12
Dec
2013
More on Krugman and Fiat Money
At Mises Canada I explored Krugman’s glib assertion about fiat money being “backed by men with guns” a little more deeply:
Furthermore, it’s obvious that Krugman’s “explanation” would have no way of accounting for changes in either variable. For example, in the 1970s in the United States, price inflation took off dramatically, meaning the purchasing power of the dollar fell sharply. Was this because of a reduction in taxes? Of course not. And in the 1920s, there were sharp cuts in marginal income tax rates at the federal level. Did this lead to severe price inflation, as people now didn’t need as many dollars to pay Uncle Sam? On the contrary, consumer prices were fairly stable in this period.
I was strongly convinced by your article.
I haven’t been taking into account relative value of money when the context is why fiat paper is money instead of gold, which is disheartening to me, because I usually emphasize relative values and prices.
Having said that, I think I am confident that this statement is not right:
“Yet even this concedes too much. Strictly speaking, if the only policy we are considering is that the government says every year, “Citizens must turn in such-and-such number of sea shells as tax payment,” that alone won’t even be sufficient to conclude that the sea shells will be the money in this society. People could still use some other commodity as the money, and then use the actual money to buy the sufficient number of sea shells each year right before paying their taxes.”
What about taxes sellers of goods must collect on behalf of the government? If I am a seller of pizza, for example, and I have to pay the government taxes in sea shells for every pizza sold and every person I continue to employ, then I would likely choose to sell my pizzas in exchange for sea shells instead of something else. I don’t think that taxes collected during April are the only relevant taxes, in terms of accounting.
You can do that in Australia, there are businesses choosing to trade in US dollars, but they must pay tax in Australian dollars. The government doesn’t care because they still get a share of the profits.
It doesn’t make the slightest bit of difference what people use for internal accounting. The value of the fiat currency is still backed by the fact that you have to get hold of some in order to pay tax.
I think that the important part of the example is seashells specifically. So the point is that while taxation may be a strong force and consideration that pushes a particular good towards “money” status, it is not the only or even most important one.
Seashells here aren’t simply an “x” example, but rather the particular attributes of seashells (durable, divisible, convienient, etc etc) are so weak that even taxation wouldn’t result in their acceptance of money.
at least thats my interpretation.
Hey Murphy, this might interest you:
http://www.cbo.gov/sites/default/files/cbofiles/attachments/44604-AverageTaxRates.pdf
The Distribution of Household Income and Federal Taxes, 2010, shows that the top 40% of income earners paid 106.2% of total federal income taxes, while the bottom 40% paid -9.1%.
The top 20% of income earners paid 92.9% of total income taxes in 2010, and the next-highest 20% paid 13.3% of total income taxes, so the top 40% paid 106.2%.
How can this be?
It’s because of refundable tax credits like the earned income tax credit and the child tax credit. The bottom 20% got more money refunded to them than they paid in taxes, so paid -6.2% of total taxes. The next-lowest 20% paid -2.9%, so the bottom 40% paid -9.1% of total income taxes.
Obama has frequently said that “the rich” should pay more taxes. Apparently 109% of taxes is not enough!
Yes but lower income earners pay a much larger share of taxes when considering all taxes, not just income taxes. Also when you start looking at disposable income tax rates, a new picture emerges. Same can be said for inflation. If your food budget is 10 % of your income compared to .1% of a wealthy persons income, a 5% food price increase sure can seem like a bundle.
But I do thing there should never be any tax payouts of any type, including tax credits, bailouts and everything in-between.
“Yes but lower income earners pay a much larger share of taxes when considering all taxes, not just income taxes”
That’s not true either.
Even in terms of total taxes, the wealthiest pay, by far, the most total taxes. This makes sense because there should be a correlation between income taxes paid and total taxes paid.
According to the CBO, who looked at 2007 through 2009, found that the bottom 20% of American income earners paid 3/10% (that’s three tenths of one percent) of the total tax burden, while the richest 20% paid 67.9 percent of taxes.
First I was not talking about just income tax. Second, the CBO doe snot calculate tax burdens that do not effect Feds. Third I said as a percentage of disposable income.
Now don’t get me wrong, I don’t thing low income earners are paying all the taxes, I simply said a low income earner has a much larger tax burned, relatively speaking, then at first glance.
Just do a simple budget for a person earning 50K, with a 100 dollar gasoline fuel bill per week, and you will see just how much total tax this person pays. That fuel tax is a killer to a small budget,
Finally, the wealthy people get all the bailouts, all the new hot fresh fiat money and they get all the wealth. It only makes since they pay the most taxes.
But I digress, the real problem is all the government spending.
On 1 hand, the subjective value theory of labor is good/preferred, then on the other hand, you want these subjectively low value people to somehow pay a labor value theory of taxes.
If we were a pay for services type of Nation, I am certain labors would save more and then ultimately demand higher wages. The only reason their wages are so low is because taxes pay the other portion of their labor, for goods they would normally charge for.
It really is a contradiction, or maybe somebody needs to check their premises?
“The only reason their wages are so low is because taxes pay the other portion of their labor, for goods they would normally charge for. ”
There are other reasons. That isn’t the only one.
“First I was not talking about just income tax.”
I know, that’s why I gave you updated information that talks about taxes, not just income taxes.
“Second, the CBO doe snot calculate tax burdens that do not effect Feds.”
True, but I doubt the conclusion above about the wealthy paying by far the lion’s share of taxes would be signficantly altered by taking into account state taxes in addition to federal taxes.
“Third I said as a percentage of disposable income.”
You said two things. That, and the prior sentence, where you said:
“Yes but lower income earners pay a much larger share of taxes when considering all taxes, not just income taxes.”
That statement is factually incorrect.
“Now don’t get me wrong, I don’t thing low income earners are paying all the taxes, I simply said a low income earner has a much larger tax burned, relatively speaking, then at first glance.”
You didn’t just say that.
“Finally, the wealthy people get all the bailouts, all the new hot fresh fiat money and they get all the wealth.”
That’s true.
“It only makes since they pay the most taxes.”
That doesn’t follow, because NOT ALL wealthy people get bail outs. Many wealthy people didn’t see a dime from the ARRA or the Fed. You want to tax ALL wealthy more because SOME wealthy people get free money?
Talk about guilt by association!
“the top 40% of income earners paid 106.2% of total federal income taxes”
How can you pay 106.2% of 100%?
That’s like saying “total spending was 106% of total spending”.
It’s because people in the bottom 40% paid negative income taxes, meaning the bottom 40% not only paid no taxes at all, but had a net positive transfer of money to them.
So the wealthy are paying all the taxes, PLUS giving the poorest free handouts (all at the point of a gun).
you can’t pay more taxes than 100% of the taxes paid.
You’re saying more taxes were paid in total than were paid in total.
No, THEY are saying that if you pay 100% of all taxes, AND you pay for additional money transfers to the poor, through political force, means you’re paying more money than taxes collected, hence 106.2%.
It’s just a representation of what’s going on.
The additional 6.2% is tax credits and other transfers not considered as taxes.
I had a look at the CBO report and the table on page 13 does say what you’re saying, but it seems like an odd way of presenting things.
For example, say the total federal income tax revenue is $100. Mr A pays $100 (i.e. 100% of the total amount), and the govt sends Mr B a cheque for $10 as a ‘child tax credit’. The total amount of tax paid by Mr A is still $100, or 100% of total tax revenue. Yet the CBO would apparently count Mr A as having paid 110% of federal income taxes and Mr B as having paid -10%.
“means you’re paying more money than taxes collected, hence 106.2%”
no it doesn’t mean that.
No, I do not want to tax anybody more but there is no way low income earners can pay an equal portion of taxes as high income earners. It is simply not possible; besides, it is usually the wealthy and upper middle class clamoring for more socialism/law and order. Should they not then shoulder the largest tax burden? Additionally If there were no fiat, bailouts, QE, preferred lending, etc, then there would not be such a large income disparity and such a large tax payment disparity. There would be way fewer wealthy people if they lost when they deserved to lose.
I understand abhorring welfare, but don’t alienate the low income earners by saying they don’t pay enough taxes. We need them on team Liberty. Besides, income tax does NOT pay for all government spending. All income tax combined does not even come close. So now who is not paying their fair share? If you back factor fiat inflation, I bet low income earners pay more than you think. At the end of the day, producers always pay all of the taxes. There is nobody else to pay taxes other than the producer. Green Martians do not pay taxes, producers pay taxes. Organizers and labors pay taxes.
The people at the top of this pyramid love it when we fight. Ayn Rand said Ellsworth Toohey would unite and conquer but she seriously short shrift divide and conquer.
This entire argument is moot as government should be limited to endeavors only government can conduct(?) and they should be provided for as a fee for service basis.
“Either” variable? Krugman asserted there were only two factors, the value of the currency and the level of taxation?
Ken B. he said (implied) that Bitcoin ought to have zero value, because it’s not backed by anything. But, government fiat money escapes this problem, because of taxes. It sure sounded to me like he was saying the thing that determines the fundamental value of fiat money is need to pay taxes with it, while any deviation from that is speculative.
If there’s other factors to explain why fiat money has purchasing power, not related to taxes, then why aren’t those applicable to Bitcoin?
But Bob, your quoted paragraph implies there should, for Krugman’s claim to be true, be a monotonic relationship between taxes and dollar value. But all he asserted was that at base dollars have a “guaranteed” value and that played a role in it becoming the most liquid asset in use.
The prosperity of NYC derives ultimately from it being such a good harbor. That provides ongoing wealth and gave it a headstart over other cities. It does not imply that forever there is a tight link between NYC harbor traffic and the city’s prosperity.
Fiat currency has some “guaranteed” demand and has had a leg up in becoming the most liquid asset. But Canadian money is accepted in Niagara Falls NY; no-one asserts a univalent relationship.
Money is money because people treat it as money. Why they do so is usually hard to tell exactly. Why cowrie? But fiat currency has advantages over some other commodities, for the reason Krugman stated. It keeps men with guns away.
That doesn’t imply there cannot be other money. Diamonds and some metals have proven reliable as money too. Maybe bitcoin will too, maybe not. But if it were made fiat currency its success would seem more likely, no?
Ken B. wrote:
That doesn’t imply there cannot be other money….Maybe bitcoin will too, maybe not.
Ken, if you were on Weisenthal’s show and said the above, then I wouldn’t have written a blog post about you.
But in reality, Paul Krugman was the guest and he said Bitcoin was a giant bubble because it wasn’t backed by anything, and that he was surprised it had retained its value this long.
Maybe he believes the regression theorem?
🙂
Actually that’s why it’s a bit odd seeing you on the bitcoin is money side.
Actually that’s why it’s a bit odd seeing you on the bitcoin is money side.
Huh?
Bitcoin looks to me like a counter example to the “Mises regression theorem”. It wasn’t traded before it existed so to speak. It was used as a promisory note from day one, and probably was conceived of that way.
Of course it may be just a bubble …
Ken and Bob you are missing the obvious. Bitcoin is also backed by men with guns, but not in the way Krugman thinks.
It is difficult to know who owns bitcoins, and also difficult to know where they are being traded. They are small, portable, easily slip across borders, and the transactions cannot be reversed by any judge in any court. Think about it.
Actually that’s why it’s a bit odd seeing you on the bitcoin is money side.
Bitcoin looks to me like a counter example to the “Mises regression theorem”.
Bob has addressed that here:
http://consultingbyrpm.com/blog/2013/10/why-misesians-need-to-tread-cautiously-when-disparaging-bitcoin.html
Ken B, like LK you are conflating Mises’ regression theorem with Menger’s barter theory of money.
It is Menger who said that a money starts out as a barter good.
Mises’ regression theorem is different. That theorem, generally stated, is that the purchasing power of a medium of exchange today, is derived from an expectation of yesterday’s purchasing power. And, that tomorrow’s expected purchasing power, is derived from today’s purchasing power.
Bitcoin clearly satisfies Mises.
Tel,
+1
From Bob’s article
“[N]o good can be employed for the function of a medium of exchange which at the very beginning of its use for this purpose did not have exchange value on account of other employments.”
Bitcoin had no previous exchange value on the basis of other employments.
Ken B:
“Bitcoin had no previous exchange value on the basis of other employments.”
Are you serious? Bitcoins were being exchanged for goods by only a few individuals at first. If it ever becomes money, that is, UNIVERALLY accepted, then we already know today it satsfies both the regression and barter theorems.
“But Bob, your quoted paragraph implies there should, for Krugman’s claim to be true, be a monotonic relationship between taxes and dollar value”
That isn’t implied at all.
Yes it is, otherwise the argument that “x went down but Y went up” would prove nothing. It’s only a disproof of a claim which asserts x cannot go down if y goes up.
If I say “MF is wronng, Romney has 6 letters in it” then I am implying that something MF said implies Romney does not have 6 letters in it.
“Yes it is, otherwise the argument that “x went down but Y went up” would prove nothing.”
That isn’t even relevant or necessary. Bob is just saying that Krugman’s theory LACKS explanatory power for changing valuations of money, and I would add relative valuations of money.
He isn’t implying that in order for Krugman’s theory to be right AS STATED, that the value must go up when taxes go up. He is saying that Krugman’s theory lacks an explanation for changing valuations. It is quite likely that Murphy thinks that Krugman doesn’t actually believe that the value of money goes up when taxes go up, or vice versa.
The MMTers constantly proclaim “taxes give value to fiat money”. I just assumed Krugman was adopting their line. To the extent that MMT becomes more popular and hip, I would expect Krugman to adopt it.
I think the MMTers are perfectly correct that taxes give value to fiat money. Unfortunately they have not taken that to the logical conclusion that anyone can see. If a government prints money (i.e. injects new money) faster than they can collect tax (i.e. slurp away old money) then inflation will be the result. Supply and demand. Economics 101.
Thus, only by running a long-term balanced budget can a government maintain a non-inflationary environment. That is to say, government must collect tax in order to spend money.
The totally weird thing about the MMTers is they want to simultaneously believe that taxes give value to fiat money, and also believe that spending more fiat money without raising tax to cover it will not devalue said fiat money. That whack.
Last year federal, state and local tax receipts were 3.2 trillion dollars or 22% of GDP. Krugman is correctly pointing out that demand for the dollar can’t collapse with this tax burden. Seems like a libertarian would use this as an opportunity to point out that the tax burden is high rather than point to 70s inflation. The dollar never came close to collapsing in the 70s. The Latin America debt crisis was a consequence of borrowing in dollars and lending in the domestic currency. When the dollar got stronger under Volcker, they could not repay the loans. That was early 80s so there was quite a strong demand for the dollar during the 70s.
Krugman may have a point. I heard a rumor that Weimar era Germany had a military and federal police force armed only with knives and machetes; no guns at all. LIkewise, the federal soldiers of Zimbabwe, when that nation experienced hyperinflation recently, were armed with spears and crossbows; again, no guns. Had these nations had soldiers armed with guns during their economic crises, their fiat money would certainly have retained its value. Let’s give Krugman credit where credit is due. He might not be right 100% of the time, but on this one, you’d have to say that, given the historical evidence, he is likely correct.
Heh Neil wins the comments.
[shakes fist]
Neiiiiiillll!!!!!!!
First of all, money is simply a lubricant in trade transactions. Fiat currency is a lubricant created by the state, for the state and of the state. Which has also become a, wait for it, good even of itself. So the concept that the ONLY way that currency can be ‘legitimate’ is if I can tax it is silly. What it does need to be is plentiful enough to allow transactions to occur yet finite enough as to not allow for unwanted drops in valuation.
What BitCoin has allowed to have happen is to create a currency that is outside of international exchanges currently sort of. But the truth is that unless you can barter in the currency its use is of little value.
BitCoin is a viable currency of little value. Because it is too finite to create a credible method of transaction. Barring there becomes a way to byte out a BitCoin.( sorry programmer humor there – technically it should bit out a Byte Coin but hey whatever ) At the ‘size’ and ‘value’ it has currently reached it become an unwieldy item.
Anyway… Krugman often times states how he wants the world to behave rather than attempting to understand how the world behaves it seems. Why should anyone want to continue to purchase the US Dollar from overseas? I sure as heck see little reason for it.
“First of all, money is simply a lubricant in trade transactions.”
Fail.
“BitCoin is a viable currency of little value. Because it is too finite to create a credible method of transaction.”
Double fail.
Well Major you need to expand otherwise you come across as a simple curmudgeon.
I would say that money originally was a lubricant or more accurately a ubiquitous representation of goods and services. Now money is so much more but I think most of it is a perversion created by shysters.
Although bitcoins are finite, the decimal can be moved, ultimately creating an infinite supply. The biggest problem I see with bitcoin is that it requires electricity and other technologies. When you step outside of a busy city you quickly realize how big of problem this could be.
I am telling you, it is impossible to trade chickens for hay bails out here in the sticks with these bitcoin thingy majiggys…
“I would say that money originally was a lubricant”
Fail.
“a ubiquitous representation of goods and services”
Double fail.
“Although bitcoins are finite, the decimal can be moved, ultimately creating an infinite supply.”
You can’t reach infinity even if you tried. A bitcoin is DEFINED as so many block coding thingamajigs (sorry, not a computer whizz). If you “moved the decimal”, all you would be doing is splitting the same supply of Bitcoins into more and more pieces, as you would a gold bar.
If you want to buy stuff made in the USA, then you need to have US dollars to buy that.