Home > Main > The TC Rule and stuff that’s easy to see

The TC Rule and stuff that’s easy to see

August 4, 2011

I’ve been meaning to write a post about this for a long time, and here Matt Yglesias beats me too it.

One reason to use inflation and unemployment as the inputs to any rules for fiscal policy is because they are easy to measure.  We can get robust measures of inflation and unemployment in real time.

That’s one good reason to use the TC rule for fiscal policy.

The TC rule uses inflation and unemployment as inputs to get a recommended level of fiscal policy.   The target of the fiscal policy would be the payroll tax.

It turns out some professional economists think the same thing.

I’d say another reason to use unemployment as a guide to policy is that there’s an ultimate and easily knowable limit.  At some point, there isn’t any more people to put to work.  You have at least one absolute known – you cannot put more people to work than people that are alive.

I consider this to be like the theory of relativity using the speed of light as the known rather than an arbitrary zero as the known.   We can know the maximum of employment, but knowing the “equilibrium” point of employment is probably impossible at any given moment.

P.S. I haven’t gone after the equilibrium real rate of interest yet like I promised.

But one of the core elements of the critique is that we can barely observe it.  it’s impossible to see in real time – you cannot use it to take action today.  Even in the future, it’s hard to determine what it was in the past.

If we can’t see the equilibrium real rate, what can we see?  Unemployment and inflation.

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  1. wh10
    August 4, 2011 at 5:38 pm

    Yes! Still waiting for the equilibrium real rate post! I think I had some questions on that a while back…

  2. Peter D
    August 4, 2011 at 10:49 pm

    Have you noticed this from Warren:

    Looking back at past cycles it seems the support from private sector credit expansions that ’shouldn’t have happened’ has been overlooked, raising the question of whether what we have now is the norm in the absence of an ‘unsustainable bubble.’ For example, would output and employment have recovered in the last cycle without the expansion phase of sub prime fiasco? What would the late 1990’s have looked like without the funding of the impossible business plans of the .com and y2k credit expansion? And I credit much of the magic of the Reagan years to the expansion phase of what became the S and L debacle, and it was the emerging market lending boom that drove the prior decade. And note that Japan has not repeated the mistake of allowing the type of credit boom they had in the 1980’s, accounting for the last two decades of no growth, and, conversely, China’s boom has been almost entirely driven by loans from state owned banks with no concern about repayment.

    So my point is, maybe, at least over the last few decades, we’ve always needed larger budget deficits than imagined to sustain full employment via something other than an unsustainable private sector credit boom? And with today’s politics, the odds of pursuing a higher deficit are about as remote as a meaningful private sector credit boom.

    It is subtly different from the usual MMT message, I think. I think Warren is saying that credit expansion – that which supports AD and makes us into debt slaves in the process – could have been avoided with the correctly sized NFA injection from the govt (just dump the stupid scary term “deficit”!) + correct regulatory and tax structure. Tax structure might be especially important. Seems to me more and more that we don’t need income taxes at all – we should not discourage labor, instead we should only have taxes on property and rentiers (shout out to Tom Hickey). We’ve been doing it all wrong all this time!
    Mosler should be awarded the Nobel prize freaking NOW!.

    • August 5, 2011 at 12:22 am


      I’ve started using Steve Keen’s terms.

      Fiat money for vertical financial assets and Credit money for horizontal financial assets.

      So Bank Reserves, Government bond, coins and notes in a sovereign nation are Fiat, but everything else is really Credit.

      What we really have is a small Fiat money system tacked on the side of a huge Credit money system.

      And if you’re in Greece or Italy your government is just another actor in the Credit system.

      • TC
        August 5, 2011 at 7:42 am

        Neil – nice one. I missed that in Keen. I’ll start using the same.

    • TC
      August 5, 2011 at 7:47 am

      Thanks for pointing this out. I’ve thought the same things about the 90’s and 2000’s for a while but the S&L idea is new and probably right.

      Lots of this goes back to that post I did about Nick Rowe – some sectors of the economy demand bubbles because they have the potential to grow at high rates. But the idea that our economy has been in low growth mode without the bubbles is a good one.

      Also, I think you’re onto something. Warren is a clear thinker, but within the world some thoughts need to be teased out more because they are so new. This idea is that we’ve needed more spending to allow the economy to grow at the rate it demands is very strong.

  3. beowulf
    August 5, 2011 at 10:31 am

    Certainly the demand leakage created by the trade deficit shouldn’t be ignored. If we’re not going to zero it out with tariffs (or w/ Warren Buffett’s cap and trade “import certificates”), the trade deficit must exceed the budget deficit to avoid draining domestic private sector savings.

    This happened the last two times economy approached full employment, in both 2000 and 2007, budget deficits (actual surplus in 2000) were smaller than trade deficit, and within a year the economy had tipped into a recession.

  4. beowulf
    August 9, 2011 at 1:44 am

    “The TC rule uses inflation and unemployment as inputs to get a recommended level of fiscal policy. The target of the fiscal policy would be the payroll tax.”
    Yup, that sums it up. Targeting GDP would lead one to think every day is recovery summer. Real GDP almost back to pre-recession peak (of course population and productivity gains have pushed potential GDP even higher). But even as GDP grew (and clearly this is what White House focused on), unemployment has kept treading water.

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