Tuesday, November 27, 2012

Steve Roth — Modeling the Wealth, Income, and “Saving” Effects of Redistribution: More is Better?

I’m rather taken with this spending + surplus = income dynamic approach to modeling. (But I would be, wouldn’t I?) I’d be delighted to see how others might analyze and display results using various parameters, and how they might adjust, improve, or dismantle the model. In particular: are there obvious, gaping flaws here?
Whaddya think? 

I take issue with is the statement about "redistribution." 

"Some percentage of the rich person’s wealth is transferred to the poorer people every year (by the ebil gubmint man)."

There is no inherent connection between taxing and spending for a currency sovereign, nor should their be. Expenditure is not funded by taxation. There is nothing preventing transfers without offsetting taxes.

Increasing spending power at the bottom increases aggregate demand and flow. Decreasing the stock of wealth at the top decreases the political and economic power of the wealthy without affecting flow in the economy.

Following the principles of functional finance, I would use taxation, first, to control incipient inflation and secondly, to discourage negative behavior such as rent-seeking.


3 comments:

Dan Kervick said...

There is no inherent connection between taxing and spending for a currency sovereign, nor should their be.

While I understand the point, Tom, I think there is still a deep and fundamental connection. It might not be the kind of connection that people are in strict speech wont to call "funding", and the connection might not be "inherent", but there is a very important and fundamental connection nonetheless.

Any sound macroeconomic policy has to attend to both the spending level and the level and forms of taxation. If an expansion of the deficit is called for, then spending can and should be increased more than taxation. If in some future overheated economy a contraction of the deficit is called for then taxation has to be allowed to catch up with spending. Spending can't simply float free of taxation as though they were two entirely disconnected spheres of policy.

If government has public purposes it wants to achieve during a given budget period that require spending at a level X, and if the optimal size deficit in the same budget period is Y, then the optimal level of tax revenues is X - Y. The policy maker can't just say, "La-di-da, the tax revenues can be arrived at arbitrary; they can even be zero."

Now, even though policy rationality requires attention to the levels of both taxes and spending, one might decide that we shouldn't say the taxes are "funding" the desired spending level. Maybe they are just "enabling" the desired spending level or "creating the policy space for" the desired spending level. And while that is literally true, insisting on the point as though it's a big deal seems a little bit too pedantic and fussy to me.

Similarly, if tax revenues and spending levels are set so that some people are big net losers of monetary assets and many others are (perhaps somewhat smaller) net winners of monetary assets, then it seems accurate to me to say that the system is redistributive, even if it is true that the money that is spent is not literally the same money as the money that is taxed.

By analogy, suppose you had a national water system in which water was pumped into household water tanks from a central national source well, and water was also sometimes pumped out of these tanks into a different national disposal well. If a sound national water policy ends up draining water from some people's tanks and adding water to other tanks, then it is redistributive, even though the water that is drained is not literally the same water as the water that is supplied. It is redistributive because the government alters the initial distribution and replaces it with a different distribution, and there are net winners and losers.



paul said...

"There is no inherent connection between taxing and spending for a currency sovereign, nor should their be."

This is one of those dynamics that appears one way but is in reality something else altogether. It appears as though taxes fund spending when in fact it doesn't.

If I recall from my reading of the history of the progressive income tax, taxing the top end at a higher rate keeps the top from accumulating disproportionate wealth and thus limits their power. It is unrelated to how much we spend at the other end.

The balanced-budget "deficit-is-the-devil" framing may have resulted from talking points that discouraged money printing dispensed by Bob Roddis' great-grandparents.

Not much has changed over the past 100 years.

Tom Hickey said...

I think that the point of the MMT approach of sectoral balance analysis determining the size of the deficit for a FE budget and functional finance to achieve it is that there is no necessity to tax in order to spend. Once the size of the deficit is determined then some mix of taxation and spending will be required. That's a political matter as well as an economic one in a democratic country. What economics can further add is matters like multipliers, issues of negative reinforcement through tax policy that may be advisable.

So, of course, taxation and expenditure are joined at the hip systemically. There may different configurations to be debate, however, and different ideological preferences may come into play — but the basic principles are clear to everyone involved. Then the issue is arriving at the desired goals effectively and efficiently. There may be only one optimal way of doing this in specific cases, but maybe there are several options.