In the comments, Schofield reminds us of the genius of Marriner Eccles.
Here's a quote summarizing Eccles, that Eccles thought was authored by either Stuart Chase or William Truffant Foster.
It is utterly impossible, as this country has demonstrated again and again, for the rich to save as much as they have been trying to save, and save anything that is worth saving. They can save idle factories and useless railroad coaches; they can save empty office buildings and closed banks; they can save paper evidences of foreign loans; but as a class they can not save anything that is worth saving, above and beyond the amount that is made profitable by the increase of consumer buying. It is for the interests of the well to do – to protect them from the results of their own folly – that we should take from them a sufficient amount of their surplus to enable consumers to consume and business to operate at a profit. This is not “soaking the rich”; it is saving the rich. Incidentally, it is the only way to assure them the serenity and security which they do not have at the present moment.London Banker
Testimony of Marriner Eccles to the Committee on the Investigation of Economic Problems in 1933
A large problem is the common confusion of primary or productive investment in real goods and secondary or financial investment that is simply the exchange of already existing financial claims, which is a form of saving rather than investing productively. A lot of people think that they and others are investing in the economic sense, when they are actually saving. The effect of this is asset appreciation as funds are withdrawn from the circular flow of production-distribution-consumption and saved as financial assets. As more funds flow to saving, the price of financial assets rises without producing anything real as a consequence. Higher asset prices can also reduce demand, for example, as housing becomes less affordable due to increasing land rent. Since housing is principal economic driver, lower investment in housing results in economic stagnation or even contraction.
9 comments:
"A lot of people think that they and others are investing in the economic sense, when they are actually saving. The effect of this is asset appreciation as funds are withdrawn from the circular flow of production-distribution-consumption and saved as financial assets."
The above seems to beg the question that if this private saving is a form of taxation and MMT argues that savings come from sovereign government creation of money why doesn't this through-pass cancel out the need for a government to clear a space for its spending? If this is so it begs a second question if private banks need reserves for the operation of the payment settlement system doesn't this alone establish demand for a government's currency? Finally, outside of dealing with abnormal inflation, do such questions attempt to answer Lynn Turgeon's question "Why should we tax people when there is Functional Finance?" contained in the following article:-
http://www.economicpolicyresearch.org/scepa/publications/workingpapers/2001/cepa0212.pdf
"The above seems to beg the question that if this private saving is a form of taxation and MMT argues that savings come from sovereign government creation of money why doesn't this through-pass cancel out the need for a government to clear a space for its spending?"
MMT doesn't claim that savings come from sovereign government. MMT claims that real wealth is produced by productive investment and claims on real wealth are a form of financial saving along with others. MMT holds that saving of net financial assets comes from government, in that non-government originated financial saving nets to zero.
Government only needs to clear a space for its spending when effective demand exceeds the capacity of the economy to meet it. When effective demand corresponds with optimal output at full employment, then government has to tax back what it spends. If inflation threatens then government may need to run a surplus to reduce excessive demand.
If non-government wishes to save to the degree that it reduces effective demand so that optimal output is not met and unemployment rises, then government needs to accommodate increased saving desire by running a larger deficit, which increases non-government net financial assets in aggregate.
Government fiscal policy is pro-active wrt to spending for public purpose and also reactive wrt to the behavior of non-government. Government call always do what is deemed worthy of public purpose if real resources are available, since it creates the funding itself.
However, it has to balance its currency creation and withdrawal to accommodate shifting non-government fiscal choices.
This is the art and science or managing fiscal policy. Conceptually it's fairly simple but accomplishing it is more difficult, like piloting a deep draft vessel coming into port versus maneuvering it in open ocean. There is not much difficulty maneuvering a deep draft vessel in open water but docking it is another matter, usually requiring a harbor pilot and tugs. It's pretty easy to add funds when the economy is slack and needs stimulus but a lot more difficult to maintain price stability at the level of full employment.
That's a reason for employing automatic stabilization. But at peaks it may be necessary to increase taxes and at troughs to increase the deficit. This has be done taking the wind, waves, and tide into consideration, that is, the changing conditions, such as shifts in saving desire and consumption-investment ratio.
If non-government wishes to increase saving then government may have more space to spend and may even have to spend more to accommodate that desire and keep the economy on even keel.
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Why do people save more, that is, why does their liquidity preference shift? Keynes observed that saving is provision against an uncertain future in addition to be a provision for planned consumption or investment. In uncertain time, there is a flight to safety. So saving desire naturally shifts with changing social, political and economic conditions.
In uncertain conditions, people tend to reduce consumption and firms reduce investment, and the income residual is "saving." This will withdraw funds from the circular flow of production (investment, supply)-distribution-consumption, and the economy will contract and unemployment rise if government doesn't offset the increased saving with its own spending.
People also make provision for the future, e.g., saving for retirement.
This kind of saving is "economic."
However, some people also hoard in the sense that they accumulate savings that are neither for security nor planned spending. This is dynastic (inherited) wealth. This is saving that is permanently withdrawn from circular flow.
Since it is cash under the mattress it is uneconomical. It's effect economically is zero since it is inert, sterilized by intent to simply pass on as an endowment to future generations.
MMT is unconcerned with that economically, but it is concerned with it socially and politically owing to the asymmetry it introduces institutionally, which does have an economic effect through application of power.
Why should anyone care if some zillionaires have zillions in their companies' equity in their portfolio, where it sits across generations and is admired but never touched? Of if China accumulates trillions in US treasuries that just get rolled over?
It's not the economic effect, which is zilch. It's the economic power, which is considerable potentially even if not actually used.
Tom let me come at my speculative probing in another way. That much of Neil Wilson’s “Voluntary Taxation”
http://www.3spoken.co.uk/2014/04/taxation-government-investment-each.html
is the same as your “secondary investment”
“A large problem is the common confusion of primary or productive investment in real goods and secondary or financial investment that is simply the exchange of already existing financial claims, which is a form of saving rather than investing productively. A lot of people think that they and others are investing in the economic sense, when they are actually saving. The effect of this is asset appreciation as funds are withdrawn from the circular flow of production-distribution-consumption and saved as financial assets. As more funds flow to saving, the price of financial assets rises without producing anything real as a consequence. Higher asset prices can also reduce demand, for example, as housing becomes less affordable due to increasing land rent. Since housing is principal economic driver, lower investment in housing results in economic stagnation or even contraction."
a direct consequence of government “deficit” spending to permit “net financial asset saving” in the private sector some of which becomes a form of “pass-through taxation” in its own right. If this is accepted then the issue becomes one of quantification to help determine the level of government taxation. This in turn relates to the Per Gunnar Berglund article I referenced as to the form that taxation should take.
I believe that it's not only the amount of taxation but also how it is aimed. Generally, MMT sees taxation as aimed at controlling effective demand. In addition, there is also the issue of taxing away economic rents, which generally raise asset prices faster than goods inflation and which is regarded as "good" economically because it increases wealth. But it does not increase real wealth. Just because the price of a company's stock increases does not mean that the actual productive value of the underlying asset has changed, only the perception of it in the eyes of the market (expectations). Similarly with RE, where land rent increases the value of the property irrespective of improvements.
This then increases the power of asset owners relative to those who do not own assets or significant assets, and it makes both housing prices more expensive (due to land rent) for workers whose incomes may not be increasing correspondingly, requiring greater debt financing, and also driving up rental expense for renters.
As return on productive investment falls with decreasing demand for product, then the consequence is increased saving in unproductive rents or investment where the returns are higher, which may explain why productive investment is lagging in the US where effective demand is lagging and financial investment has been increasing, e.g., in equities, while US productive investment has migrated to the emerging world.
The MMT policy prescription for offsetting increasing saving desire also has to address the issue of where the funds are flowing and what the full consequences are. Yes, effective demand increases and the economy performs better, but inequality may increase too if economic rent is not also addressed in fiscal policy.
With more regressive tax policy where the workers pay significantly while economic rents are privileged rather than penalized, the flow is to the top. The result is trickle down, where just about everyone is somewhat better off but the top of the town reaps the bulk of the effect of fiscal policy through rents. And as the rich pull further ahead they not only spend more but also save more since there is a limit on consumption even of luxury goods, so inequality compounds, and elite power and privilege grow. The result is a threat to democratic governance.
So saving may be "voluntary taxation" in a sense, but practically speaking, a lot of what gets saved is economic rent, which is always at least partly enhanced by government policy. So we have to look the internal dynamics of the flows and their effects in addition to just sectoral balances in the the income-expenditure model.
The was the point that Keynes was making in saying "euthanize the rentiers." He was not against saving as provision, that necessary and prudent economically, but hoarding, and hoarding is almost always traceable to economic rents. This is the Achilles heel of capitalism and needs to be modified to save capitalism from itself, as Keynes realized. The "classical" version is to aim at all sectors running surpluses since saving is good, which is numerically impossible. The mercantilist view is that this is to be addressed through net exporting, which leads to economic imperialism and colonialism, since not all countries can be net exporters simultaneously.
Whole heartedly agree. Picketty would now appear to have added a great deal of weight to Keynes call to "euthanize the rentier" which makes it difficult for MMT and especially MMR if it wants to fully "do policy" to avoid taking your "secondary investment," Neil Wilson's "Voluntary Taxation" into account. More precisely it could be said and perhaps the term coined that the implications of "euthanesiac investment" must be explored. This I think would help meet Dan Kervick's objections to MMT having a certain toothlessness when it came to "doing policy."
I had two key realization about economics and policy. The first, arrived by questioning Warren Mosler at his blog, is that fiscal affordability is never the issue, only availability of real resources to put to use. So it is always possible to do policy if the real resources are available.
The second was about economics and power, and that wealth equals power in a capitalist context. This was gleaned from reading Michael Hudson and his view that highly asymmetrical wealth, hence power, accrues chiefly from economic rents — land rent, monopoly rent, and financial rent.
Putting these insights together it became clear to me that while policy could be accomplished through MMT in such a way as to overcome the trifecta of growth, employment and price stability, offsetting non-government saving desire with deficits would also result in asymmetric wealth and power that would firmly establish oligarchy and undermine liberal democracy unless economic rent was addressed through fiscal policy, institutional reform, elimination of perverse incentives, and cultural change through education.
This would involve taking on the interests that are propagandizing for institutional asymmetry that favors capital accumulation through economic liberalism over participatory democracy based social liberalism. It is a conflict within liberalism about different views of liberalism.
Capitalism is a socio-economic approach that favors money and machines over people. Democracy is government of the people, by the people, and for the people. These political views are antithetical. Under capitalism, while all have negative freedom (more or less), only a few of have positive freedom that comes from means.
Piketty's analysis substantiates this, including the policy view of taxing away rents. However, I don't think that this is a permanent policy solution. If capitalism is left in place, they'll be baaaack!
The system needs redesign rather than reform. As long as money and machines are set before people, the bias will be be toward asymmetry of wealth and therefore power. Neither trickle down nor redistribution is a solution, and history shows that if power is not shifted, then reforms will be reversed over time.
It is often said that the problem of main stream economics is that it has little role for money, how it’s created and used, and this mind-set or belief system would appear to be true and lies at the bottom of many readers’ comments on articles in the media and especially negative response to MMT arguments. The big assumption that money has “neutrality” especially in its use and the challenge to that assumption lies at the heart of Keynes call to “euthanize the rentier” and in its round-about way Piketty’s “CITT-FC” book. The effect of “economic rents” or “financialized money” is I believe an issue now ripe for MTT to push more strongly because there can be only one possible antidote which is carefully designed “market intervention” to challenge the mindless primitivism of “market fundamentalism” and the core belief in markets self-equilibrating which is, of course, another way of saying that the use of money also does too. Of course, “market intervention” when you bother to carefully think about it lies at the heart of MMT theory.
The solution you seek, Tom, sounds more like a reversion to aggregate sanity, than a reform.
The timeless logic of social species - nay, of "reverse entropy" itself - is that it is far more valuable, over time, to hoard coordination methods than to hoard static resources.
Snails, for example, hoard static assets.
Army ants, for another example, (and homo sapiens too) hoard and accumulate coordination methods. Which would you rather emulate?
ps: Rich people, like snails, can get carried away, uselessly hoarding physical assets.
http://www.dailykos.com/story/2012/09/18/1123429/-An-80-year-old-solution
ps: ps: Capitalism is merely a set of accounting methods used by a given human culture. Any set of methods can be made to work by a sane society. The underlying issue is whether there is enough volume & distributed quality (including tempo) of public discourse to produce sane use of current methods.
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