Home > Main > The TC Rule: MMT Inspired Fiscal Policy

The TC Rule: MMT Inspired Fiscal Policy

June 21, 2011

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!

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  1. Clonal Antibody
    June 21, 2011 at 6:12 pm

    TC said

    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.

    I do not agree with you here. Two articles today made me think that things are changing.

    Robert Reich’s recitation of economic history basically highlighting Marriner Eccles role in the FDR programs (excerpt of Reich’s book) – Aftershock: The Next Economy and America’s Future – Eccles’ Insight

    Young Marriner, one of David’s twenty-one children, trudged off to Scotland at the start of 1910 as a Mormon missionary but returned home two years later to become a bank president. By age twenty-four he was a millionaire; by forty he was a tycoon—director of railroad, hotel, and insurance companies; head of a bank holding company controlling twenty-six banks; and president of lumber, milk, sugar, and construction companies spanning the Rockies to the Sierra Nevadas.

    In the Crash of 1929, his businesses were sufficiently diverse and his banks adequately capitalized that he stayed afloat financially. But he was deeply shaken when his assumption that the economy would quickly return to normal was, as we know, proved incorrect. “Men I respected assured me that the economic crisis was only temporary,” he wrote, “and that soon all the things that had pulled the country out of previous depressions would operate to that same end once again. But weeks turned to months. The months turned to a year or more. Instead of easing, the economic crisis worsened.” He himself had come to realize by late 1930 that something was profoundly wrong, not just with the economy but with his own understanding of it. “I awoke to find myself at the bottom of a pit without any known means of scaling its sheer sides. . . . I saw for the first time that though I’d been active in the world of finance and production for seventeen years and knew its techniques, I knew less than nothing about its economic and social effects.” Everyone who relied on him—family, friends, business associates, the communities that depended on the businesses he ran—expected him to find a way out of the pit. “Yet all I could find within myself was despair.”

    When Eccles’s anxious bank depositors began demanding their money, he called in loans and reduced credit in order to shore up the banks’ reserves. But the reduced lending caused further economic harm. Small businesses couldn’t get the loans they needed to stay alive. In spite of his actions, Eccles had nagging concerns that by tightening credit instead of easing it, he and other bankers were saving their banks at the expense of community—in “seeking individual salvation, we were contributing to collective ruin.”

    Also another article by Bill Gross – School Daze, School Daze
    Good Old Golden Rule Days

    Additionally and immediately, however, government must take a leading role in job creation. Conservative or even liberal agendas that cede responsibility for job creation to the private sector over the next few years are simply dazed or perhaps crazed. The private sector is the source of long-term job creation but in the short term, no rational observer can believe that global or even small businesses will invest here when the labor over there is so much cheaper. That is why trillions of dollars of corporate cash rest impotently on balance sheets awaiting global – non-U.S. – investment opportunities.
    .
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    The U.S. needs to learn from their state-oriented model. In times of extremis, pushing on the private sector string is ineffective, especially within the context of a global marketplace that offers alternative investment locations. Government must temporarily assume a bigger, not a smaller, role in this economy, if only because other countries are dominating job creation with kick-start policies that eventually dominate global markets.

    When Bill Gross comes “so close,” it will not take much to push him over to”our” side. Maybe somebody like him will be today’s Marriner Eccles

    • Peter D
      June 21, 2011 at 9:20 pm

      Bill Gross is one confused individual. He could’ve benefited from a session with Marshall Auerback when the latter was consulting PIMCO – would’ve saved him some recent embarrassment.
      That said, I think we just need some good political brains to come up with a way to sell ELR to the public (if only Karl Rove were on our side), which might not be as hard as it seems. I think a lot of people are pissed – rightly or wrongly – about all the folks on “welfare” living off “the rest of us” (mostly wrongly, I believe, just because whatever abuse there is, it is surely dwarfed by all the rest of the items comprising govt deficit.) ELR should be framed as “work instead of welfare” – in other words, making sure people get paid only if they are willing to take whatever job the govt is offering them (insert all the details here.) I think this might actually appeal to a lot of conservatives; at least I hope so…

      • Clonal Antibody
        June 21, 2011 at 10:36 pm

        Ed Harrison on Bill Gross – On why Bill Gross supports a job guarantee despite railing against the deficit and on the general topic of unemployment and possible policies

        • TC
          June 21, 2011 at 10:55 pm

          Egads! That is truly remarkable.

          I feel a TC post coming on:

          Bond King Bill Gross: “I’m short Treasuries – so will the U.S. Government please spend a few hundred billion and make my trade pay off?”

          😉 But this is jaw dropping to me. He’s a big deal. And hes supporting a jobs program.

        • TC
          June 22, 2011 at 12:23 am

          He actually used the words “Employer of Last Resort”! Curiouser and curiouser…

        • Clonal Antibody
          June 22, 2011 at 12:37 pm

          Also this article at the US News and World Report –
          Why the Jobs Situation Is Worse Than It Looks

          The Great Recession has now earned the dubious right of being compared to the Great Depression. In the face of the most stimulative fiscal and monetary policies in our history, we have experienced the loss of over 7 million jobs, wiping out every job gained since the year 2000. From the moment the Obama administration came into office, there have been no net increases in full-time jobs, only in part-time jobs. This is contrary to all previous recessions. Employers are not recalling the workers they laid off from full-time employment.
          Click here to find out more!

          The real job losses are greater than the estimate of 7.5 million. They are closer to 10.5 million, as 3 million people have stopped looking for work. Equally troublesome is the lower labor participation rate; some 5 million jobs have vanished from manufacturing, long America’s greatest strength. Just think: Total payrolls today amount to 131 million, but this figure is lower than it was at the beginning of the year 2000, even though our population has grown by nearly 30 million.

          The most recent statistics are unsettling and dismaying, despite the increase of 54,000 jobs in the May numbers. Nonagricultural full-time employment actually fell by 142,000, on top of the 291,000 decline the preceding month. Half of the new jobs created are in temporary help agencies, as firms resist hiring full-time workers.

          Today, over 14 million people are unemployed. We now have more idle men and women than at any time since the Great Depression. Nearly seven people in the labor pool compete for every job opening. Hiring announcements have plunged to 10,248 in May, down from 59,648 in April. Hiring is now 17 percent lower than the lowest level in the 2001-02 downturn. One fifth of all men of prime working age are not getting up and going to work. Equally disturbing is that the number of people unemployed for six months or longer grew 361,000 to 6.2 million, increasing their share of the unemployed to 45.1 percent. We face the specter that long-term unemployment is becoming structural and not just cyclical, raising the risk that the jobless will lose their skills and become permanently unemployable.

          Don’t pay too much attention to the headline unemployment rate of 9.1 percent. It is scary enough, but it is a gloss on the reality.

  2. TC
    June 21, 2011 at 8:09 pm

    Reasonable people agree that a job creation program. However, 27% percent of our country is batshit insane.

    http://kfmonkey.blogspot.com/2005/10/lunch-discussions-145-crazification.html

    “John: Hey, Bush is now at 37% approval. I feel much less like Kevin McCarthy screaming in traffic. But I wonder what his base is —

    Tyrone: 27%.

    John: … you said that immmediately, and with some authority.

    Tyrone: Obama vs. Alan Keyes. Keyes was from out of state, so you can eliminate any established political base; both candidates were black, so you can factor out racism; and Keyes was plainly, obviously, completely crazy. Batshit crazy. Head-trauma crazy. But 27% of the population of Illinois voted for him. They put party identification, personal prejudice, whatever ahead of rational judgement. Hell, even like 5% of Democrats voted for him. That’s crazy behaviour. I think you have to assume a 27% Crazification Factor in any population.”

    I agree that there pendulum is swinging. But we really far from getting what we need, because 27% of the population is crazy.

  3. Clonal Antibody
    June 21, 2011 at 8:47 pm

    TC :
    Reasonable people agree that a job creation program. However, 27% percent of our country is batshit insane.

    That may well be so, but that has always been the case. More reading og the Robert Reich extract may be a bit more educational

    There was a more elaborate and purportedly “ethical” argument offered by those who said nothing could be done. Many of those business leaders and economists of the day believed “a depression was the scientific operation of economic laws that were God-given and not man-made. They could not be interfered with.” They said depressions were phenomena like the one described in the biblical story of Joseph and the seven kine, in which Pharaoh dreamed of seven bountiful years followed by seven years of famine, and that America was now experiencing the lean years that inevitably followed the full ones. Eccles wrote, “They further explained that we were in the lean years because we had been spendthrifts and wastrels in the roaring twenties. We had wasted what we earned instead of saving it. We had enormously inflated values. But in time we would sober up and the economy would right itself through the action of men who had been prudent and thrifty all along, who had saved their money and at the right time would reinvest it in new production. Then the famine would end.”

    Eccles thought this was nonsense. A devout Mormon, he saw that what passed for the God-given operation of economics “was nothing more than a determination of this or that interest, specially favored by the status quo, to resist any new rules that might be to their disadvantage.” He wrote, “It became apparent to me, as a capitalist, that if I lent myself to this sort of action and resisted any change designed to benefit all the people, I could be consumed by the poisons of social lag I had helped create.” Eccles also saw that “men with great economic power had an undue influence in making the rules of the economic game, in shaping the actions of government that enforced those rules, and in conditioning the attitude taken by people as a whole toward those rules. After I had lost faith in my business heroes, I concluded that I and everyone else had an equal right to share in the process by which economic rules are made and changed.” One of the country’s most powerful economic leaders concluded that the economic game was not being played on a level field. It was tilted in favor of those with the most wealth and power.
    .
    .
    .
    Eccles made his national public debut before the Senate Finance Committee in February 1933, just weeks before Franklin D. Roosevelt was sworn in as president. The committee was holding hearings on what, if anything, should be done to deal with the ongoing economic crisis. Others had advised reducing the national debt and balancing the federal budget, but Eccles had different advice. Anticipating what British economist John Maynard Keynes would counsel three years later in his famous General Theory of Employment, Interest and Money, Eccles told the senators that the government had to go deeper into debt in order to offset the lack of spending by consumers and businesses. Eccles went further. He advised the senators on ways to get more money into the hands of the beleaguered middle class. He offered a precise program designed “to bring about, by Government action, an increase of purchasing power on the part of all the people.”

    Eccles arrived at these ideas not by any temperamental or cultural affinity—he was, after all, a banker and of Scottish descent—but by logic and experience. He understood the economy from the ground up. He saw how average people responded to economic downturns, and how his customers reacted to the deep crisis at hand. He merely connected the dots. His proposed program included relief for the unemployed, government spending on public works, government refinancing of mortgages, a federal minimum wage, federally supported old-age pensions, and higher income taxes and inheritance taxes on the wealthy in order to control capital accumulations and avoid excessive speculation. Not until these recommendations were implemented, Eccles warned, could the economy be fully restored.

    I fear that Obama was not the right person to get elected. At the present moment he cannot be challenged from within the democratic party unless he willingly does not run for reelection. There is nothing “rational” left in the Republican Party. There are only two options — Obama does not run for reelection, and lets his intentions be known now, or there is a third party challenge.

    I fear that if the Republicans get in, in 2012, an FDR will not come in 1933, but rather in 1937 or perhaps even 1939 — just imagine if the depression had been 4 to six years longer in duration. Obama had his chance, and he may have blown it because there was no Marriner Eccles or Sam Pecora!

    • Peter D
      June 21, 2011 at 9:13 pm

      I posted this over at Warren’s site:

      At this point I start wondering whether having somebody like Romney in office (as much as I dislike him) would be actually better than having the supposedly “good” Democrat like Obama. My thinking is this: the GOP shuts down any sensible measure that can help the economy out of totally cynical and sociopathical desire to hurt Obama and the Democrats. Having a Repuglican in the office would remove the opposition and as long as that Repuglican is not totally batshit crazy, it is possible to expect some good economical measures, such as increased deficit. In fact the Republican icons like Reagan and Dubya presided over increases in the deficits that dwarfed anything the Dems had done with hardly a peep from their side of the aisle.
      But with Obama’s lack of understanding/commitment/ability, we’re doomed. As Soros recently put it:

      The Republicans have gained control of the agenda, and they are promoting a misleading narrative: everything is the government’s fault. The Democrats are forced into fighting a rearguard battle, defending the opposite position.

      • June 21, 2011 at 9:36 pm

        I’ve had this very same thought for a while now. The Republican position would be ‘We’ll reduce the deficit … later’. In the meantime we would get some deficit spending. The GOP will go along because the president would be in their party, and the Democrats would go along because they go along with everything.

        The Democrats have been fighting a rearguard action since Reagan.

      • TC
        June 21, 2011 at 9:40 pm

        At this point I start wondering whether having somebody like Romney in office (as much as I dislike him) would be actually better than having the supposedly “good” Democrat like Obama.

        I’ve thought the same thing, about the same dude. These people are impoverishing their grandchildren. (Hey – thats a good one!)

    • TC
      June 21, 2011 at 9:38 pm

      When I read that RR piece earlier, it seemed like an impossible dream.

      I too worry about war. I don’t know what, but these people are crazy. Obama…well, he’s a good, practical man. It ‘s just that being practical right now means buying into the Larry Summers view of the world.

  4. Peter D
    June 21, 2011 at 9:11 pm

    TC, so your payroll tax cuts are temporary, right? Otherwise we may hit a point of ZTR (zero tax rate) 🙂
    This is what I’ve been harping on for some time: automatically adjusted tax rates. People say this is an insane idea, but I don’t think so. Take the tax rate out of the hands of Congress and make it based on something like the TC rule – transparent and verifiable, so that there are no crazy conspiracy theories. Floating tax rates can become a fact of life just like floating interest rates. I predict Goldman Sachs to be the first to come up with a tax-rate derivative!
    There is however what I see as an issue (in general) with payroll tax cuts in that they benefit working people first of all – and those are the better off ones during the recessions. It might take some time before the money trickles … not down but rather sideways to the rest of the economy and the unemployment fall. Another is that there are always program that the govt just has to be the one spending money on because the private sector will never pick those up because uncertain or unquantifiable ROI and because those are in public interest domain. To the extent that those become inflationary (wow, can we even imagine such a wonderful time in the current dire straights 😦 ) they’d have to be taxed away with some well-thought targeted taxation.

    • TC
      June 21, 2011 at 9:35 pm

      Hi Peter,

      Yes, the payroll tax rate would fluctuate every month. The formula would be something like:

      Target payroll tax rate – (amount of stimulus needed according to TC rule, annualized)/divisor to make it work = current payroll tax rate.

      Total Payroll taxes were estimated to be 638bn in 2010. So every month, there is roughly $53bn in payroll taxes collected. Say the economy needs $300bn to get to our target levels according to the TC rule. Then the amount payroll taxes would be reduced this month would be 300/12 = $25bn, or by roughly 50% from the current levels.

      We could add seasonality, but why make it complicated?

      if the economy really starts to get overheated, then, well maybe the amount gets negative, so taxes get raised. At that point, people would be making tons of money – everyone would be employed, and finding a job would be easier than making Austrians look like cranks.

      But this is something that can be worked out – I’ve just been so darn engaged in other projects I haven’t had time to work through the numbers on the TC rule, or to research how the Bank of England can hit 5.2% NGDP over a period of years, or to take out the equilbrium real rate of interest.

      Re GS derivatives – lol. I bet Credit Suisse and UBS would give them a run for their money. One of my pet ideas was to create inflation futures – actually a whole complex of futures based on GDP, inflation, and Social Security.

      Re hits working people first. I agree. It’s a weakness. The TC rule is something we can use in place of the ELR. Clonal raised a good point about the possibility of an ELR being higher than I stated.

      But if we cannot have an ELR, and unemployment will never be pushed to a high enough level to make it create the necessary effective demand, we’re left with slim pickings. Of course, some infrastructure spending would be great, but government programs take months or years – forever in a deep recession – to get started. You’d think they would have a backlog of projects waiting for funding, ready to go. But this is not the case.

      The only way I see to inject lots of money into the economy very rapidly and in a flexible manner is a floating tax rate. It’s a practical, workable solution to a tough problem.

      This means that the

      • beowulf
        June 22, 2011 at 5:46 pm

        The Social Security Administration has a fairly awesome chart breaking down the FICA wage base, 2009 is most recent year they have up (2010 won’t be ready till October). Who knew that 72 Americans earned more than $50 million in wages that year? Each paid the capped 12.4% SS FICA on the first $106k and the uncapped 2.9% Medicare FICA on all of it.
        http://ssa.gov/cgi-bin/netcomp.cgi?year=2009

        Clearly the first order of business is uncapping Social Security taxes (the pension formula is progressive, SS trust fund would be solvent forever even if benefits were uncapped too). Everyone, whether they make $50,000 or $50 million, would pay the same 15.3% FICA rate and get the same tax holiday rate. ($5.894 trillion wage base x .153 = $901.8 billion)

  5. wh10
    June 21, 2011 at 10:47 pm

    Guys, sorry I don’t have much to add right now, but I just wanted to say great discussion and that I love this blog. TC, please keep it up. You’ve done some great work and provide interesting takes/applications of MMT that you don’t get elsewhere in the MMT blogosphere. You really think for yourself rather than regurgitate.

    • TC
      June 21, 2011 at 10:59 pm

      Thanks wh10!

  6. beowulf
    June 22, 2011 at 12:07 am

    “This is what I’ve been harping on for some time: automatically adjusted tax rates. People say this is an insane idea, but I don’t think so.”
    John Maynard Keynes agreed with with you.
    In correspondence with the economist James Meade in 1942 Keynes says he is “converted” to Meade’s idea of altering the social security payroll tax over the business cycle. Here are Keynes’s words:
    “I am converted to your proposal…for varying rates of contributions in good and bad times.”

    http://gregmankiw.blogspot.com/2009/02/mature-keynesian-perspective-ii.html

    If I may dispense with all three of your objections with one suggestion; simply expand an existing program funded by payroll taxes at the same time you declare a payroll tax holiday. Let me unpack that (all numbers are annual and most are necessarily approximate); a portion (2.9%) of the 15.3% FICA tax goes towards Medicare. Lets say Medicare was expanded to cover everyone and a universal program would cost double the current $900 billion or so that FICA collects now (ex temporary 2 % point payroll cut).
    First uncap Social Security FICA, like Medicare already is, above $106k ($200 billion), reallocate Obamacare’s existing revenue stream ($100 billion), then hike the new unearned income Medicare tax ( > $250k beginning in 2013) from 3.8% to full FICA rate (an additional $100 billion). Presumably employer-paid insurance premiums would be shifted to taxable income ($220 billion). After all of the above is allocated to Medicare, the just shy of $300 billion remainder could be paid for by increasing standard FICA rate, say from, 15.3% to 20%. So 10% by both employer and employee (that certainly makes the math simple). Now the floating payroll tax holiday part– The formula I suggested was nominal FICA rate reduced by BLS’s monthly U3 rate x a multiplier (say, 10). This month then, a 91% reduction from nominal rate. Once U3 unemployment is below 4% and we need to fill in the fiscal gap (though our chronic trade deficit make that unlikely), we could always enact a carbon tax. Of course, all of the above could be reduced by the hundreds of billions that Tsy pays now in net interest but would not in the future if the policy rate was locked at 0 and Tsy issued nothing longer than 3 month T-bills.

    • Peter D
      June 22, 2011 at 12:14 am

      Beo! My head is spinning! You are unbelievable. Let me try and digest it tomorrow 🙂

      • TC
        June 22, 2011 at 12:22 am

        I know – he’s an encyclopedia! 🙂

    • Clonal Antibody
      June 22, 2011 at 9:23 am

      Beowulf,

      I am against payroll taxes in principle. I would rather have a progressive income tax with adjustable creeping brackets from the top. Thus, the bottom 50% would always remain untaxed. I do not believe that there is ever any reason to tax the incomes of anyone in the bottom 50-60%. Social Security could still be linked to lifetime earnings, in terms of determining the benefits paid to an individual on retirement, subject to a minimum and maximum benefit.

      Inflation of basic commodities like food is almost always driven by excess money in the hands of speculators, and not by an increase in demand from the bottom 50-60%. The progressive taxation, and/or taxation of speculative income is a much better way to go.

      • beowulf
        June 22, 2011 at 3:25 pm

        Clonal,
        I agree with you however what you’re suggesting should be done through the income tax code. What I suggested was simply broadening the base of the existing FICA tax regime and adding a counter-cyclical floating rate (funding universal Medicare along the way), without touching the rest of the tax code; the premium deduction could be left untouched since no employer would pay premiums if their employees already had Medicare cards. Short of a national sales tax, its hard to improve on the FICA system as a counter-cyclical fiscal tool.

        To make the tax code more progressive, Congress should add “negative income tax” universal credits (I suppose you could fund it with a financial transaction tax if you want to be revenue-neutral about it). Once that’s on the books, every time Congress cuts govt spending, use the savings to increase the size of the credits instead of cutting the deficit. Al Sheahen wrote a great article about the last effort (in 2006) to add universal tax credits to the tax code, “The Rise and Fall of a Basic Income Guarantee Bill in the United States Congress””
        http://webcache.googleusercontent.com/search?q=cache:dceeWw2bOJAJ:www.usbig.net/papers/179-Sheahen–rise%26fall.doc

  7. June 22, 2011 at 1:58 am

    Does your rule take into account the Paradox of Productivity?

    Are our machines and processes now so good that we don’t need everybody’s labour to deal with the maximum theoretical economic demand of everybody? Is labour still the limiting factor?

    The Paradox also comes in when you start taking sustainability into account.

    If we are in Paradox territory, then that means either the external sector or the government sector must top up demand, or the private sector will fall to an even lower equilibrium level.

    As described in this rather nice video: http://youtu.be/Ei_B5MTJofI

    The Paradox gives you some ‘free’ deficit spending and I suspect that will get more as we take sustainability limits increasingly in account.

    • TC
      June 22, 2011 at 6:18 pm

      It does not. I am not sure that its a real threat at this point. $150K a year, and I’ll be worried.

    • pebird
      June 22, 2011 at 6:56 pm

      Don’t confuse real with nominal – we can always think up activities that need to be performed in order to receive an income. Digging and refilling holes, airline security, jumping jacks, sorting through junk mail. All while the robots keep producing.

    • TC
      June 25, 2011 at 7:45 am

      The more I think about this, the more I think we’re very close to it. We are much better at controlling our machines than we were just a few years ago.

      Hmmm.

      • June 27, 2011 at 9:41 am

        I wonder if the Germans prove it. They use the external sector as their top up mechanism and effectively export the problem to lower productivity countries.

        Add in an unwise currency peg to remove the dampening mechanism and boom.

      • beowulf
        June 27, 2011 at 1:08 pm

        Cue Marshall Brain:
        “We are standing right now on the threshold of the robotic era. Once robots start arriving in the job market in significant numbers — something that we will see happening within a decade or so — they have the potential to dramatically change the world economy. At least 50 percent of the people working in the American job market today are working in people-powered industries like fast-food restaurants (McDonald’s, Burger King, Wendy’s, etc.), retail stores (Wal-Mart, Home Depot, Target, Toys “R” Us, etc.), delivery companies (the post office, Fedex, UPS, etc.), construction, airlines, amusement parks, hotels and motels, warehousing and so on. All of these jobs are prime targets for robotic replacement…

        “The following suggestion at first seems impractical because it is so simple: What if we, as a society, simply give consumers money to spend in the economy? In other words: What if the way to achieve the strongest possible economy is to give every citizen more money to spend? For example, what if we gave every citizen of the United States $25,000 to spend?”
        http://www.marshallbrain.com/robotic-freedom.htm

  8. Phil
    June 22, 2011 at 11:19 am

    “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.”

    — I love this distinction. More please!

    “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.”

    — Yes!

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

    — Why can’t more MMT apologists talk like you?!? This is some of the most sane talk, from the point of view of promoting MMT, that I’ve read in a long time.

    • June 22, 2011 at 12:42 pm

      Tax Cuts might be easier to sell, however without an automatic stabiliser system the tax rises needed to choke of the subsequent boom are much harder to sell.

      I’m in favour of fiscal policy proposals that are designed as automatic stabilisers, so payroll tax cut until unemployment drops below 5% etc.

      The problem fiscal policy has had in the past is that it has been discretionary. Most politicians haven’t the strength of character to tighten policy when required. That’s why they sloped shoulders and created this independent central bank idea. It gives them somebody to blame with the necessary gravitas.

      • wh10
        June 22, 2011 at 2:07 pm

        Great point! A tax cut is easy to sell now, but a tax rise in the future isn’t. Another way to conceptualize the benefit (economically and pragmatically) of automatic stabilizers.

      • TC
        June 22, 2011 at 6:17 pm

        Nothing is perfect, but this is a problem. I suspect that a few years of experience with this and people will be very happy.

        • wh10
          June 22, 2011 at 6:26 pm

          Yeah- potentially. In other words, say you cut taxes today, the economy recovers, people are happy. But people don’t want to raise taxes. Well- they are going to suffer from inflation and at some point you think they’d get the hint and raise taxes. Maybe then people will be clued in. But this assumes so much- people may still misinterpret and decide the system didn’t work from the start and go back to the old way, or a worse new way.

  9. pebird
    June 22, 2011 at 6:54 pm

    I would have something in the formula regarding propensity to save – might be a function of the level of private debt. Knowing the government would increase spending as private debt rises might act as a stabilizer on excess private debt expansion.

  10. Peter D
    June 22, 2011 at 10:40 pm

    TC: This feeling is wide spread – people don’t like the government just spending.

    Alas, this idea that govt spending is almost always inefficient is such a noxious one. It is hardly supported by any evidence, as far as I can tell. Yes, there is some waste (as with any system), but it pales next to the real big numbers comprising the of govt deficit – the defense, the SS and the Medicare/Medicaid. SS is necessary (we should be spending MORE on SS, not less). Medicare is actually more efficient than private insurance: Ezra Klein – who, unfortunately, doesn’t understand MMT, although he’s slowly getting there – is still your man on healthcare policy; see this, for example:
    http://feeds.washingtonpost.com/click.phdo?i=5b76f7a34ccc618a6bde13011b509509. The problem with Medicare is not that it is govt-run – that’s actually the good part about it – but our dysfunctional healthcare system in general.
    Which leaves us with defense spending, which is about the last thing conservatives decrying govt waste have any inclination of tackling.
    And I just loved how when Mike Norman went on Fox Business, the best Varney could do to indict the stimulus package was 72000 dead people and 17000 inmates receiving $250. This is what, 22 million out of 800 billion? 0.003%? Find me another program less wasteful than this.
    MMT actually implies that the waste we should really be concerned with is in real – including human – resources. Seen this way, just about the biggest waste in our economy is all the human endeavor going into the Finance industry (myself included…)

    • TC
      June 22, 2011 at 10:54 pm

      I agree. Most government spending isn’t that wasteful. And one person’s waste is another persons Corporate Profits. 🙂 If spending flows to real people through wages, then I have almost zero concern.

      But I do have some sympathy for governments making bad decisions and distorting markets. I look at NYC and the dumbass highway. I look at I-355 here near Chicago.

      And if there ever was an accurate accounting of the Iraq war, I bet over $100bn cash money was stolen. I swear – I swear – the next war, I am going to be a military contractor. i don’t know what I was thinking, passing that up. They were literally handing out bags of money.

      I don’t think that spending is all bad. It’s just that if I had to choose between the government spending money and giving a tax cut to the millions of people making $40K a year, I choose the tax cut.

      I hate to even disagree with you at all on this, because I think we’re on the same page…

      • Clonal Antibody
        June 22, 2011 at 11:31 pm

        TC :
        I don’t think that spending is all bad. It’s just that if I had to choose between the government spending money and giving a tax cut to the millions of people making $40K a year, I choose the tax cut.
        I hate to even disagree with you at all on this, because I think we’re on the same page…

        I would rather eliminate FICA, have targeted social spending (increased educational spending at all levels, increased funding of research, public subsidy of infrastructure needed to survive the coming resource crunches.


        http://video.google.com/googleplayer.swf?docid=-3541124963870120315&hl=en&fs=true

        I would also reinstitute the 90% tax bracket, with no Income taxes below the 80-85th percentile of adult income, along with 100% deduction for charity, and a high taxation on corporate retained earnings – If corporations need money, they can raise more equity capital, or raise more debt. The profits need to be disbursed to the shareholders on a regular basis.

        You will be surprised how quickly the corporate purse strings open up to the workers and shareholders, when the managers are at a 60% + tax bracket, and they have to go back to the stock owners for money. When the top tax rates were 90%, the ratio of Fortune 500 CEO compensation to the lowest paid worker in the same organization was 20:1 this is before tax compensation. today it is about 600:1

      • Peter D
        June 23, 2011 at 7:24 pm

        Yesterday I went to see a 10 minutes play by a friend who lives in Newark, NJ. He came here as a small boy in the 50s from the Wales. Always a cheerful person with lots of joie de vivre, he was visibly shaken and his voice trembled as he described how Newark, that looked like undergoing a revival in the recent years, now again was plunging into the abyss of gang violence, with people getting killed every day. The new mayor – Cory Booker – was forced to lay off more than a hundred policemen because there is no money to pay them. And with the economic dire straights everything again goes to hell. His short play was about that and he was hoping to promote it and make people aware of what’s going on.
        This is not a recession – more like economic repression. How people can buy into this idiotic meme of government spending being the problem! A tragedy…

        • beowulf
          June 23, 2011 at 10:27 pm

          Repression is an interesting word to use.

          Thom Hartmann has made the point that compared to today, Americans in the 1960s had much lower income inequality with a much broader middle class. For example, depending on if you adjust by inflation or average wage index, the minimum wages today is $3 to $5 lower today than in 1968 (unemployment was 3.5%).

          There was also a lot more counterculture and student activism, and why not? There were plenty of good jobs available once you were ready to clean up and start working. Hartmann’s theory is that wages have consciously been kept low in part to keep young people financially insecure, so they’re too tired and worried to engage in activism. He’s probably overthinking it, but if that wasn’t the intent behind tthe economic changes since then, its certainly been one result.

  11. TC
    June 25, 2011 at 7:59 am

    Repression.

    I grew up in Highland in, just south of Hammond and southwest of Gary in.

    I am hugely familar with the dynamic your friend describes. My parents grew up in a rich and rapidly growing place. Then the 1970’s happend, and the area was wiped out.

    During the last few years, it had gotten a bit better, but now my parents live in a place that is clearly going downhill again. ugh.

    Repression is a good word. Look at beowulfs comment too. Too many things makes sense from this perspective. Look who benefits from these changes.

  12. June 25, 2011 at 11:35 am

    That’s always the question: Cui bono?

  13. June 28, 2011 at 9:48 pm

    I presume the payroll tax is a federal tax in the US? That makes the payroll tax cut in the US relatively simple. Unfortunately here in Australia, it is a State tax, recent reviews of it has claimed it as efficient.

  14. June 28, 2011 at 11:12 pm

    Sadly like most things in politics, all sides have promised never to alter the 10% rate (read raise). I was leaning towards abolishing it, not that I will ever be in a position to argue for its abolition to be implemented. There’s more complications to the Aust. GST than that but that will do for today. Thanks for the suggestion Beowulf.

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