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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Monday, October 28, 2013
Warren Mosler & Thomas E. Nugent — Debtor Nation, Without The Rhetoric
Oldie but goodie from Warren. Hat tip to Charles Haydn on FaceBook.
"For example, it is fact — not theory — that government budget deficits add exactly that amount to the savings of financial assets that the rest of us hold."
So the government is forcing the non-govt to save? via the govt "add" here?
Or is the deficit the record of the non-govt savings desires over the period? and the non-govt is doing the "add"?
Or is it a combination of the efforts of both the govt and non-govt to either "add" or "reduce" savings?
govt can reduce savings ex ante by increasing taxes? or increase savings by cutting taxes?
non-govt can reduce savings ex ante by keeping less? and add to savings by keeping more?
Here is Bill M on this:
"the endogeneity of the fiscal balance"
So Bill thinks the fiscal balance is endogenous, 'from within', I'll take this to mean it cannot be controlled "from without".
I think I'm with Bill on this one. I see 'the deficit' as under the desires/control of the non-govt completely....
If govt changes the tax policy, there will be no changes to the fiscal balance that the non-govt does not control/make happen.
Deficits floats per residual net-savings attempt by the non-government.
And if gov't spending is not at a level to pay the tax bill and offset non-government net-savings attempts, you get a larger gov't budget deficit the ugly way.
The way I see it the existence of involuntary unemployment and excess capacity is the market's way of signaling policymakers that the deficit is TOO LOW.
ok. well the best way to target full employment gov't budgeting would be with a JG.
And if you go the tax cut route you need it to result in more incomes in the hands of those with higher spending propensities. Supply side cuts won't work due to the higher propensities to save at higher income levels.
Is it that "the deficit is too low" or rather that "govt spending is too low"?
It's the spending that creates demand and saving that destroys it. Spending comes first. If the tax structure is such as not to permit hoarding at the top, then the deficit can lower. The deficit flows largely to the savings of the wealthy. Progressive taxation can restore circular flow so that most all of the flow stays flowing instead of large quantities being shunted off into reservoirs that don't serve any productive purpose and disrupt the system by creating distortions in the social, political and economic structure.
Spending by direct issuance (no tys issuance), setting the overnight rate to zero, instituting high progressive taxation, tightly regulating externalities, and spending liberally on R&D, education, health care, and other social welfare and public investment would go a long way to addressing a lot of the ills of neoliberal capitalism.
"How can you cut someone's taxes that is unemployed? ie Is not paying income tax?"
People who are unemployed have to pay taxes on what they receive in unemployment insurance.
"What if those receiving the tax cut just increase savings? How will that increase employment?"
Maybe that is the market's way of allocating capital in the most efficient way. Maybe private sector desire to de-leverage trumps spending by central planners. I'll bet that the market wisdom embedded in a crowd of two hundred million workers and business people outperforms the investment decisions of a few hundred or a few thousand central planners 9 times out of 10.
"Supply side cuts won't work due to the higher propensities to save at higher income levels."
Just because high income earners get a tax cut doesn't necessarily mean that their savings is lost to the economy. The savings may be invested in projects that create a lot of jobs.
While we are on the subject of taxes, I favor taxing all sources of income at a flat 10%, including earned income, interest income, dividend income, capital gains, corporate income and social security with 5% paid by employees and 5% paid by employers, while eliminating the income ceiling applicable to the SS tax. Estate tax should also be 10% on estates in excess of $5 million.
Most current deductions would be eliminated and replaced by a generous standard deduction such that a U.S. family of four earning $50K would only have to pay the 10% tax on the first dollar of earned income over and above the $50K threshold. This means that even though this tax structure appears as a flat 10% rate, it is nevertheless quite progressive especially when taking into account the elimination of the income ceiling on the social security tax for high income earners. Under current law the SS tax is the most regressive tax borne disproportionately by the middle class and working poor. This feature should appeal to liberal progressives.
Under this plan, if you do the math you will see that regardless of the source of one’s income the total effective tax rate never exceeds 18.75%. Moreover, 10% is a simple number to remember and reminiscent of the 10% Biblical Tithe which should appeal to the religious right.
This approach overcomes the objection often raised by the political left about the Armey/Forbes flat tax which did not tax capital gains, interest income or dividends. Makes sense too, because it doesn’t seem fair that some rich guy who derives all his income from coupon payments on Treasury securities wouldn’t have to pay any tax.
At the same time, the 1% would probably embrace paying a combined effective tax rate of 18.75%, which is more than Romney, Warren Buffet or Bill Gates pay, without having to pay an army of tax accountants and lawyers or create a "charitable" foundation to exploit every available loophole the way they do.
In other words, the 10% solution for tax reduction and reform is likely to garner support from liberal progressives on the left as well as Supply Siders and Libertarians on the right who want to cut taxes. Moreover, it is so simple that a 12 year could calculate the return on a 3X5 index card. I believe that a tax reform of this nature would unleash a shock wave of economic growth that would put people back to work and break the current cycle of economic malaise and stagnation.
matt, yes the govt can 'force' the non govt to save nominally, with prices/'real savings' being the fallout, etc. That is, govt can try to spend more (nominal) than it taxes and 'worst case' drive up prices in the process, etc. likewise, the govt can cut its deficit spending with unemployment etc. the fallout, assuming no govt. 'auto stabilizers' etc. The endog thing is largely due to the auto stabilizers/institutional structure of most nations.
Matt said: "0 taxes, the limit to tax cuts, are 'hyper inflation' so full employment is at something less than that."
ONLY if the public doesn't find other motivations to match currency creation to currency demand
In practice, we fail at full group motivation and utilization and option-exploration ...
so fiat taxing (currency destruction) is a fall-back, safety mechanism.
What's not as clear to most people is how to Automatically Limit too much taxes, net, or mal-distributed.
The safety mechanism for that, bookend tolerance limit, would be some Automatic Stabilizer linking tax-&-tax-pattern relief to employment and/or capabilities expression?
Seems eminently doable, if we'd only put some of our under-utilized minds to it. :)
That would require some of our fearful minds letting go a little bit, to allow full-employment of all our minds.
"For example, it is fact — not theory — that government budget deficits add exactly that amount to the savings of financial assets that the rest of us hold."
ReplyDeleteSo the government is forcing the non-govt to save? via the govt "add" here?
Or is the deficit the record of the non-govt savings desires over the period? and the non-govt is doing the "add"?
Or is it a combination of the efforts of both the govt and non-govt to either "add" or "reduce" savings?
govt can reduce savings ex ante by increasing taxes? or increase savings by cutting taxes?
non-govt can reduce savings ex ante by keeping less? and add to savings by keeping more?
Here is Bill M on this:
"the endogeneity of the fiscal balance"
So Bill thinks the fiscal balance is endogenous, 'from within', I'll take this to mean it cannot be controlled "from without".
I think I'm with Bill on this one. I see 'the deficit' as under the desires/control of the non-govt completely....
If govt changes the tax policy, there will be no changes to the fiscal balance that the non-govt does not control/make happen.
rsp,
test
ReplyDeleteDeficits floats per residual net-savings attempt by the non-government.
ReplyDeleteAnd if gov't spending is not at a level to pay the tax bill and offset non-government net-savings attempts,
you get a larger gov't budget deficit the ugly way.
The way I see it the existence of involuntary unemployment and excess capacity is the market's way of signaling policymakers that the deficit is TOO LOW.
ReplyDeleteCharles,
ReplyDeleteIs it that "the deficit is too low" or rather that "govt spending is too low"?
rsp,
Therefore, austerity is a smoke screen for destruction and politics.
ReplyDeleteThey say that the government "doesn't make anything" ...
They say that the government "doesn't work, it's broken" ...
They say that the government
"doesn't need dept of education, it's unconstitutional" ...
They say that the government "doesn't balance it's books, it just prints money" ...
Matt,
ReplyDeleteSo the involuntary unemployment and excess capacity is about total spending being too low.
And for the government, it's a political decision on how we get to full employment spending levels, whether it's thru more gov't spending or tax cuts.
Charles,
ReplyDeleteHow can you cut someone's taxes that is unemployed? ie Is not paying income tax?
What if those receiving the tax cut just increase savings? How will that increase employment?
We have had high employment back in the 90's with actual fiscal surpluses...
rsp,
ok. well the best way to target full employment gov't budgeting would be with a JG.
ReplyDeleteAnd if you go the tax cut route you need it to result in more incomes in the hands of those with higher spending propensities. Supply side cuts won't work due to the higher propensities to save at higher income levels.
And we had high employment and fiscal surpluses in the 90's due to an unsustainable and highly distortive private credit expansion.
ReplyDeleteIs it that "the deficit is too low" or rather that "govt spending is too low"?
ReplyDeleteIt's the spending that creates demand and saving that destroys it. Spending comes first. If the tax structure is such as not to permit hoarding at the top, then the deficit can lower. The deficit flows largely to the savings of the wealthy. Progressive taxation can restore circular flow so that most all of the flow stays flowing instead of large quantities being shunted off into reservoirs that don't serve any productive purpose and disrupt the system by creating distortions in the social, political and economic structure.
Spending by direct issuance (no tys issuance), setting the overnight rate to zero, instituting high progressive taxation, tightly regulating externalities, and spending liberally on R&D, education, health care, and other social welfare and public investment would go a long way to addressing a lot of the ills of neoliberal capitalism.
Is it that "the deficit is too low" or rather that "govt spending is too low"?
ReplyDeleteOf course it can also be that taxes are too high.
"How can you cut someone's taxes that is unemployed? ie Is not paying income tax?"
ReplyDeletePeople who are unemployed have to pay taxes on what they receive in unemployment insurance.
"What if those receiving the tax cut just increase savings? How will that increase employment?"
Maybe that is the market's way of allocating capital in the most efficient way. Maybe private sector desire to de-leverage trumps spending by central planners. I'll bet that the market wisdom embedded in a crowd of two hundred million workers and business people outperforms the investment decisions of a few hundred or a few thousand central planners 9 times out of 10.
"Supply side cuts won't work due to the higher propensities to save at higher income levels."
ReplyDeleteJust because high income earners get a tax cut doesn't necessarily mean that their savings is lost to the economy. The savings may be invested in projects that create a lot of jobs.
While we are on the subject of taxes, I favor taxing all sources of income at a flat 10%, including earned income, interest income, dividend income, capital gains, corporate income and social security with 5% paid by employees and 5% paid by employers, while eliminating the income ceiling applicable to the SS tax. Estate tax should also be 10% on estates in excess of $5 million.
ReplyDeleteMost current deductions would be eliminated and replaced by a generous standard deduction such that a U.S. family of four earning $50K would only have to pay the 10% tax on the first dollar of earned income over and above the $50K threshold. This means that even though this tax structure appears as a flat 10% rate, it is nevertheless quite progressive especially when taking into account the elimination of the income ceiling on the social security tax for high income earners. Under current law the SS tax is the most regressive tax borne disproportionately by the middle class and working poor. This feature should appeal to liberal progressives.
Under this plan, if you do the math you will see that regardless of the source of one’s income the total effective tax rate never exceeds 18.75%. Moreover, 10% is a simple number to remember and reminiscent of the 10% Biblical Tithe which should appeal to the religious right.
This approach overcomes the objection often raised by the political left about the Armey/Forbes flat tax which did not tax capital gains, interest income or dividends. Makes sense too, because it doesn’t seem fair that some rich guy who derives all his income from coupon payments on Treasury securities wouldn’t have to pay any tax.
At the same time, the 1% would probably embrace paying a combined effective tax rate of 18.75%, which is more than Romney, Warren Buffet or Bill Gates pay, without having to pay an army of tax accountants and lawyers or create a "charitable" foundation to exploit every available loophole the way they do.
In other words, the 10% solution for tax reduction and reform is likely to garner support from liberal progressives on the left as well as Supply Siders and Libertarians on the right who want to cut taxes. Moreover, it is so simple that a 12 year could calculate the return on a 3X5 index card. I believe that a tax reform of this nature would unleash a shock wave of economic growth that would put people back to work and break the current cycle of economic malaise and stagnation.
matt, yes the govt can 'force' the non govt to save nominally, with prices/'real savings' being the fallout, etc. That is, govt can try to spend more (nominal) than it taxes and 'worst case' drive up prices in the process, etc. likewise, the govt can cut its deficit spending with unemployment etc. the fallout, assuming no govt. 'auto stabilizers' etc. The endog thing is largely due to the auto stabilizers/institutional structure of most nations.
ReplyDeleteCharles, yes re ugly way, which is also a function of auto stabilizers. otherwise it's a lot more ugly with a smaller deficit.
ReplyDeletematt
ReplyDeleteunemployment is the evidence the deficit is too low.
yes, you can restore demand with sufficient tax cuts.
we know 0 taxes, the limit to tax cuts, are 'hyper inflation' so full employment is at something less than that.
and if a tax cut is entirely 'saved' it just means that tax wasn't doing anything in the first place and that there's room for further cuts.
Rom, savings is the accounting record of investment
Thanks Warren,
ReplyDeletesome key takeaways (for me):
*yes the govt can 'force' the non govt to save nominally
*The endog thing is largely due to the auto stabilizers/institutional structure of most nations.
*we know 0 taxes, the limit to tax cuts, are 'hyper inflation' so full employment is at something less than that.
Much more to "digest" here!, rsp
Warren - I know that Tom Nugent and you know all about the Laffer Curve, so how doe that fit into this discussion?
ReplyDeleteMatt said: "0 taxes, the limit to tax cuts, are 'hyper inflation' so full employment is at something less than that."
ReplyDeleteONLY if the public doesn't find other motivations to match currency creation to currency demand
In practice, we fail at full group motivation and utilization and option-exploration ...
so fiat taxing (currency destruction) is a fall-back, safety mechanism.
What's not as clear to most people is how to Automatically Limit too much taxes, net, or mal-distributed.
The safety mechanism for that, bookend tolerance limit, would be some Automatic Stabilizer linking tax-&-tax-pattern relief to employment and/or capabilities expression?
Seems eminently doable, if we'd only put some of our under-utilized minds to it. :)
That would require some of our fearful minds letting go a little bit, to allow full-employment of all our minds.
What'd FDR say in private?
ReplyDelete"The only thing we have to fear, is fear of allowing ALL our minds to go to work."