But this massive spending is offset by a number of crucial revenue measures: The “Back to Work” budget increases taxes on millionaires and billionaires, taxes investments at the same level as wages, closes corporate tax loopholes, enacts both a financial transactions tax and a carbon tax, and introduces both a public option and government negotiating for drug prices to Medicare. In addition, the budget finds savings by cutting Pentagon spending back to 2006 levels.
In short, they sketch out the opposite vision of Paul Ryan: reduced military spending, robust public investment and a strong safety net.
Moreover, the budget actually reduces public debt over the next ten years....The Nation
A Truly Progressive Budget Vision
George Zornick
Deficit doves and debt hysteria.
12 comments:
The CPC does not consult with a single progressive economist, instead relying on Neoliberals like Jeffrey Sachs and the Pete Peterson funded Economic Policy Institute.
Contrary to MMT, they claim they can create jobs by reducing the deficit.
There are some good items in the CPC budget but the overall plan is not MMT-compatible.
"Contrary to MMT, they claim they can create jobs by reducing the deficit."
This raises an issue that's a little hairy for me.
Jobs are created as a result of the FLOW of money, not necessarily the STOCK of money, right?
For example, hypothetically everyone's bank could be credited with $1 million and this wouldn't in and of itself create jobs. What creates jobs is sufficient and continuous spending. The Flow.
If that true, technically we probably have plenty of Dollar-balances in existence to create a sufficient flow for plenty of job creation, without having to increase the deficit.
The problem is we don't have a mechanism to make that money flow. Individual people and businesses control the flow of their own dollars. We can't force them to spend. Or can we?
I completely agree that we ought to be increasing the deficit right now, but when I think about the 'big picture' I'm left with the feeling that the problem isn't that there isn't already enough money in existence, the problem is that money is flowing enough. (e.g. too much in too few hands).
It seems like the bigger the gap becomes in wealth inequality, the larger our deficits must become in order to keep a sufficient flow.
Would it be accurate to say that a more equal income distribution needs a smaller deficit in order to maintain sufficient flow?
Of course it is possible to increase employment without increasing to the deficit and adding to the debt, if that the objective, by targeted spending offset by targeted taxation, since it is about directing flow.
The MMT point is that it is not necessary to fund spending with taxation under the general case in a non-convertible floating rate system. But the US is a special case due to politics, so it may be necessary pragmatically, in that it's about politics in addition to monetary economics.
The problem with the progressive position is that they don't understand the monetary economics, so they are stabbing in the dark economically and just doing the partisan politics.
So we have three approaches to the budget — Ryan's, the administration's and the Progressive caucus's — and all of them are based on the politics and none are based on the economics.
JK,
I think you are right that an increase in the velocity of money in circulation could produce growth, even if there was no net inflow from the government sector. But I think that is why MMT emphasizes "savings desires." If people in the aggregate were willing to reduce their saving significantly and increase their spending on goods and services, you could get a spurt of growth. But it is probably not sustainable for an extended period, and its pretty hard to do that kind of mass psychological engineering of the population. I suppose the President could say "go shopping" like GW Bush did, but I'm not sure that would be effective.
I think it is necessary to disaggregate saving desire — whose saving desire, the top of the town or the middle class, whose "saving desire" is often deleveraging by paying down excessive debt.
Therefore, increasing taxes progressively hockey stick style could decrease fiscal injections just going directly into "safe assets" while increasing fiscal injection at the bottom and middle can facilitate he desired saving/deleveraging of the lower four quintiles.
Look at what happened to the recent outsized deficits. They went right into "safe assets" with little flow through the economy and therefore little effect on employment or the balance sheets of the four lower quintiles. In fact, most of it ended up in the coffers of the 1%. Dumb use of a deficit.
Jk,
This is where Dan's Public 'Enterprise' has to come in...
Rsp
Good thoughts all.
I guess what I'm getting at is the role wealth/income inequality plays on the velocity of money. Does anyone know if the velocity of money was higher 1040s-1970, the time when our wealth/income gap is considered to have been much narrower?
(I'm aware our current account balance was quite different then too)
Maybe this would be a good area of research? Any know if much research has been done on the velocity of money?
MattFranko, I haven't read Dan's Public Enterprise piece/series. I'll check it out.
JK, the velocity of money is pro-cyclical. As effective demand increases the economy expands and this is autocatalytic but not infinitely so, e.g., since incomes may not keep pace with credit expansion. "Animal spirits" result in irrational exuberance at tops, and people get over extended. If the cb steps in at this point and starts raising rates to "take away the punch bowl," asset markets react, the wealth effect decreases and people start feeling poorer.
When the economy begins to contract due to falling effective demand, then the tendency is toward greater saving as people retrench and pay down excessive debt accumulated in the boom times.
At this is point effective demand can contract quite rapidly, again due to autocatalysis of "animal spirit" that become depressive instead of over-exuberant. this result in unplanned inventory accumulation, and cut backs, increasing unemployment.
Government can break the fall due to an overly abrupt reversal of animal spirits and the corresponding fall in effective demand by increasing the velocity of money by fiscal injection where it will be spent rather than saved. If deleveraging is also an issue, then enough has to be injected to cover that and add to spending in order to prevent to great a disinflationary trend becoming debt-deflation and liquidation that destroys capital unnecessarily, as well as resulting in a lot of social problems.
"Government can break the fall..... by increasing the velocity of money by fiscal injection where it will be spent rather than saved."
Tom - I think saving and spending are intrinsically linked. A ballooning budget deficit in times of recession provide the risk free Treasury debt for people looking to de-leverage and save. After that desire has been more or less sated, people begin to spend, borrow and take risk again and in this way the credit cycle and economic expansion begins anew.
I would make the deficit much bigger by going to 10% flat tax on earned income, interest income, dividends, capital gains, the estate tax, which is a stiff undertaking, corporate tax and social security payroll tax with 5% paid by employee and 5% by employer and at the same time eliminate the income ceiling applicable to the SS payroll tax. Most deductions would be eliminated except for generous standard deductions that would leave a family of four earning $50K having to pay the 10% rate only income over and above $50K. It would be simple, clean and overall very progressive. It could get political support from the left, right & center.
If this kind of tax reform expanded the federal budget by $1 trillion, I firmly believe that it would produce much more robust economic growth than if the central planners in the federal government spent the same amount on various programs.
Velocity as rate of flow relates to flow kind of like amperage to electric current or pressure to liquid flow in a pipeline. It's a measure of the strength of the flow.
If govt spends but the spending goes into savings quickly, then there is little turnover resulting. But if the spending is such that it flows through many hands (accounts) then velocity increases.
Government can amp up the flow by targeted spending and prevent hoarding by targeted taxation. Both of those affect rate of flow. It's not just the right size deficit to offset saving desire that is resulting in demand leakage.
Economists measure this with multipliers.
Tom - My point is that the individual decisions made by millions of taxpayers out there are far more likely to allocate capital efficiently and garner a better return on investment from a budget deficit than government central planners.
It's not just about the FLOW of money as JK suggests above, but also about INCENTIVES. All else being equal a higher after tax return on capital increases incentives to work, save and invest. This is an area where Supply Siders and MMT should be able to agree on. As Warren Mosler often says: "For the size government we have, we are grossly overtaxed."
My point is that the distribution of the deficit economically is iaw multipliers to increase "bang for the buck" thru velocity. I don't believe that MMT economists would change that approach. The deficit involves expenditure and expenditures are specific transactions. This is how the targeting comes in. Same with tax relief.
Tax relief at the top has a low multiplier counter-cyclically since the wealthy tend to save in financial assets then instead of investing. So deficits target to the the top through tax relief or subsidies will go straight into tsys without substantially increasing flow.
Of course, political considerations overrule economic ones, so lot of the bang for the buck with deficits in downturns is wasted on increasing savings of the already wealthy.
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