Sunday, April 4, 2021

Let Me Hear Your Balalaikas Ringing Out

Some folks probably thought I was joking when I spoke of Modern Monetary Theory as something that could lead to a situation like that of the countries in the Soviet orbit after World War II, and I guess I was trying to get a rise, anyway, but it's pretty amazing how close I came, based on a little (a very little) research—how much the monetary and fiscal system in the USSR itself, at any rate, worked the way MMT advocates claim monetary and fiscal systems are supposed to work, which just happens to explain some of the very serious problems that led to the country's demise in 1991.

Starting with the fact that, while Stephanie Kelton and colleagues wrongly suggest that the US government has sole responsibility to create all the money in the United States, in the Soviet Union it really did create all the money. That's because, for starters, there was basically only one bank, the Gosudarstvennyj Bank USSR or Gosbank, combining the functions of a central bank and a commercial bank. As the central bank, it issued all the currency, the physical rubles and kopeks, and as the sole commercial bank it issued all the credit, in particular loans, such as they were, to the state "enterprises" that constituted most commercial activity, so all the money is included in those two functions:

The banking system basically consisted of a single state bank (Gosbank), which combined the roles of a central bank and a commercial bank. Such an arrangement is often called a monobank. Gosbank had no autonomy, but was basically a financial control agency under the Council of Ministers. As a central bank, Gosbank created narrow money (cash in circulation outside the state sector) by authorizing companies to pay wages in accordance with accepted wage bills. If government expenditure exceeded government revenue, and sufficient household savings were not available to cover the budget deficit, state sector wage bills still had to be paid, which would contribute to imbalance in the consumer goods markets. This was probably the case at least toward the end of the Soviet period, though the relation between the state budget, Gosbank, and money supply was among the best-kept secrets in the USSR. Gosbank also managed the currency reserves of the country.

As a commercial bank, Gosbank issued short-term credit to enterprises for working capital. Household savings were first kept by a formally separate Savings Bank, which was incorporated into the Gosbank in 1963. Household savings were an important source of finance for the state. Gosbank also controlled Stroibank, the bank for financing state investment, and Vneshekonombank, the bank for foreign trade.

Government spending ("final consumption expenditure" as opposed to investment) was financed out of the enterprises' profits, which, if they earned any, were turned over to the owner of the business, which was the state of course; by borrowing funds from the Savings Bank; and apparently, when that wasn't enough, by literally printing rubles (to pay the state sector wages, which were always paid in cash).

The proceeds of taxation, mostly through the so-called "turnover tax" on sales, had a more peculiar relationship to government spending. Officially, the function of taxes was not to fund government at all, but to regulate the economy: as Franklyn D. Holzman explained at the outset of a 1950 paper in the Journal of Political Economy (DOI link),

In other words, taxation was supposed to prevent that "imbalance in the consumer goods markets" that could be caused by paying workers with currency that was literally unaccountable, that is, that didn't correspond to anything in the account books.

In practice, it would be hard to tell, since those account books were a state secret, but it looks as if the turnover taxes really did do something like that, because of the way they worked, as laid out in this 2009 paper by Sergei Koulayev:

In the Soviet Union, the turnover tax was raised at retail level, but only on the goods whose retail price was higher than the wholesale price. Such goods included durable goods, luxury products, alcohol, and tobacco. For goods such as foodstuffs and a wide array of consumer goods, which were sold for prices below their wholesale prices, the turnover “tax” became a subsidy. The tax could be raised either as a percentage of projected turnover or per physical unit sold. Effectively, there existed hundreds of tax rates, as every enterprise negotiated with its ministry a rate that would achieve an acceptable level of profitability. Thus, the turnover tax was not a “tax” in the usual meaning of the word; rather, it was more of an accounting device used to level the profitability of enterprises across industries. 

That is, they "leveled" the difference between profitable enterprises like vodka and cigarettes and unprofitable ones like food and clothing by taxing the former to cover the losses of the latter.

I should note that the USSR worked really well, financially, in sectors that really ought to be entirely socialistic in the narrow sense, that is owned by the state, at least in the early years: education and scientific research, health care (financed originally by insurance premiums but basically completely state-funded from 1934), arts funding (which was always pretty generous, but also much less unprofitable than you might think, for cultural reasons—the citizens spent a lot of money on cheap concert, opera, and ballet ticket and on books and magazines), and of course the military, the constant expansion of which was increasingly responsible for the deprivation of the others, but did after all win the European part of World War II; medical care was extremely good, though increasingly rationed and unavailable in rural areas. Education was excellent in technical subjects where ideology could be ignored, but the supply of tertiary education also began to dwindle. Creative work in arts and science was harmed by Stalinist thought control especially after Stalin himself took over, but there was plenty of money for all of them for the first decades. Afterwards, that diminished as well.

The Soviet financial sector, though, really was built the way MMT theorists claim should be the pattern in every developed country, not merely issuing a sovereign currency (as the US has done since the 1860s) but also in control of all money creation, through its ownership of all banks. It was thus able to finance all its expenses in principle by borrowing from itself or as a last resort by printing physical currency, while taxation, not required to finance government spending, was devoted to controlling inflation, as a sleepless commenter put it early this morning:

Or as Dylan Matthews put it in a big Voxplainer on MMT,

Like most strands of economics, MMT thinks that inflation can result when aggregate demand (all the purchasing being done in the economy) outstrips the real stuff (consumer goods, factories for corporations, etc.) available for purchase. If there are a lot of dollars out there trying to purchase stuff, and not enough real stuff to purchase, that stuff becomes more expensive — so, inflation.

“The second reason [after making people use the currency] to have taxes … is to reduce aggregate demand,” the Mitchell, Wray, and Watts textbook states. Eliminating all taxes while spending 30 percent of GDP on government functions, they note, would spur a massive increase in aggregate demand, one that might cause dangerous inflation.

The first reason, by the way, is to force people to use the currency, which sounds funny to me. Is that really why we use dollars, because the IRS makes us do it once a year? (Maybe that's what cryptocurrency fans think, but I'm not going there.)

It's also something the USSR handled by prohibiting people from using foreign currency, though they couldn't stop a burgeoning black market from doing it, supplying the population with contraband blue jeans and Beatles records. Reasons three and four, for the record, are to redistribute income to diminish inequality, and to discourage bad behavior; I certainly favor no. 3, but I don't think MMT contains any economic reasons for it—on the contrary, large-scale redistribution from the very rich who sit on their money to the middle and lower classes who spend would also spur large increases in aggregate demand, and thus obviate reason no. 2. Kelton et al. don't notice this obvious contradiction because they're not taking the idea seriously, just throwing it as a sop to the liberals they're hoping to recruit to the cause. Hold that thought for just a minute.

Anyway, the USSR also provides an object lesson for where an MMT-inspired economic regime could go wrong, even without the socialism. To begin with, with the illustration that hyperinflation isn't the only thing that can go wrong when a sovereign currency uses itself as a bank account. In the case of the ruble, it essentially stopped being a currency in the modern sense of the term; it was merely company scrip. The distribution of goods and services (dictated in detail by the Five-Year Plan) didn't even use it, but rather than an elaborate barter system among the different enterprises sending each other stuff, which failed to produce enough, and people who had the chance to do so increasingly used marks, dollars, or other foreign currency for the things they couldn't find in shops. 

Nothing like this is likely to happen in the US, where extremely developed markets already exist, but I can't believe we should be following the MMT plan by increasing the money supply first and then promising to deal with the tax situation later. Our money supply is already big enough! Switching the Fed to creating special unbacked dollars for the use of the Treasury (however desirable the objects of the spending) while its traditional role of controlling inflation is turned over to the tax system might lead to completely different kinds of distortions, like those in Japan, where decades of quantitative easing have led to a national debt that is 240% of the country's GDP but fails to ignite demand at all, and negative inflation rates, and the country remains moored in stagnation.

If I was designing socialism in a country like the US, I'd want to keep away from one owner of everything, if only because it's systemically bad, lacking control. I'd like to see a bunch of different kinds of collective ownership—coops, union-owned companies, independent "statutory boards" running things like public utilities, maybe even let the military go into business, as they did in China. And I'd keep the Fed, which isn't really owned by anybody, right where it is, focused on interest rates and the difference between MB and M2, and not involved in any fiscal stuff at all.

It seems to me that rather than getting the Fed to invent more money, we should be getting some of those hundreds of billions that already exist out of the billionaires' coffers where they sit collecting rent checks, and into action, sparking demand and by all means some inflation, in the hands of the hungry rest of us, including all the poor, letting the money supply increase itself in response, through increased economic activity, and letting the Fed control it as necessary using its traditional tools. The Soviet Union isn't us, but its mistakes, of trying to squeeze the functions of the central bank and the commercial bank together and untethering taxation from its job of financing the government, aren't something we should emulate.

No comments:

Post a Comment