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Orszag supports the linking payroll taxes to unemployment rate – aka the TC rule

August 9, 2011 8 comments

Peter Orszag – the former economic advisor to President Obama – really must like the TC rule.

He keeps bringing up linking the payroll tax to the unemployment rate. He talked about it in congressional testimony in June.

The Traders Crucible was the first to propose linking spending to the level of unemployment in April of 2011.  Beowulf – aka one of the guys who got the Trillion Dollar coin into the mainstream press  – and I started linking the level of spending of the TC rule to the level of payroll taxes just a few days later.

Orzag proposes a system of reducing or increasing the level depending on how much unemployment increases or the absolute level.

I think the TC rule is simpler.

Here is the TC rule again:

Spending Deficit =

1.8(current unemployment %-unemployment target %) + (target inflation-current inflation) + Population Growth = %G

I certainly hope some sort of way to link the payroll taxes to unemployment levels gets talked about all over the place.

I talked about why linking the level of payroll taxes to the unemployment rates hits a sweet spot of effective demand that’s really, really hard to target a while back.

The TC Rule and stuff that’s easy to see

August 4, 2011 7 comments

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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