An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
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Tuesday, July 31, 2012
Steve Randy Waldman — Trade-offs between inequality, productivity, and employment
Good article. Thanks, as always, for the reference.
Waldmann sneaks in his usual false equivalence between monetary and fiscal policy, however. IMO, fiscal policy is much more powerful, and I think the examples he uses make that clear. Does anyone think that monetary policy was an important part of the WWII dynamic? No, it was massive and direct government mobilization of resources - fiscal policy - that led to greater equality in the U.S.
Interesting perspective on the motivation of the very wealthy and "insurance". All the more reason we in the middle need to got our policy act together. But do enough of the middle have the capacity to figure it out? Ah, there's the rub. It seems to require a major crisis to get the point across.
"Does anyone think that monetary policy was an important part of the WWII dynamic?"
The US govt was running 20% to 30% of GDP deficits (equivalent to if we ran $3 trillion to $4.5 trillion deficits) for several years running funded at an average interest rate of less than 1%.
This was due to the Fed agreeing to peg rates (by buying without limitation in the secondary markets). Granted, its not like the Fed governors were flying B-29 firebombing missions with LeMay but certainly monetary policy was part of the war effort.
good point... I think Bill Mitchell has termed "savings" as something like: "a hedge against uncertainty across time"... which may be at some level what SRW is trying to drill down to here....
"So folks were attracted to buy the War Bonds at the generous yield of 1% and therefore the govt was able to fund the war efforts?"
It was Keynes's brainstorm that a compulsory savings plan would draineAD from an overclocked wartime economy just as effectively as the equivalent amount of taxes. The difference being, the worker would get the money back after the war (when the economy could use the additional AD anyway). US War bonds were a form of compulsory savings in all but name (the 8 war bond drives made workplace and/or neighborhood participation nearly universal). Most workers had the the money deducted along with the new FICA and (even newer) income tax witholdings.
So don't think of them of as 1% bonds, think of them as refundable payroll taxes. :o) And sometimes I glean insight from Bugs Bunny instead of Marriner Eccles. http://www.youtube.com/watch?feature=player_embedded&v=_TUPUbvO0eU
"The US govt was running 20% to 30% of GDP deficits (equivalent to if we ran $3 trillion to $4.5 trillion deficits) for several years running funded at an average interest rate of less than 1%. This was due to the Fed agreeing to peg rates (by buying without limitation in the secondary markets)." [Beowulf]
Thanks as usual for the information. I've certainly learned a lot from your posts, and this is no exception.
I still think Waldmann is way off base in his discussion of fiscal and monetary policy, and that he engages in gross false equivalence. In Waldmann's WWII example, as noted by Beowulf, the U.S. ran fiscal deficits 3 times the current size (in relation to GDP). The Fed basically kept interest rates low, which is the one thing they control. The obvious driver of the transformative change described by Waldmann was fiscal policy. Monetary policy didn't screw it up, but that's about it...
Just want to add to my last post a bit. We have < 1% interest rates now. To say that monetary policy generated transformative change in WWII via 1% interest rates would be ludicrous. It is obviously the fiscal deficits that drove the change...
very interesting article
ReplyDeleteGood article. Thanks, as always, for the reference.
ReplyDeleteWaldmann sneaks in his usual false equivalence between monetary and fiscal policy, however. IMO, fiscal policy is much more powerful, and I think the examples he uses make that clear. Does anyone think that monetary policy was an important part of the WWII dynamic? No, it was massive and direct government mobilization of resources - fiscal policy - that led to greater equality in the U.S.
Interesting perspective on the motivation of the very wealthy and "insurance".
ReplyDeleteAll the more reason we in the middle need to got our policy act together. But do enough of the middle have the capacity to figure it out? Ah, there's the rub.
It seems to require a major crisis to get the point across.
"Does anyone think that monetary policy was an important part of the WWII dynamic?"
ReplyDeleteThe US govt was running 20% to 30% of GDP deficits (equivalent to if we ran $3 trillion to $4.5 trillion deficits) for several years running funded at an average interest rate of less than 1%.
This was due to the Fed agreeing to peg rates (by buying without limitation in the secondary markets). Granted, its not like the Fed governors were flying B-29 firebombing missions with LeMay but certainly monetary policy was part of the war effort.
Beo,
ReplyDeleteSo folks were attracted to buy the War Bonds at the generous yield of 1% and therefore the govt was able to fund the war efforts?
Sounds like you have been reading Eccles again ;)
rsp,
Matt
ReplyDeleteAt the end of the day, dollars that didn't exist were brought into existence from an external source.
The 2nd Law was not violated. :-)
It never will be.
So the rich are basically "preppers" with better funding.
ReplyDeleteGee,
ReplyDeletegood point... I think Bill Mitchell has termed "savings" as something like: "a hedge against uncertainty across time"... which may be at some level what SRW is trying to drill down to here....
rsp,
"So folks were attracted to buy the War Bonds at the generous yield of 1% and therefore the govt was able to fund the war efforts?"
ReplyDeleteIt was Keynes's brainstorm that a compulsory savings plan would draineAD from an overclocked wartime economy just as effectively as the equivalent amount of taxes. The difference being, the worker would get the money back after the war (when the economy could use the additional AD anyway). US War bonds were a form of compulsory savings in all but name (the 8 war bond drives made workplace and/or neighborhood participation nearly universal). Most workers had the the money deducted along with the new FICA and (even newer) income tax witholdings.
So don't think of them of as 1% bonds, think of them as refundable payroll taxes. :o)
And sometimes I glean insight from Bugs Bunny instead of Marriner Eccles.
http://www.youtube.com/watch?feature=player_embedded&v=_TUPUbvO0eU
Beo,
ReplyDeleteWhew!, you're still OK then.... just checking on you to make sure ;)
Rsp,
"The US govt was running 20% to 30% of GDP deficits (equivalent to if we ran $3 trillion to $4.5 trillion deficits) for several years running funded at an average interest rate of less than 1%. This was due to the Fed agreeing to peg rates (by buying without limitation in the secondary markets)." [Beowulf]
ReplyDeleteThanks as usual for the information. I've certainly learned a lot from your posts, and this is no exception.
I still think Waldmann is way off base in his discussion of fiscal and monetary policy, and that he engages in gross false equivalence. In Waldmann's WWII example, as noted by Beowulf, the U.S. ran fiscal deficits 3 times the current size (in relation to GDP). The Fed basically kept interest rates low, which is the one thing they control. The obvious driver of the transformative change described by Waldmann was fiscal policy. Monetary policy didn't screw it up, but that's about it...
Just want to add to my last post a bit. We have < 1% interest rates now. To say that monetary policy generated transformative change in WWII via 1% interest rates would be ludicrous. It is obviously the fiscal deficits that drove the change...
ReplyDeleteRight Dan,
ReplyDeleteThe CB is supposed to act like the FRA requires it to, ie act as the "Fiscal Agent" of the US Treasury, ie accommodate fiscal policy....
Resp,
To say that monetary policy generated transformative change in WWII via 1% interest rates would be ludicrous
ReplyDeleteExcellent observation.
"Whew!, you're still OK then.... just checking on you to make sure ;)"
ReplyDelete"M: Bond. I need you back.
James Bond: I never left."