Things Are Not How They Seem

Among the giants of science stands Galileo Galilei, by all accounts a genius who could describe the world in a more accurate fashion and would use the experimental technique to verify his ideas.
In the early years of the 17th century, Galileo came into conflict with the Roman church because he had embraced the idea of heliocentrism, a model of the Solar System which had the Sun at the centre and Earth going around it. The Pope and the rest of the Roman establishment held to the belief that Earth was at the centre and that the Sun, planets and stars revolved around it. Not only did the Bible support this notion, it appeared to be self evident. One only had to look up at the sky and see all these things rise in the east and set in the west.

After many years, in the summer of 1633, after they had tried Galileo, the Roman Inquisition announced that he was suspected of heresy and placed him under house arrest. Under threat of torture, Galileo recanted his heliocentric belief. Yet his subsequent writings show that such recantation was disingenuous.
I tell this story of Galileo to show how a deeper understanding of reality can sometimes struggle to be accepted against established modes of thought. When nearly everyone thinks they know how something works, and all agree with each other on a flawed notion, they can become passionately defensive, even confrontational and violent when a better, more accurate and nuanced model comes to light.
Even in the modern era when space flight has been commonplace for over half a century, most people believe that astronauts float around inside their ships because there is no gravity in space. Look at the pictures. It's obvious, isn't it? Yet the truth is that Earth's gravity is almost as strong where they are and that in fact, they are permanently falling around the planet. Things are often not as they appear.

These examples of mistaken popular thought are given to show how the Establishment and the population as a whole are able to move along with faulty models of reality and can, on occasion, attempt to maintain their errors through the use of more forceful tactics than mere logical argument. I believe this is what is now occurring in the understanding of money and in particular, with a school of thought that has come together under the title of Modern Monetary Theory.
MMT is a lens through which we can better understand how an economy works. However, its ideas cut across popular beliefs, and as it gradually spreads through society, some take to increasingly forceful means to counter it. Below is a description of MMT and some of the conclusions that stem from it. It is written from the perspective of the United Kingdom but it applies to any country where the government issues its own currency.

The government's IOU

MMT starts out with a simple statement; the United Kingdom has a sovereign currency. 

This currency has a unit of account called the pound Sterling. It is not tied to gold or anything else. Only the UK government has the legal and sovereign right to issue the currency. This necessarily means that a government with a sovereign currency cannot become insolvent. It can always pay its debts and it can purchase anything that is priced in that currency. This is the first idea that sticks in the throat of popular thought, but it is the case.

When the government needs to spend, it asks its central bank, in this case the Bank of England, to electronically increment the accounts of those from whom it wishes to purchase. It doesn't need to borrow and it doesn't need to tax in order to do this. A proof of this fact is the programme of so-called 'quantitative easing' that occurred when the 2008 financial crisis happened in order to pump money into the banks. They did this by purchasing loans (which they call government bonds) from the banks. By July 2012, the Bank of England had created £375 billion in this programme and it is still doing so, heading towards half a trillion pounds Sterling. It is notable that this creation of money has had little effect on the UK's inflation rate.

When the state creates money, is it essentially creating an IOU, and being the issuer of those IOUs, it can always, always repay them - with its own IOUs.

Gimme your money!

So where does taxation sit within this? Watch any political TV programming in the UK and running through it is the notion that government spending is paid for from the revenue that comes from taxation. The population as a whole believe it and the politicians seem to believe it too, though it is possible that they are merely agreeing with those who would elect them. But if the government issues the currency (and it does), it does not need to raise money through taxation to provide spending revenue. So why does it tax?

The purpose of taxation is threefold. First, it gives legitimacy to the currency. What this means is that the population has to pay its obligations to the government in that currency and only that currency. Therefore, they have to acquire the currency and that forces its adoption. There are serious consequences for those who do not meet these obligations which can include a term in jail.

Second, taxation allows the government to control the amount of money in the economy. If government spending has been excessive, it may find that it has been outbidding the private sector for the country's resources. This is inflationary but can be countered by removing money from the economy through taxation.

Finally, taxation can be used as a tool in an attempt to affect behaviour. This is where the government taxes those things that are perceived to be bad for the population, typically tobacco, alcohol, diesel fuel, excess income.

For these three roles, taxation is an absolute necessity but it is a mistake to believe that tax is required to raise income for government spending. This is a myth, yet it is a powerful one that has been carried over from the days when the currency was tied to a gold standard. The UK went off the gold standard in 1971, yet based on the output of the media, it would appear that essentially all politicians, political pundits and the public believe that government spending is directly paid for through taxation.

Currency issuers and users

A logical conclusion from MMT (that is, the notion that the UK government issues the currency) is that there is no such thing as "taxpayers' money". To tax is to decrement an account electronically. The money is destroyed in much the same way as football authorities might deduct points from a team's score in a league as a punishment. Thus, MMT shows the essential error of the policy of austerity. The story repeated by the politicians is that because the UK government had spent too much compared what it had taxed, that the budget had to be balanced. This thinking stems directly from Margaret Thatcher's belief that a government had to act like a household. While such financial housekeeping is true for "currency users" like households, companies and states without a sovereign currency, it is not true for states that do have a sovereign currency because they are "currency issuers".
The job of the currency issuer is not to balance the budget. It is to balance the economy; to ensure that the resources of the economy are fully utilised. This distinction between currency users, who have to balance their incomes and outgoings, and currency issuers, who should be balancing the economy, is crucial. This means finding the balance between maximum employment and inflation.
Thus an enlightened government, one that understands money theory, will spend as necessary to keep unemployment low yet will not spend so much that government work begins to outbid the private sector because to do so would cause inflation. It would not worry about so-called "deficit spending" because it would understand that the government's deficit is the private sector's surplus. This is simple double-entry book keeping. The deficit of one entity is the surplus of another.
The government must run a deficit if the rest of us are to have money for our economy. The government that attempts to run a surplus will starve the private sector of money. We saw this with Clinton in the US who ran a government surplus. He unwittingly forced his country towards private debt to maintain their standard of living and this lending bubble burst in the crash of 2008.

Job Guarantee

To sum up, when someone says "taxpayers' money", immediately wonder whether they are referring to UK tax or some other entity (e.g. Council Tax or taxation raised by a nation like Scotland). For the UK, there is no such thing. Further, it is worth understanding that a knowledge of MMT gives a government a wider range within which to enact policy decision. They can do more, as long as they don't cause inflation.
Thus we get the idea of the Job Guarantee, a facet of MMT that is really a policy decision and, in my opinion, ought not to be included as part of the MMT framework. Nevertheless, the Job Guarantee is a means of keeping people employed and therefore ready for the private employment market. The Job Guarantee would offer employment to anyone who wishes it and would replace conventional unemployment benefits. It would also do away with the minimum wage legislation because it would pay a living wage that would then set a market base from which the private sector could hire labour at a suitable higher wage to tempt them away. It would keep skills practiced and in place and allow people to maintain their habits of going to work on a regular basis rather than living off benefits. It would inject money directly into the wider economy, where people buy and sell goods and services that promotes real growth rather than tying vast amounts of currency in loans that do nothing.