19 June 2010

The Priceless Ritchie

I feel almost cruel fisking him, given what a soft target he is, but he invites it by his conduct. Even when he makes a post with some reasonable elements to it, he can't help but have a hissy fit if somebody points out, in reasonable terms, something which might hint that he isn't infallible.

Take the piece he posted today, the substance of which is essentially that a government isn't like a company because it can print money endless if it wants to. There's some merit to the point, but there are some issues with it. Another reader touched on one of them, to which Ritchie posted a reply which included this:
Take one simple example: there is no chance whatsoever of any company ever paying itself in currency it creates

But the government can demand it be paid in currency only it can create
In response to which, I posted this:
It generally operates that way, but it isn't inherently the case.

Any company can demand it be paid in whatever form it chooses and in terms of self-created currency, company issued scrip has existed in numerous forms.

I think the more significant difference is that, unlike most companies, a government can extract revenue by force and in doing so can maintain effective demand for its currency.

In short the difference is not so much that "the government can demand it be paid in currency only it can create" but that "the government can demand it be paid."
I don't think that's a particularly unreasonable point to make, but unsurprisingly, as I am a heretic who has previously denied the absolute truth of the word of Ritchie, it was blocked.

Of course, a government printing more money to cover its debts is perfectly possible. The flip side is that as a course of action, it doesn't exist in a bubble; it creates side effects. Most obviously, it is inflationary. Another significant element, which doesn't get mentioned as frequently, is that it is effectively a tax; it's just less obvious, because instead of the government taking cash directly, it funds its activities by making the cash which is in circulation less valuable.

Now, as Ritchie has previously criticised me for suggesting that it would be a good idea to increase the proportion of tax taken from land based taxes, on the basis that he feels that Council Tax is regressive, then I would expect him to examine whether or not this is a regressive tax before supporting it. I'm going to guess he hasn't, because it would appear to be a tax which is, at the very least, moderately regressive.

The burden of the tax falls on those who hold Pounds Sterling (or assets denominated in Pounds Sterling), with the burden being in proportion to the amount held. At first glance, that may appear to be a fairly progressive wealth tax, as the very poorest will have no savings and will face almost none of the burden. However, as you go up the wealth scale, a different picture emerges. Those with a small to moderate amount of savings will tend to have most of it in cash and accounts denominated in pounds. As you move further up the wealth scale, you would expect that proportion to fall, for two main reasons; firstly because those with more wealth will tend to feel a need to diversify and secondly, because there are transaction costs involved in converting cash to other investments which tend to produce economies of scale. For example, the dealing costs involved in buying a few shares would probably outweigh any potential gain in a way that wouldn't be the case if buying a larger number.

So, it would appear that the burden would fall, in proportion to total wealth, most heavily on those with low to moderate levels of savings. That's not the most obvious thing for somebody who supposedly dislikes regressive taxation to support.

3 comments:

Mark Wadsworth said...

Broadly agreed, but your post seems to repeat itself again halfway down.

BTW, that is the whole point of printing money, it is part of the mechanism whereby wealth is shifted towards landowners (by eroding the value of other forms of saving and by inflating away landowners' debts).

As those who have been playing the landowner game longest are the richest, this is of necessity regressive.

AntiCitizenOne said...

I was about to say what MW says.

Paul Lockett said...

Oops! Thanks for pointing that out. I think I got a bit trigger happy while cutting and pasting.

As for the comments, agreed.