Archive for June, 2011

Demand for Products Matters more than Credit to Small Businesses

June 28, 2011 2 comments

More evidence that the only thing that matters for hiring and expansion is the demand experienced by business owners.   Small business owners are not asking for more credit.  They don’t need it, even at favorable terms.

Businesses hire when they are swamped with demand, not when profits are high, or when they can get credit.



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TC’s on the road again!

June 24, 2011 1 comment

We’re heading out to Cali on a huge family road trip.  Sorry about not responding to all the excellent comments.

But I’ll have more posts today – Mrs. Traders Crucible is driving for the next few hours.


Categories: Main

The TC Rule: MMT Inspired Fiscal Policy

June 21, 2011 50 comments

If you were going to make a rule on fiscal policy, what would you do?

A while back I had some thoughts on what a rule might be that could guide fiscal policy.  I came up with:

c(u-u) + (i-i) + f*Population Growth = %G [Update: This is %G Deficit]

Where :

c(u-u) is Okun’s law, relating the change in GDP to change in unemployment.  According to most people, c is about 1.8 and (u-u) is the difference between the “natural” rate of unemployment and current unemployment.

(i-i) is the difference between the current core inflation rate and the target inflation rate

% Population growth is for the entire currency area – we might want to include China in this area given the current policy of China.  f is a multiplier, set to 1 for now.

This is a rule for the size of the deficit the government should run to get the economy back to full employment. It would tell us how much we should be spending to get the economy moving back to full employment.  It can even tell us to cut back on spending.

Then, I wanted something we could plug and play tomorrow. The rule targets the important things we’re concerned about on a large scale.  Employment, population growth, and inflation – these are the concerns, right? That’s what the TC rule targets. I’d suggest any rule for fiscal policy should have these as first order concerns.

I had some conversations with people about the TC rule, and they had great ideas.  Beowulf had one of the best observations. This spending needs a place to be spent.  Where should the spending be targeted?

Probably the best place to spend is on payroll tax cuts. The reason why is simple – it targets effective demand.

When the economy needs to get moving, effective demand is the place to look.

Not aggregate demand, but effective demand.  We don’t need some random spending thrown around the economy, we need money spent where it will make maximum impact.

Why not infrastructure spending?  I am not always 100% confident about government spending being spent wisely.  It might be spent, but frankly, spending $1T in Iraq doesn’t quite have the same attraction for me as spending $1T on infrastructure projects. But they all count to the deficit.

This feeling is wide spread – people don’t like the government just spending.  Tax cuts are a much easier sell.

One good way to target effective demand is through payroll tax holidays.  In fact, its probably the best way to target effective demand that has any hope of being implemented here in the United States.

For this, turn to Pavlina Tcherneva:

“As already noted, for Keynes, the principal goal of fiscal policy was to secure true full employment and the principle measure for adjudicating among different policy responses was their employment-creation effects (Kregel 2008). Unfortunately, what is considered to be Keynesian policy today is largely a misinterpretation of the Keynesian prescriptions, which largely stems from a fundamental misidentification of Keynes’s theory of effective demand with the theory of aggregate demand (Tcherneva 2011). In the General TheoryKeynes carefully articulated that employment determination depended not on the volume of aggregate demand but on the point of effective demand which was very hard to stabilize and fix at full employment.” [Bold Mine]

Wow!  That’s bold stuff.  She makes an excellent case that the optimal way to do this is through targeting employment directly.

But let’s face it. We are not going to see an Employer of Last Resort program next year, or any time in the next 2 score years here in the U.S. It’s a political non-starter.

But tax cuts…everyone loves tax cuts.  They are the sweet, sweet words that every politician likes to say, over and over again.

So the TC rule is going to target payroll tax holiday.   It’s a tax cut.  People love tax cuts.  And a payroll tax cut is probably the best place to target effective demand we’re going to get.

Remember those posts about corporate profits not causing hiring? I am trying to start a meme about hiring:  Businesses hire when they are swamped with demand, not when corporate profits are high.

Well, a good way to swamp companies with demand is to have people spend more money at the store.  Payroll taxes target people who are extremely likely to spend more money.  If we want more people to be hired, one good way to get this moving is through a payroll tax cut.

The formula beowulf suggested was to balance the dollar value of the amount of deficit spending with the size of the payroll tax cut.  This would target effective demand as well as we could, given the political climate.

The more spending required, the higher the payroll tax holiday.  It could be reset monthly, or every 8 weeks like we have the fed do with monetary policy, or every quarter.  My suggestion is to reset the level every month, as new employment and inflation numbers come out.

I don’t have the actual amount of tax holiday for different amounts of needed deficits, but maybe soon…and much thanks to beowulf!

Summer Solstice

June 21, 2011 1 comment

Stonehenge on the Summer Solstice

Happy Summer Solstice! It’s the longest day of the year!

I am looking forward to the second half of 2011.  I am optimistic about the U.S. economy and world economy!


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From the Comments: The Economy is an engineering problem

June 21, 2011 6 comments

From the Comments, by the excellent Neil Wilson:

“Theories are all very well, but the economy is an engineering problem. That means we need to know what the requirements are so we can design a system (based on the best available theories and evidence) to address those requirements. And it means there can be many system designs we can try not the ‘one true religion’ as preached by the IMF.

We also need to understand what the unknowables are (for example whether the economy will actually quantity expand when stimulated) and have a back out plan in case it doesn’t work as expected (impose a tax to neutralise inflationary pressure if the economy decides to price adjust instead).

We need to be doing engineering not religion.”

I agree.

This is real economic thinking, about the way the world really works.  Economics is a practical philosophy, thinking applied to the workings and interactions of humans.  We need to be able to make decisions – even wrong decisions based on incomplete information – within a framework where progress can be made.

The current framework used – that the government is spending constrained  – cannot ever result in progress. Because if we make an error, we’ll never know it. Just as we’ll never know if we did something correct.

The Government Spending Constraint is based on an assumption that is unknowable.

By assuming something we can never know, it makes any statement based on that assumption possibly true. It moves the debate onto holy ground, where religion thinking is allowed and even encouraged.

People can make claims about government spending being too high, and well, maybe it’s true!  Or someone can say Government spending is too low, and that might be true too!

Everything is potentially true when you have an assumption that you cannot know if it is true or false.  An unknowable assumption makes any statement based on it meaningless.   So, the Government Budget Constraint is meaningless.   “It’s not even wrong“, as Peter D. likes to say.

When we can’t tell if a statement is true or not, people can make outrageous claims of any variety. We have no tool, no method to judge between the claims.

The framework of observables is the only way to move forward, and assuming an unobservable makes moving forward impossible.

We need engineering, and engineering does not use assumptions we cannot verify.  It’s based on what we can observe happening with a some degree of certainty.

“Call me radical, again I ask you for evidence.”


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Kevin Drum knows the simple truth about hiring

June 20, 2011 Comments off

Kevin Drum:

“…but companies don’t expand and hire more people because their corporate treasuries are flush. They expand and hire more people when they think demand for their goods and services is strong.”

It’s really true.  Companies hire when they are swamped with demand, not when profits are high.

Then, he goes on to show that the corporate tax holiday for repatriated profits is a scam.  It’s a great post all around.



Welcome MMT Fans!

June 20, 2011 6 comments

Thanks for stopping by from Warrens Place!

This blog has lots of MMT thinking on it.  I was inspired by Warren Mosler and the other thinkers in MMT (like Scott Fullwiler and W. Randal Wray)  to do some thinking of my own.

I truly believe the world can be a slightly better place if MMT was widely accepted as the way money works.

Here is a list of some of the cool things that have happend on this blog, if you care to take a look.

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