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Saturday, February 25, 2012

Guns, dungeons, taxes and favors

by John MacBeath Watkins

Now, here's an interesting perspective on money:
The government has men with guns and dungeons. The armed men will throw you in the dungeon unless you pay taxes. So if the government chooses to accept random pieces of paper as payment, the pieces of paper become valuable. The point of collecting taxes isn't that the government needs money (it can print money) it's that if the quantity of taxes is too low relative to the stock of money, then the money loses its value and the price level rises. 

Of course, Mr. Yglesias is having a bit of fun here. This statement is true only if you consider the signifier (paper bills) to be identical with the signed (money.) We call the bills that represent the meaning of money "money," but that's really just a bit of shorthand. The problem Yglesias is talking about is that for money in the form of paper bills to have the meaning of money, they must represent the labor, resources, and the genius of the people.

As we discussed in this post, what money represents is a favor owed. If you have a lot of dollars, you are owed a lot of favors -- food when you need it, and in the case of government, guns and soldiers when it needs them. For the government to do the things we ask of it, the government must be owed favors, so we transfer some of our favors to it.

Thinking of money this way allows you to make sense of the basic paradox of money -- that it represents wealth, but is created through debt.

Not only does the central bank create money through creating debt, banks create money of a sort through debt as well. From Wikipedia:
When a commercial bank loan is extended, new commercial bank money is created. As a loan is paid back, more commercial bank money disappears from existence.
A chipmunk's wealth is represented by the seeds and nuts it accumulates, and this wealth is not dependent on other chipmunks. But financial wealth represents a stored obligation, so can only exist in a society. However much we may wish to believe in our autonomy, and boast of our individualism, money, like language, is incoherent for the autonomous individual, valueless because it is useless without the social fabric it is woven into.

The nature, strength and give in that fabric is important. Germans have a larger part of their economy in the government sector than the Greeks, but they can maintain this because they are willing to pay for it. Tax cheating in Greece is endemic. When the Greek Finance Ministry started using Google Earth to spot swimming pools that were not declared on property taxes, Greek homeowners responded in the only rational way. I know what you're thinking: They paid their taxes.

No, no, no. They started hiring contractors to disguise their pools with green tarps so that they could continue to evade the tax. The Greek people may have a smaller state sector than Germany, but they still aren't willing to pay for it.

Does it conceal a swimming pool?
With our relatively small (by European standards) state sector and more successful tax collection, we're not exactly Greek. But we do have a party that keeps trying to convince people they don't have to pay for the government they want: The Republicans, who are constantly floating tax plans that collect less revenue, but castigate anyone who wants to save money on Medicare (unless it's the Ryan plan) or the Defense Department.

Now, given that modern governments, in terms of expenditures, are pretty much an insurance company with an army, telling people you can lower their taxes without cutting those costs is pure snake oil. It is part of a deliberate strategy, called the two Santa strategy. The idea was that instead of telling people they wanted to cut government, Republicans would offer to cut their taxes. And with the Laffer curve, they argued that this would not require cutting government.

You can spend a little or a lot on the government sector of the economy, but it isn't free. Just as a restaurant cannot survive if it doesn't recover the cost of serving food, a government cannot survive unless it recovers the cost of the services it provides. If it just prints money, the money will have no meaning. It must be part of the web of obligation that is the meaning of money.

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