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Wednesday, August 17, 2011

Response to Nathan Tankus on Payroll Tax Holiday

We got a response from long-time listener to the podcast or reader of the blog challenging our dismissal of the payroll tax holiday as an effective tool for getting out of the mess we're in. We thought we'd bring it up to the top half of the page, and we'll probably do that for other commenters in the future, since we have excellent comments (as far as you know, anyway, since the non-excellent ones don't get through).  We like policy and theory, but beginning next week the podcast is going exclusively to forecasting issues and forecasts.

Here, from Nathan Tankus. (I'll cut it up for readability)

Nathan: In "The Echo Chamber Denies Recovery -- Wow!" you criticize unnamed (I'm assuming Chartalist) progressives for supporting a payroll tax holiday as part of a recovery plan on the basis that the increases in household income will simply be used to pay down debt, won't be very stimulative and the money would be better used for a jobs program. I have a few responses.

Alan: Not Chartalists alone, by any means, support a payroll tax holiday. Even so tedious a conservative as Bill Dunkelberg of the National Federation of Independent Business supports such a thing, because his members -- small businesses -- are hurting for lack of customers. Others include the mainline progressives like Robert Reich and Robert Kuttner. Also folks like James K. Galbraith, though I suspect him of Chartalist leanings. Everybody likes it. [I've asked Nathan to come up with a capsule description of Chartalism for the next round, if there is one.]

Nathan: First, paying down private debt should be government policy (more specifically, reducing the ratio between debt and after-tax income).

Alan: Agreed. But that should be done by writing down the debt, destroying the bad loans, as a nod to historical practice and to generate a little bit of market discipline. Steve Keen estimated that excess private debt in the U.S. (including financial debt) amounts to about 125% of GDP. That's $17 trillion, more or less, in today's numbers. The chances of paying that down in any reasonable amount of time is negligible.

Nathan: Government policy should be aimed at medium term stability (because long term stability is nearly unattainable ala Minsky), not just reducing unemployment (although it should be aimed at that too). reducing aggregate private debt to private income is a crucial part of achieving that medium term stability (tranquility).

Alan: Okay. We'll leave that point for later. Except poor Minsky never expected us to reach this pass. He always thought the government could cover the problem before it got to debt-deflation, largely, as I recall, by policies that protected the middle class and produced inflation.

Nathan: Second, I think you are stuck in the economics of 'macrostatics' (Roy Harrod's term). Multipliers are based on the marginal propensity to spend. That essentially refers to how much of 1 dollar I would spend if you gave me a dollar. the problem with that concept is that it's static. If you give me 1000 dollars and then gave me 1 dollar my marginal propensity to spend that dollar would probably be very different (see higher). Similarly a large reduction in the private debt to after-tax income through a payroll tax holiday may largely go to paying down debt but after the first few thousand dollars, household's marginal propensity to spend would rise precipitately. In addition, since it is a sustained monthly stimulus, it would generate more demand as time went on. On top of that, new hires resulting from a jobs program will not have to pay payroll taxes preventing the usual fiscal drag that has historically occurred after large rises in employment.

Alan: The first part of this is exactly my argument for jobs rather than payroll tax reductions. A job, say $25,000 plus benefits, creates a full spectrum of spending, from rents to groceries to durables to gasoline. A payroll tax holiday goes to somebody who already has a job and will likely not make changes to his spending on a large part of that spectrum. The marginal propensity to spend, you say, would be higher. I say it would be saved or used for debt reduction. In the main, of course. Taxes, of course, and particularly payroll taxes are direct transfers to another's income.  The larger the payroll tax cut, the more would go to consumer spending?  Maybe.  This is a flat tax reduction. The more you make the more reduction you get, and we know that the propensity to save goes up with income.

A secondary effect of jobs is inflation. Job programs would by necessity go to public goods and services. The private sector would likely choke any Congressman who allowed jobs to be used to produce consumer goods. These public goods and services ought to be considered investment goods. As Minsky and Kalecki have shown, it is the proportion of the workforce employed in the investment goods sector that determines true inflation, a general price rise. Now I would say that if all that money the Fed is protecting in the financial sector got a whiff of inflation or the prospect of profit, then there could be the much-feared uncontrolled situation. But if that money is properly destroyed, then we have the Minsky starting point, where capitalists are chary about lending, and it is lending that creates money (in the current framework).

Nathan: Third, Chartalists usually propose payroll tax holidays and job guarantees simultaneously, making your either-or argument moot.

Alan (interrupting): I do believe it is an either-or argument, not because it is not possible, but because the political will to do both will not be there. I could be wrong. I heard Wray talking about a jobs guarantee plan. Minsky proposed one. It is a very good idea.

Nathan: This leads me to question the supreme importance of multipliers in determining what policies we should pursue (ignoring negative spending multipliers). Let's say there are two stimulus programs. One costs $500 billion and has a 2.0 spending multiplier while the other costs $2 trillion and has a 0.5 spending multiplier. They both stimulate private spending by 1 trillion dollars. Should we choose the one with a higher multiplier over the other? Just because it increases spending more doesn't mean it's better. The first one increases private sector propensities to spend while the the second one decreases it. Why should increased savings be considered a bad thing? Both programs stimulate demand equally. I see no reason to pick one over the other purely on the amount of deficit spending it entails when it increases effective demand exactly the same. You may say it involves more bond issuance which sends more income to rentiers. I say that is not a necessity of deficit spending. The Treasury has the authority right this minute to buy back all Treasury debt by getting income moved to their reserve account through the deposit of platinum coins (in whatever denomination, independent of market price) into federal reserve vaults. Ultimately I agree with the Minskyans and Chartalists, stimulus programs are hastily designed and too slow to respond to events. We need institutions that preserve full employment (like the job guarantee) so that policy can be free to be designed around how to reallocate and reorganize the use of real resources, without being concerned about preserving employment and output.

Alan:  Increased savings is a good thing, so long as it is ratified by somebody else making good use of that savings.  Talking past the point a bit, I would say that jobs programs, education and infrastructure spending are targeted at investments for the future. I am going to accept your point about the Treasury because it is true. But who will believe it?  What about the political problem that a majority of the people think the whole disaster now comes because the government just prints money? I sense more support for employment and targeted investment and support for states and municipalities ... Well, step back, I guess we are on the same page there.

The multiplier is important, I think, because it is higher for a reason, that the initial stimulus is passed through several hands. This creates or recreates the web of economic activity that is the core of stability. Notice that the reason the multiplier has deteriorated over the past 40 years is because of the proportion going to debt payments. (I say "note," but that is my theory, untested but logical.)

Nathan: Feel free to use the contents in this email on your blog or in your podcast.

Alan: Done, thank you.  Shoot back if you like, and as I warned you, I am including the collection of excellent quotes which follows your signature:
"When the regulation, therefore, is in support of the workman, it is always just and equitable; but it is sometimes otherwise when in favour of the masters" - Adam Smith

“If our Nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good also. It is absurd to say that our country can issue $30 million in bonds, and not $30 million in currency. Both are promises to pay: but one promise fattens the usurer, and the other helps the people.” -
Thomas Edison

"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" -
Upton Sinclair

"We call our demonstration a campaign for jobs and income because we feel that the economic question is the most crucial that black people, and poor people generally, are confronting." -
Martin Luther King, Jr.

"The voices which, in such a conjuncture, tell us that the path of escape is to be found in strict economy and in refraining, wherever possible, from utilising the world’s potential production, are the voices of fools and madmen."
- John Maynard Keynes

"When I learn new things, I change my mind. What do you do sir?"
- John Maynard Keynes

“Talk about centralisation! The credit system ... constitutes enormous centralisation, and gives this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner-and this gang knows nothing about production and has nothing to do with it."
- Karl Marx

A humane society should not be sacrificed on the altar of narrow economic efficiency." -
Henry Simons

"There are some ideas so wrong that only a very intelligent person could believe in them." -
George Orwell

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