At the beginning there, you heard our guest this week, MMT founder Warren Mosler, and in a moment we’re going to be talking to him about his recent paper on inflation, his proposals for overhauling the banking system, and his ideas about simplifying the tax system.

If you’re new to MMT, you might want to check out our first three episodes for an easy-to-understand introduction, but if you want to dive in here, I’ll set this episode up by probably surprising you by saying that taxes don’t fund government spending.

That’s a bit of a bold statement - what do I mean by that? What I mean is that the tax money that you pay to your central government, those dollars, or pounds, or yen are not collected by the government and then spent, they’re spent into existence first and then, only after that, can they can be used to pay taxes, and this is true by definition in all nations where the government issues its own floating-exchange rate currency, such as the UK, the US, Japan, Canada, or Australia.

Governments with modern money systems like these spend by changing numbers on a spreadsheet at their central banks using keystrokes. When they spend, they revise bank balances upward, and when they tax, they revise bank balances downward.

And, as our guest, Warren, likes to say, when you spend by changing numbers on a spreadsheet, the idea of running out of money is completely inapplicable - and so, even though when you say it out loud, it sounds like a tautology, it really is the case that currency-issuing governments can never run out of their own currency.

And we think that’s quite an important insight for those of us with a vote and a voice in political discourse - that our governments’ most commonly-used justification for the politics of austerity stems from a - let’s be generous - misunderstanding of how the monetary system works. So to be clear, as former US Federal Reserve Chair Ben Bernanke once told the viewers of 60 minutes, the central bank spends by using a computer to mark up bank balances - and so, as an even earlier Fed Chair, Beardlsey Ruml, wrote in 1946, “Taxes for revenue are obsolete”.

So if taxes for revenue are obsolete, what are they for? If the dollars, pounds or yen needed for payment of taxes are issued by the government in the first place, why does the government even bother collecting them?

It’s because taxation is there to solve a more elementary problem for the government. Namely: Why would anybody work for intrinsically-worthless, government-issued pieces of paper, (or more accurately, entries on a spreadsheet)? How does the government, which needs to be able to spend something to hire people and buy things to carry out the policies it was put in charge of enacting, how does the government ensure that people will accept its currency in exchange for goods and services?

And the answer is that the government creates a permanent demand for its currency by issuing tax liabilities, or tax bills, denominated in its chosen unit of account. And because it’s preferable to have spending limited by the will of the people rather than the availability of a precious metal, these days states tend to choose a money of account, a token, that they can issue without limit. In the UK we call these tokens pounds. The government’s pound-denominated tax bills create people needing to do things, to earn pounds to settle those tax bills, allowing the government, the issuer of currency, to spend its money into existence to provision itself. And so the government doesn’t tax you because it needs your money, it taxes you because it needs you to need its money.

So taxes primarily drive currency from inception, and after that they perform other more familiar functions: they remove currency from the system, which regulates the spending power of the private sector - and they can also be used to influence behaviour, by giving tax breaks to activity we’d like to see more of, and imposing punitive taxes on things we’d like to see less of.

So, to circle back to where we started: taxation is the mechanism by which governments are able to spend, but that spending is not revenue-constrained, because taxes for revenue are obsolete.

One last thing to bear in mind for the conversation you’re about to hear is in that money system I just described, the thing needed to pay taxes is issued by a sole issuer (the government) - and so the national currency is a public monopoly. You can think of currency users, you and me and the rest of the private sector as buyers of currency and we have to buy that currency (because of taxation), and we have to buy it with something that’s not that currency - namely, our time and labour, or things we produce with that time and labour. And when there’s a single seller of something, a monopolist, that monopolist gets to set the price of the thing that it sells. And in this case the currency monopolist, the government, sets the value of its currency by saying what the rest of us have to do to earn it.

Every time the government spends on something, it’s communicating a piece of information about the value of its currency. So for instance, to the UK government, an essential worker like, say, a central banker is worth £500,000 a year but a less important worker, like a nurse, is worth £22,000 a year. So the government is saying the value of a pound is 5.7 minutes of nursing or 14.9 seconds of central banking. These absolute values, along with all the other prices government pays when it spends, feed into our decisions about the relative values of other things, when the rest of us currency users buy and sell things with each other in the market - and this is what Warren means when he says that the government, whether it likes it or not, is the source of the price level - that the price level is a function of prices government pays when it spends, or collateral demanded when it lends. Just a footnote - I assumed a forty hour week for a central banker, there - which is probably about as accurate as one of their forecasts.

Anyway, just before we dive in, some recommendations for newer listeners. For more on how the banking system works and how the central bank interacts with commercial banks, you can listen to our episodes 13 and 43. To understand why governments that can’t run out of their own money do this thing that gets called “borrowing”, that isn’t really borrowing, you can listen to our episodes 30 and 31. For a more a more finely-detailed picture of how the UK government spends, you can listen to our episodes 84 and 86, for more on inflation, listen to our episode 65, and for more on hyperinflation listen to our episodes 88 and 89.

I’ve linked to all of the above in the show notes for this episode, along with some other things that came up in the conversation, and to where you can support this podcast financially via Patreon dot com slash MMT podcast. Support starts at a dollar a month, or a pound a month, or whatever the equivalent is wherever you live - and no matter what level of support you give, you get early access to all of our episodes, and patron-only episodes where you can ask me and Patricia MMT questions.

We are 100% listener funded, your financial support really helps keep the show going, and your support in other ways, whether it’s by recommending us to other people, or just by listening and spreading the word about this stuff really helps, too.

We will be taking a break until January, although we’ll still be doing patron-only episodes, but until then, from me and Patricia, have a great holiday season, thanks as ever for your support - and thanks for the time you put into understanding MMT. Let’s dive in!