reasons, it constrains itself from requiring the Fed to mark up the Treasury spending account in the amount specified in each of its appropriations.

      See the key article showing this by Stephanie Kelton née Bell:

      1. Gary Goodman

        Congress is like a rich guy who always cries “broke” or like Rockefeller Sr. making a big show of handing out dimes to children.

        Except it affects our entire country and planet, human life, economic life, everything.
        It’s possible for wealthy humans to be wasteful of resources, it’s also possible to develop healthy ecologically-sound human systems. If people can’t throw trash on their neighbor’s yard, there’s no reason govt’s or corporations *must* do so, especially not govt’s that have no limits on spending on development — like the Internet, Manhattan Project, WW2, Cold War.

  13. 4D

    There’s a lot of indisputable reality to the MMT theory such as this tax value of money, but there are plenty of other determinants too. MMT is yet to be fully tested in the US, the one place in the world that it might succeed to a greater degree because of the dollar’s reserve currency status.

    As I argued here on NC about six or seven years ago, and as Steve Keen has just indicated at Patreon, the external balance is where it becomes tricky for almost all other countries.

    Without mentioning the Z country, the currency is always the correcting balance, which China is just finding out about now.

    China has essentially followed MMT on and off for years while also driving private sector expansion, and it worked just fine while the world was happy to exchange yuan for hard dollars, euros and yen.

    But now foreign companies and banks are unwilling to take direct or indirect exposure to yuan backed debt, so China has had to raid $1 trillion of its currency reserves and impose severe capital controls in order to fill the hole in its capital account.

    Not unlike Z country, Chinese yuan holders know the currency is being made less and less valuable as the government attempts to deal with severe financial imbalances via two quarterly bouts of fiscal spending and debt transfers of around $1 trillion in both Q1 2016 and Q1 2017.

    If any country has the ability to demand taxes in its own currency, its China, but the yuan is showing that when a some total debt point is reached, outflow pressures intensify, now matter how good its tax coercion policies are.

    So China is left trying to disprove the “impossible trinity”.

    1. Joe Firestone


      The descriptive aspects of MMT content are tested every day in all nations, and I’d be interested to see any facts you have that you think refute MMT expectations.I’m nor sure there are any, and I’m always looking for facts that falsify MMT.

      I think what you may mean is that progressive policies based on MMT views have not been fully tested. That may be, but nothing is fully tested in the sense that events tomorrow may require our falsifying certain ideas that we do not challenge today.

      So my question is what are the progressive policies based on MMT propositions that you don’t think have been “fully tested” and which policies of this kind have been?

      1. Carole

        RE MMT’s proposed Job Guarantee:

        For those individuals who are doing “unpaid” work (see Marilyn Waring ‘If Women Counted’) such as child care, care of elderly parents (i.e., the “sandwich” generation), how does the Job Guarantee address their needs for a living income and a retirement income?

        One solution is to not care for your own children or grandchildren or parents and pay someone money to do these “unpaid” jobs, while you yourself take on some “paid” employment. Removing humans from these kinds of “unpaid” jobs so that they can make “money” ignores the social/emotional/cultural value of this kind of “unpaid” work.

        1. Joe Firestone

          The MMT JG hasn’t been tested in its full-blown form, which also means that the proposition that it will be a useful policy has not been refuted. So what? HOw can we know whether it will work in its full- blown form until we implement it and see what the results are?

          Also, the Job Guarantee is never presented by MMT economists as the only safety net policy that we need, and it is never claimed that it solves all problems. The problem it solves is that people who want a job offer at a living wage with good benefits can always get that from the Government, when they can’t satisfy their desire for that in the private sector.

          The issue of whether people engaged in helping family members can get paid for that is a separate issue. One way of solving that problem is to allow Job Guarantee participants the freedom to define such work as Job Guarantee work. This would be possible as long as the legislation specifies that such work can be qualified. A second way to solve the problem of paying people for their own child care or elder care of relatives Ian to pass safety net programs that do just that. MMT economists do not generally advocate for that, but certainly MMT views about Government solvency, the ability of Government to just create money, and public purpose suggest that such a proposal would be one they would support.

      2. 4D

        Sorry for late reply, different time zone here.

        I do mean the progressive MMT policies with regard to the US, and if by some miracle both parties agreed to a serious ramp-up in government spending far in excess of Trump’ proposed $1 trillion over four years, that is when the theory will ultimately be tested in the currency and bond markets.

        For now US debt expansion is being countered by the contraction in the eurodollar pool- in other words the “reserve currency” component of dollars – which is keeping the US dollar in short global supply.

        I note you have nothing to argue against my point about China?

        For a theory to be a practical reality, it must work under all circumstances, and I’m afraid this where I have grave doubts about MMT.

        Zimbabwe is the extreme example against MMT, but even with its trade surplus and access to export dollars, China is a current real world test of the ability to drive immense, irresponsible fiscal expansion while retaining currency value.

        The lost $1 trillion in reserves and need for draconian capital controls suggests it can’t, and a financial crisis there will be the proof.

        1. Joe Firestone

          Sorry, I don’t see where the disagreement with MMT is, since it, too recognizes the reality of the impossible trinity, and, as predicted by MMT, insofar as it tries to maintain its dollar peg it will experience the kinds of difficulties you mention. Eventually, if China wants to avoid some of the difficulties it is now experiencing, then it will have to float its currency.

          As far as Zimbabwe Is concerned, Art Senexx’s comment just above is right.

    2. Gary Goodman

      Does China collect taxes in foreign currency?

      MMT, primarily, states how systems work, including the Gold Standard, Euro, non-sovereign “pegged” currencies, as well as sovereign non-fixed floating “fiat” currencies.

      MMT proposals are a different matter. I’d say, contrasting a Job Guarantee to the risky black market in drugs, etc. and prison labor and probation … nobody is saying a JG would eliminate crime, just crime that has roots in financial scarcity, scarcity of jobs, low wages, weak sales, and penny-pinching labor deals. The JG doesn’t impose a top-down minimum wage, it pulls up on pay by creating a floor, while boosting aggregate Demand.

      Will there be “winners and losers”? Yeah. Ditto for NAFTA, GATT, GATS, the WTO rules. Clinton himself said there’d be “winners and losers”, so did conservative & liberal economic experts of that day. They did it anyhow. It seemed FAR less “controversial” to outsource US factory-union jobs (a net economic gain, overall), while slashing public spending, than the fake controversy of allowing people who WANT jobs to work. Are the poor lazy? Prove it. Offer them low-wage non-danger jobs, appropriate for the wage level, and see if jobless people show up or not.

      (Not to eliminate unemployment benefits … denied for part-time work .. and the right to look for a new job for 26 weeks. JG deals with the remainder beyond unemployment checks … but it allows full employment WITHOUT a situation where employers can’t hire ANYONE — too-tight labor market that NAIRU is envisioned to deal with, by causing unemployment and suppressing business growth too, because JG employees are meant to be ready and available for higher paying private jobs at any time.)

      Medicare & Social Security for elderly who can’t work has become “controversial” too, but the TPP was almost a done deal … but for populist skepticism & Trump.

      The JG is projected to be _less_ spending than *current* infrastructure to mitigate the problems of mass unemployment and under-employment.

      Yet maybe we don’t want that. Maybe employed people will be insufficiently desperate and scared, and begin to be too uppity for political elites.

      Proposals based on the MMT that Cheney used to justify the Iraq War should NOT be MORE controversial than predatory policies which directly harm workers & citizens.

  14. Senexx

    the value came from my effort to earn it.

    This is also true. As an example UMKC that runs the buckaroo program, its one hour of labour (community service work) for one buckaroo.

    The taxation drives it but the effort to earn it gives it value.

    1. Sue

      “the value came from my effort to earn it” or to buy it
      “The taxation drives it” or the perfect disposition to comply with self financed Mosler’s course to acquire a college degree drives it.

    2. Gary Goodman

      “the value came from my effort to earn it”

      Labor Theory of Value much?

      NeoClassical econ has almost totally rejected that, whether Adam Smith or Karl Marx.

      Not to say there’s zero correlation, ever, just that the correlation is arbitrary. Plenty of administration and marketing earns gobs more than hard hard work. Hard work on software projects — or anything that people don’t want to buy — doesn’t automatically grant it proportional value.

      Not to mention the super profits earned by manufacturing and trading private debt, and expertise in semi-rigged financial bets, like Goldman’s wheat index.

  15. Roger Erickson

    The logic of fiat currency operations was tested circa 1933 (not to mention in the various Colonial Scrips, circa 1650-1750; and with the Civil War Greenback currency). Read Ben Franklin 1729, plus Marriner Eccles many papers, PLUS his criticism that none of the logical options available to a fiat currency issuer were ever ADEQUATELY tested, posted 1933. Marriner Eccles papers

    ps: for a long list of references on fiat currency operations & “compensatory economics” [i.e., organization], see

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