Tuesday, August 30, 2011

Bizarro economics courtesy of Yale: The "balanced budget stimulus."



This ranks right up there with "contractionary expansion."

Yale professor Robert Shiller, talks about how we can solve our economic problems by raising taxes then spending that revenue.

"In reality, stimulus can easily take a balanced budget form: The government can simply raise taxes and raise expenditures by the same amount."

Ummm...isn't that just redistribution of income? Net change is zero?

Okay, maybe it could work by recycling the savings of the wealthy (presumably, they are the ones who'd be taxed) into greater levels of consumption. But call it what it is...income redistribution.

The problem is, no new net financial assets are created and that's what the non-government is desiring to accumulate right now. It's why interest rates are so low and why demand for Treasuries is so high.

Deficit spending facilitated by higher public debt issuance does the same thing only better. It recycles savings into higher consumption AND creates net new financial assets.

22 comments:

Tom Hickey said...

This is not the way to deal with the situation now, and Congress would never buy into redistribution in any case.

However, to address the overarching problem of global demand scarcity that is squeezing the global economy, the issue of increasing inequality of income and wealth distribution has to be dealt with.

We can either have a growing pie by giving everyone a larger slice or purchasing power, or a shrinking pie by giving only a very few a bigger slice.

CybrWeez said...

Not the best solution, but wouldn't it be somewhat effective? The debt is amongst middle and poor classes, so income redistribution would have a positive effect on economy, taking money from rich, which isn't being spent, recycling to those who will spend.

Not passing judgement on such a solution, but just that it would have a positive effect, wouldn't it?

Mike Norman said...

A little income distribution wouldn't be a bad thing at this point, however, it's never going to fly politically.

Clonal said...

Also a related article by Greg Hannsgen from the Levy Institute - How many Social Security checks fit inside one tax break?

Quote:
The Congressional deficit reduction committee has numerous government programs on the chopping block, and we may soon see some very severe spending reductions. The committee must agree upon, and Congress must pass, $1.2 trillion in spending cuts and/or tax increases by November 23, or automatic, across-the-board spending cuts will go into effect in 2013. I hope that cuts to Social Security are not among the committee’s recommendations, but fiscal hawks are beating the drum harder than ever with their insistence that spending on the program must be reduced soon.

The Social Security issue came to mind a week or two ago, when I read James B. Stewart’s article in the New York Times on possible changes in the way the federal government taxes certain kinds of investment income.

CybrWeez said...

Mike, it seems nothing that will help average American is politically viable at this point.

TomatoBasil said...

If you don't spend, we will take your money and spend it for you!
Good way to get people to hide money in their mattress.

Clonal said...

TomatoBasil

Good way to get people to hide money in their mattress.

Solution for that abolish coinage and currency, and have state issued debit cards -- already coming for UI in California.

Anonymous said...

Seems our economic system is a circular system that spends and taxes and might be considered a perpetual motion machine except for one thing. The fuel that it runs on is population growth. Maybe that is why you see so many ads with an underlying sexual tone.

Mike Norman said...

TB:

It's the wrong way to look at it. It's more correct to say that policy will be used to restore middle class incomes in proportion to the degree that upper class incomes were allowed to grow.

Mike Norman said...

Tom,

I agree that redistribution is not the preferred way to deal with it under MMT, but politically there is nothing MMT that is about to happen. (Even the payroll tax cut is probably not going to be extended.) So it's a choice. I'd much rather see tax hikes on the rich recycled into higher consumption (via some distributive policy) than more tax cuts for the rich that merely leak out into savings or destructive financial market specualtion.

Calgacus said...

Here's a billyblog on balanced budget multipliers/stimulus, also in response to an article by Shiller: What is the balanced-budget multiplier? Mitchell points out that a major problem is ignoring the external sector, foreign savings. This was ignorable in the USA of decades ago, but not now. This leakage will cause much less bang for a balanced budget buck.

beowulf said...

"Mitchell points out that a major problem is ignoring the external sector, foreign savings. This was ignorable in the USA of decades ago, but not now. This leakage will cause much less bang for a balanced budget buck."

So target the leakage with a Pigouvian tax. Replace the $600B trade deficit with a $600B payroll tax cut (half that if oil is excluded at first).
We believe that a fair way of distributing the benefits of balancing the current account
deficit would be to auction certificates directly to importers, rather than [per Warren Buffett's plan] granting them
without charge to exporters; the government would then use the auction proceeds to
offset reductions in payroll taxes..."

"The Buffett Plan for Reducing the Trade Deficit", Levy Institute
http://tinyurl.com/42eeutm

Laura said...

What, if anything, would be politically viable? Higher sales taxes? Hand wringing?

beowulf said...

Shiller's head is definitely in the right place. He mentions something interesting...
My colleague Martin Shubik, now an emeritus professor of economics at Yale, has proposed... a Federal Employment Reserve Authority, a permanent new government agency that would continually be in the business of creating a list of public works projects that are ready to go should there ever be a steep economic downturn."
http://www.tnr.com/article/economy/94275/shiller-infrastructure-debt-stimulus

Riddle me this, couldn't the Fed create a 13(3) lending facility open to any and all State in the Union? If the Fed lent at a fixed 0.25% rate for infrastructure projects with the repayment term tied to project design life (75 yrs for bridges, 20 to 40 yrs for highways), it would be off-budget for Tsy and barely on-budget for states, who all use capital budgeting for infrastructure loans.

Dan Kervick said...

I understand that the optimal MMT approach is to expand the deficit so as to put income into the private sector without taking any wealth out, but I really wish you guys wouldn't speak so disdainfully of wealth income redistribution. Taking surplus savings out of the savings-glutted part of the economy - where they are doing little of benefit other than collecting dust and miniscule rates of interest in their mattress-like savings instruments - and injecting them into areas of the economy where they will be used for both consumption and genuinely productive investment, could be very, very helpful.

One of the reasons our economy is broken, in my view, is that so much wealth has been extracted and bled out of the bottom 90% that the top-heavy economy can no longer sustain healthy consumption and investment levels. We're like a company that has poured all of its profits into frippery for the executive suite and is now falling apart in every other department, and whose executives have so much extra compensation and cash that they stuff it into suit jacket pockets and forget about it.

beowulf said...

"but I really wish you guys wouldn't speak so disdainfully of wealth income redistribution."

I take your point, the growth of high frequency trading makes a pretty strong case for transaction taxes. Actually, the optimal negotiating stance (politically and policy-wise) is to trade away "taxing the rich" for increased govt spending. At lunch today, I posted something on using a net asset tax (that'd actually collect err, about $8 Billion a year, a bit less than alcohol excise taxes) to fully fund the $1 trillion a year cost of universal Medicare coverage.

How that's even possible... well you'll have to click through (OK, the nickel version is it takes advantage of a bug in the CBO's budget scoring model).
http://correntewire.com/taxes_are_the_bait_spending_is_the_hook

Mike Norman said...

Laura,

As long as policymakers and a vast majority of the public believe that taxes fund spending and/or that government spending is "money printing" that debases the currency, then the politically "acceptable" policy options will ALWAYS be some form of income distribution. Unfortunately, for the past 30 years, it's been from teh bottom to the top and that has accelerated at a frightening pace the past 11 years.

Clonal said...

Beo,

Brilliant! But I have another problem to solve for you. How would you legally get out of the private debt mess that we are in. I alluded to it here in my comments on banking reform. The problem of private debt is discussed at length by Art Shipman here and in my comments to him on another thread here.

Art discusses the problem of Private Sector endebtedness at length in his blog. I think he is right, just as Michael Hudson is right, on blaming the current mess to a large extent on the private sector having a huge debt burden.

In other words, how do you deleverage the banks, declare a debt jubilee without moral hazard, and do it legally! I have some ideas, but I would love to hear your thoughts!

beowulf said...

Clonal, not sure what the solution is other than a Fed 13(3) program for current and new mortgage at, say 2% fixed for 30 years, which will help performing mortgage holders, nonperforming mortgages will have to be marked down. This will wipe out banks left and right and while the FDIC has a credit line with Tsy of $500 billion, that won't be nearly enough. Besides since Tsy is subject to the debt ceiling, they don't have $500B to spare (err, unless they start minting jumbo platinum coins to pay down public debt).

The FDIC has authority to issue its own bonds through the Federal Financing Bank (the Fed treats them like Treasuries). Its bond limit is cash on hand + $500 billion.
However, because Tsy has the discretion to deposit jumbo coins with them (US coins = vault cash), FDIC the bond limit is actually infinity + $500 billion.
"When designated for that purpose by the Secretary of the Treasury, the Corporation shall be a depositary of public moneys... and may also be employed as a financial agent of the Government."
http://www.fdic.gov/regulations/laws/rules/1000-1500.html

JKH said...

Thoma on the same thing:

http://economistsview.typepad.com/economistsview/2011/08/the-balanced-budget-multiplier-could-create-jobs-without-increasing-the-deficit.html

Note Rob Parenteau's comment there:

http://economistsview.typepad.com/economistsview/2011/08/the-balanced-budget-multiplier-could-create-jobs-without-increasing-the-deficit.html#comment-6a00d83451b33869e20153912e0889970b

And Thoma's rather typically MMT-paranoid response to it.

I think Thoma's explanation conflicts with Bill Mitchell's.

Thoma's looks wrong to me.

But then I thought Bill made an error as well.

Anonymous said...

You sound like another Peter Schiff wannabe. Get some original ideas wanker

Tom Hickey said...

Inappropriate.

And doing so in an anonymous post is especially bad form.