The government does not need to gather capital via tax and Treasuries to spend? According to MMT

Question

I have watched Warren Moslers interview. https://www.youtube.com/watch?v=W97s3zbFKvc&t=841s. At 7:26 he says that the Treasury does not issue securities for the purpose of financing spending (it is actually accomplished by the Fed debiting the Treasury and crediting somebody else). And at about 10:20 - 11:00 he says that it is not the governments problem if the Treasury notes are not bought. This logic is very unlike the usual understanding that the Treasury issues bonds to finance government spending. He says they are spending first and only after that the bonds get sold. But what if nobody buys the bonds then it is a problem, right? Am I understanding this correctly? Is this common knowledge? Because it sounds very different from what you read about elsewhere. My questions: Does the government really not need taxes and debt to spend since it can just print money? Are taxes really only for reducing money supply. Are Treasuries only for controlling interest rates?

Answer 1

There are a number of points in this question, and I do not want to write too long a response that goes too far into opinions. I will note that I am a proponent of Modern Monetary Theory (MMT).

I will first address two questions. I will write from the MMT perspective, and note that I am referring to a sovereign that controls the currency it borrows in (examples: the United States, Canada, Japan). Countries that borrow in a foreign currency (or a currency it does not control, like the euro bloc), face the same financial constraints as a household or firm.

Does the government really not need taxes and debt to spend since it can just print money?

Technically, the government does not "need" to tax to spend, but that ignores a side effect that is also part of MMT: taxes create a demand for state money, and without taxes, government spending would be highly inflationary. (Some countries might be able to achieve the feat of abolishing taxes by having large natural resource endowments exploited by a government-owned enterprise, but I will ignore that.)

A less controversial way of stating this is that a central government does not need to tax before spending, which is undoubtedly true.

As for bond issuance, MMTers observe that spending is implemented by the government issuing cheques (or making bank transfers), which has the effect of creating "reserves" (bank settlement balances at the central bank) in the banking system. It can do this (within institutional limits) without prior borrowing. Bonds can then be issued, which eliminate these reserves that are created.

Are taxes really only for reducing money supply. Are Treasuries only for controlling interest rates?

Although taxes eliminate "reserves", that is not their primary role, rather it is inflation control.

Treasuries drain "reserves," and allow for interest rates to be able the interest rate paid on excess reserves (which used to be zero in the United States).

This post by Bill Mitchell (one of the co-founders of MMT) discusses the lack of necessity of government debt issuance. Link to website. This subject is also covered in Chapter 21 of the textbook Macroeconomics by Mitchell, Wray, and Watts.

I will then turn to:

Is this common knowledge?

I do not think there is a way of avoiding opinions on this question. In my view, the number of informed dissents to the MMT view in 2020 are very few, the issue is almost entirely how the statements are worded. Conventional economists would refer to this discussion as "money-financed expenditure," and the practical effects of this under conventional theory are hard to distinguish from MMT's description. There is a debate about the inflationary effects of such a policy.

He says they are spending first and only after that the bonds get sold. But what if nobody buys the bonds then it is a problem, right?

The statement "nobody buys the bonds" is probably better expressed as: can a floating currency sovereign default on its debt? That is a difficult question, as the institutional regime in each country is different. The MMT argument is that any institutional arrangements that could lead to a default are self-imposed, and could be eliminated by the government whenever it wishes. I think you would need to ask a separate question on that topic for a country of interest.