MMT and Russia

Whenever I post anything about taxation and public expenditure, it’s a good bet that someone will pop up in the comments section to claim that, according to Modern Monetary Theory, states that issue their own currency don’t need taxation to finance public expenditure. That’s a misunderstanding of the theory, but it’s proved hard to explain this. The current crisis in Russia provides a teachable moment.

Russia is facing a lot of difficulties because of the drastic fall in the price of oil (more on this soon I hope), along with sanctions imposed following the war with Ukraine. The government depends on oil for around half its revenue, and it looks as if the drop in the oil price will be sustained for a while. But of course the Russian government can print as many rubles as it wants[^1]

Why, then, is there a problem? Modern Monetary Theory says that governments should not worry about the budget deficit. Rather, they should determine the appropriate level of public expenditure on standard economic grounds, then work out the desired rate of monetary expansion (in effect, a tax on money balances) based on the macroeconomic needs of the economy. Ordinary tax revenue is then determined as a residual, the difference between the desired level of spending and the desired level on monetary growth.

That’s a useful way to look at things, but it doesn’t make the problem of financing public expenditure go away. If oil tax revenue drops, and nothing else changes, some other source of revenue (that is, tax) must be made to keep the rate of monetary growth at its desired level, or else spending must be reduced.

In Russia’s case, the economic downturn implies the desirability of some monetary expansion, but that’s limited by inflation, currently running at 9 per cent and likely to accelerate as the plunge in the value of the ruble feeds into import prices.

To sum up, while MMT provides a different and sometimes useful way of looking at the interaction between monetary and fiscal policy, it doesn’t change the basic equation that, in the long run, public expenditure is paid for by taxes

[^1]: And is suspected of doing so to help some of Putin’s friends, but that’s a side issue.

196 thoughts on “MMT and Russia

  1. @J-D
    That acctually means that government can still buy it since it has more money then private sector, inflation will be a sign that such buying is doing damage to private sector by taking away too much, more then it can produce of it. This damage will create political constraints. But government can still buy as much as it wants. Should it keep doing it is another question but it still does not prevent it from buying untill political constraint does not stop it.
    The example is the war economy where the price is also controlled and population readilly gives to government no matter if it needs to use it themselves. Copper drive, metal drive, bond drive etc in WWII. There was no political constraint and government kept buying no matter the damage to private sector while enabled private sector to accumulate savings and pay off the debts.
    Governments marketing campaign worked to create willingnes for sacrifice for a purpose. The environmental problem requiers the same willingness and national unity that specifys determination around a goal.

    Now consider that many things for sale come from imports, which requiers foreign currency to import if not 5 countries that import stuff using only their own currencies. These 5 countries can buy even world supply of goods and services without constraint and without creating inflation domestically.
    But those countries that can not buy internationaly using their own currency are in different position, especially if they have to import oil or food. ANy additional buying by such government is producing or inflation or exchange rate change, depending on the set up of monetary operations, sometimes both change procyclicaly.

  2. @J-D
    Yes J-D, you are not alone. It is a little perplexing to me as well. Under the current regime we have a federal reserve actively setting an inflation target which it achieves by manipulation of the money supply ( via interest rate settings ). What’s the difference.

  3. If governments face inflationary and political constraints, doesn’t that mean they can’t always afford to buy anything for sale and that their solvency is not absolute?

    No, because solvency means “can pay current debts”, not “can make new debts”.

  4. Doesn’t ‘constraint’ mean ‘something that limits freedom of action’? If I am subject to constraints, doesn’t that mean I am not absolutely free to do anything I want? What different meaning could it possibly have?

  5. They can still pay the bill if they’re willing to brave the constraints, which may or may not materialize. But if a Gov’t issues specie and alloys it or plugs it with copper (etc), and bingo, before anybody buys another thing you have inflation.

    You can also have cost-push inflation, where a critical import like oil suddenly increases in price, which means a lot of money is going to go to foreign savers unless you limit such imports. Then you’d have deflation unless you gave in and spent the extra $ or found an acceptable substitute.

  6. @John Hobgood

    If you’re saying that debasing specie coinage automatically causes inflation, while expanding the supply of fiat money does not automatically cause inflation, I don’t see why. It seems to me much more plausible that both debasing a specie coinage and expanding a supply of fiat money carry some risk of inflation, with more risk of inflation (and risk of more inflation) the more the money supply is expanded.

    Also it seems to me that although (in both cases) it may be possible for governments to meet all their bills by expanding the money supply so long as they are willing to accept whatever inflationary risk accompanies that expansion, governments aren’t always willing to accept inflationary risks — and what’s more, I’d say governments shouldn’t always be willing to accept inflationary risks, not without limit.

  7. @J-D
    Up until recently the US were printing money faster than the trees could grow with their quantitative easing. As far as I can tell interest rates are still very low and inflation as well.

  8. @J-D

    You have hit on the reason why MMT and heterodox but non-neoclassical economists don’t really have any great disagreement in my opinion.

    It depends on how you define “constraints”. If you want to define constraints in a narrow, notional or formal system manner then a fiat currency issuing government has no constraints on “printing money”.

    But as soon as you move into the real economy and into other real systems, such as the ecosystem, constraints exist. Also, political system constraints exist as mentioned above.

    I think heterodox economists, when they say there are constraints on government spending, are using budget limits as proxies for real limits. They know as well as MMT theorists that the government could print any amount of money. They also know that that might cause problems.

    At the level of public discussion, heterodox economists, especially neoclassical economists, show little or no respect for the public’s understanding of economics (rightly or wrongly). Here the rhetoric is simplified and the notional limit as proxy for the real limit is simply portrayed as the real limit. The public think (or are thought to think) that money is as real as anything else ie. that is a real thing with real quantity not a notional thing with notional quantity.

    The fundamental problem exists in political economy. Here I use “political economy” to mean not just national economy but economics as conditioned by politics and ownership. Monopoly-finance capitalism prefers to operate with unutilised capacity. That is to say, it prefers to operate with an unemployment pool and some idle plant. The unemployment pool exists to discipline labour and reduce wages and conditions. Idle plant is tolerated as an outcome of unemployment and the cost of discipling labour and also as a buffer for surges in production when such surges are temporarily attractive in the business cycle.

    The promotion of budget constraints as real constraints in themselves suits neoclassical economics and the capitalist-oligarchs of monopoly-finance capitalism. The government’s spending capacity is not permitted to extend as far as it could, soaking up unemployment and reducing capacity under-utilisation. If this was permitted, the entire economy would be better off and workers would be both relatively better off compared to the rich and absolutely better off. On the other hand, the rich remain relatively better off and absolutely better off when the economy produces less but is made highly unequal in its rewards and heavily favours profit share over wage share.

  9. @Crocodile

    I am no expert on Quantitative Easing but I think almost any economist of any persuasion including an MMT economist will tell you that Q.E. is not the same as “printing money”. Text below in quotes is from Wikipedia.

    “A central bank implements quantitative easing by buying specified amounts of financial assets from commercial banks and other private institutions, thus raising the prices of those financial assets and lowering their yield, while simultaneously increasing the monetary base.”

    “In economics, the monetary base (also base money, money base, high-powered money, reserve money, or, in the UK, narrow money) in a country is defined as the portion of the commercial banks’ reserves that are maintained in accounts with their central bank plus the total currency circulating in the public (arena) ….

    “The monetary base should not be confused with the money supply which consists of the total currency circulating in the public plus the non-bank deposits with commercial banks.”

    Q.E. increases commercial bank reverves held in the central bank.

    “Quantitative easing can help ensure that inflation does not fall below a target.”

    That is, it can help ensure the economy doesn’t fall into deflation.

    Theoretically, these reserves could also help commercial banks lend more but if there are no more credit worthy customers out there the commercial banks won’t lend more anyway. So Q.E. may do little to really stimulate the real economy. On the other hand, it might encourage rises in stock prices and lending and speculating for that purpose.

  10. @Ikonoclast

    Only to the degree that the Fed buys securities that end up being truly worthless.

    QE2/3 was more about stepping in front of buyers at the auctions of T-Securities, essentially telling them to take their Trillions and DO something with them, because welfare for rich guys is about to dry up. Paying attention to sectoral balances, you can see this type of thing actually acts like a tax on the Private Sector, through loss of interest income.

    That being said, one shouldn’t really howl at the rich. They’re typically as pro-cyclical as consumers are. This is where the Employer of Last Resort and fiscal adjustments like temporarily suspending payroll and self-employment taxes (while the Gov’t makes those payments in our stead) can work in a counter-cyclical fashion and provide a bottom to the market. That way you don’t get employees saying “hire me, hire me” while biz is saying “I’ll hire you when you start buying more stuff.” ELR and tax suspension would add to existing “automatic stabilizers” like Unemployment Insurance.

  11. @Ikonoclast

    I should have said “It’s “printing money” to the degree that the Fed ends up with securities that end up being less valuable than their purchase price”. Otherwise it’s basically a swap of one $ denominated asset for another, or preventing the market from purchasing Gov’t guaranteed interest bearing assets (T-Securities).

  12. @Crocodile

    It may be true that the quantitative easing engaged in by the US has had no effect on the rate of inflation, but even if it is it may still be false (personally I’d bet it is) that the US has an unlimited capacity to engage in quantitative easing without causing rising inflation. I’m suggesting that the risk of inflation limits the capacity of any government to engage in monetary expansion (of any kind), but not that it limits that capacity to nil.

  13. @J-D

    Look at Japan. They’ve been at it for 25 years and have a “debt” to GDP ratio that makes the talking heads spin like studies for Linda Blair in The Exorcist.

    With a fully fiat currency, it all boils down to this:

    How much of your fiat tax credits (your currency) are in the private economy?

    Do you have enough real goods and services to satisfy the velocity of those credits?

    Yes: You’re good, stay at stationkeeping, but look lively and adjust for eventualities.

    No: Dial back spending/increase tax collection, find substitute goods/services where practical.

  14. According to MMT proponents, the constraints on government spending in the case of a sovereign currency issuer (such as the Australian Government) exist on the real side of the economy, not the financial side. The availability of labour, materials, energy, and technology determine how much money the government can spend while still maintaining price stability. Money is not the problem. A currency issuer can never run out of its own currency; it creates the currency at will; it is not revenue constrained.

    Taxation is necessary for four reasons: 1. To force households and firms to get their hands on currency so that they can pay their tax liabilities. The currency is in demand because it is the only thing that the government will accept as payment for tax liabilities. 2. To drain purchasing power out of the private sector to prevent inflation. 3. To achieved desired distributional goals (such as reducing the degree of inequality of wealth) 4. To encourage desirable behaviours (donating to charity) and discourage undesirable behaviours (consuming cigarettes and alcohol).

    Raising funds for the government to spend is not among the purposes of taxation (if the government is a sovereign currency issuer). Why would it need to collect its own dollars? The dollars it creates whenever it wants?

    Tax dollars are not gathered so much as extinguished. They constitute a depletion of the private sector’s purchasing power.

  15. @J-D

    “It may be true that the quantitative easing…without causing rising inflation.”

    Wholly incorrect. QE is not monetary expansion. It’s giving holders/prospective purchasers of T-Securities something they didn’t want in the first place (reserve balances). That’s why they showed up at the auction. They wanted the T-Securities and they got turned away because the Fed didn’t want to pay them interest for taking no risk. Unfortunately, QE decreases interest income to the private sector and so acts like a tax.

  16. @Nicholas

    So, just to be clear, are you saying that the Russian government can spend as much as it likes for any purpose, and doesn’t face any problems arising from the sharp drop in its oil revenues?

  17. First thing MMT assumes is very active government that serves the needs of its population.
    Second thing it assumes is that only real constraint is availability of labor.

    With activist government if any material is falling in supply, it will quickly find a substitute material that is needed and transform technology as needed. The government can organize new technology and production and also cover the adjusment costs in order to fill the needs of people.
    All that is possible if there is enough available labor to do it.
    If oil is needed but can not procure it in the market, then government will subsidize the cost of technology of pumping preassure into old wells to get some more of oil, or to get it it from shale. Subsidize gas production to get gas by fracking and subsidize adjustment to using gas instead of gasoline. If that is still not enough, it will subsidize alternatives to hydrocarbon sources of energy.

    It is not a problem to achieve that if you have activist government and available labor to employ that new technology requiers additionaly in order to supply substitute comodity.

    What matters is our pay, is everyone getting satisfactory wages to cover for needs. And all our pay is nominal which we replace for what we need. Government is not constrained to cover nominal pay. But, it is constrained by available labor to produce substitute materials/ comodities/ goods. Automatization is the way to have no limits to available labor for such new substitute. And globalization.

    Sure that it is hard to grasp the logic of MMT if you do not want active government that knows what is doing. But, they are explaining it to us all the time in this manner. The problem i see is that most of the government can not hear what ordinary people say to them but hear only what those close to them say. They hear only those that have huge organisational power. Corporations are becoming the biggest organisations of people all around us. People follow its leaders (CEOs) and government is listening to those CEOs that have huge swaths of people behind them.
    Corporations are organisations of people, just as states are organisations of people. Hierarcy of that is becoming somewhat messy tough.

    When labor is not available anymore then it is inflation that is taking over. Under assumption that inflation is comming from wage increase and as such from the increase in buying power.
    Activist government can predict and prevent any comodity supply constraint. It can also use buffers in supply like National Oil Reserve Agency to smooth out short term demand.

    MMT is also proposing the labor buffer such as Job Guarantee and Basic Income Guarantee against inflation preassures.

  18. @John Quiggin

    I think he’s saying that MMT says that for a fully fiat currency issuer, it’s not a nominal question, but a question of real resources.


    A: You offer no old age pension, but allow seniors to contribute to a tax-free (no tax in or out) self-directed investment account. They manage to retire at 62 on at least $2k/mo proceeds from the account and never have to work again.

    B: You guarantee seniors, for their service to the economy will get USD 2k/mo minimum upon retirement, gratis.

    In either case, it’s a question of whether or not enough real goods and services are available to service their needs. Perhaps not so evident, the net $ ultimately come from the same source.

  19. @John Quiggin

    are you saying that the Russian government can spend as much as it likes for any purpose, and doesn’t face any problems arising from the sharp drop in its oil revenues?

    Only in combination with activist government that will organise production of previously imported goods. In the meantime they have the rest of the world, besides west, to import what it needs.

    But why need to specify “for any purpose” when the production of previously imported goods is sufficient purpose to spend what it wants to prevent problems.

    If the government does not want to do anything but only apropriate spending, does not want to meddle actively into economy, then it will have to spend much much more and make prevention of problems from drop in oil revenue allmost impossible. SInce the time it will last will also be much longer.
    On the other hand, really activist government can reduce amount of spending and time needed to make problems go away.

    Many anallysts of present Russian problems are saying that these sanctions and oil price drop is an oportunity not a burden. Depending on what road will Putin go. Activist government/ anti-neoliberal or passive/neoliberal.

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