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.
Important poll. Unfortunately, Auburn doesn't "get" the Kaleckian implications of the poll and instead falls back on the old MMT fantasy that the class war is obsolete because we don't need to tax the rich to pay for progressive policies.
Kalecki gets it, Rodger Mitchell gets it, MMT as a whole does not get it.
And BTW, I've yet to see an MMT budget that creates a 1st world safety net, a 1st world infrastructure, and a 1st world educational system without raising taxes.
I think that if you added up the cost of all of Warren's policy proposals you'd find that it exceeds the size of a full employment deficit, so increased tax revenues might be necessary.
I think that Warren would likely admit that point about the need for taxes to dampen increasing demand owing to deficits. His answer to the increased taxation and addressing inequality resulting in a power elite is a land tax. I would prefer to see economic rent taxed away more broadly.
Hat tip to you Dan for finding that poll. I saw it originally because of your tweet.
Anyways, how much income is too much income for the middle class? Thats a very important question and one whose answer cant be known by theorizing. Thats why MMT generally states the relationship as full employment or savings desires.
We should simply suspend FICA for a while and see where we are at to start.
If productivity gains have continued apace since 1980 and yet real income gains have stayed basically flat, then I'd venture a guess that incomes should be about as high as productivity gains. If it worked for all those decades before 1980 without causing problematic inflation, I don't see why the present should be any different.
Especially considering now the entire world's population is practically available to provide enough supply for just about any level of increase domestic demand via our free trade policies.
But we can't know until we try increasing private sector incomes substantially, and we wont try as long as the population is ignorant and the wealthy control the system. As you've seen what the wealthy's views are.
Dan, I don't think that a comprehensive policy proposal will be forthcoming from MMT economists speaking for the MMT POV. I think that they will continue to speak generally and probably the only specific policy proposal they will push as MMT is a JG.
I think that this is a good idea to leave MMT as a monetary economic theory open rather than closed wrt to policy, leaving it up to individuals or groups to propose specific policy within the MMT framework. After all, this cuts across countries and other contextual factors that influence policy.
I would like to see an economist conversant with MMT, Post Keynesianism, and institutionalism update Galbraith's The Good Society (1996) for today's context. It's a useful template with somewhat dated and a bit out of paradigm, but overall he covers the ground pretty well and it's a good template to start from for a comprehensive progressive policy proposal.
I think Tom should write something on regarding updating Galbraith's book :)
You're a philosopher, what better qualifications for thinking about the good economy?
Philosophers are concerned with the good society rather than the good economy, which is not their field. It really takes an economist to argue for "the good economy" convincingly in detail by appealing to both economic theory and evidence.
Actually, the question, What constitutes the good life for an individual has been the fundamental question of ethics since ancient times, and what constitutes the good society and how to achieve it are the fundamental questions of social and political philosophy. A lot of ink has already been spilled over them.
Galbraith approaches the question in terms of the US political context, differentiating the conservative view based on the individualism of classical liberalism that seeks to minimize the role of government in the economy and the institutional approach of modern social liberalism that sees activist government as being necessary socially, politically and economically. He says that instead of arguing the positions, he will simply set forth the economic thinking of the latter POV wrt to achieving a good society institutionally.
As a philosopher I would be much more interested in the aspect of the problem that Galbraith treats as decided from his POV. The addition of MMT dispenses with the funding problem and turns the focus on availability of real resources.
What is also needed is a book of articles from philosophy and the relevant sciences, as well as economics, exploring what constitutes the good for an individual and a good society, and how to achieve these objectives.
An homogenous presentation would take a group of people with very similar points of view. It would also be useful to have a debate among people with different points of view.
There's actually a lot of material on this out there already that is just waiting to be collected and organized.
I also think that there are separate issues involved philosophically. The first issue is an investigation of the questions as such. This depends on one's POV which is determined by ontological, epistemological and ethic assumptions first and foremost and then subsidiary assumptions. The result is a clash of points of view based on different fundamental assumptions.
The second issue is practical. We live in a pluralistic society and solution therefore have to be reasonably pluralistic to be adopted and endure. So no one POV is likely to dominate, at least for long. How to achieve a compromise position in a pluralistic environment is necessary but difficult in that most people think that their POV is the only correct one, or the most correct.
Warren has consistently stated that the question of the size of government - roughly the total volume of spending - is a political question. From the MMT perspective, the government deficit needs to be big enough to satisfy private sector savings desires and permit sufficient demand to generate full employment. But you can get a $1 trillion deficit with $1 trillion in taxes and $2 trillion in spending, or with $4 trillion in taxes and $5 trillion in spending.
For some reason, many progressive MMTers seem to have taken it upon themselves to convince other progressives not to increase taxes on the wealthy. But I think their efforts would be better spent in trying to convince other progressives to increase public spending and expand public enterprise to offset the tax increases, and not to use the tax revenue to pay down the deficit.
Also, some MMTers sometimes resist the term "redistribution" to describe what is happening when the government increases taxes and spending at the same time, on the theory that the money that is spent is in some way operationally independent of the money that is taxed. But I don't think that matters. If the combined tax and spending program leads to a different distribution of wealth than existed before, it is accurate to describe the net effect as "redistributive".
It's not just philosophy v. economics. For example, Stiglitz's book and Galbraith's book both go into the economic harms caused by inequality. This is an issue MMT just hasn't studied that much. Other post-Keynesian's have also neglected. it.
The basic MMT policy stance is that a full employment economy is necessary condition for a good economy, following Keynes: “Look after unemployment and the Budget will look after itself."
However, I don't think that this implies also sufficient. Clearly there is more to public purpose and provision of public goods than simply full employment.
For example, MMT holds that the constraint on government is real resources in the present and for the future. The policy challenge is to ensure that public policy is sufficiently employing real resources in the present to take care of future needs and wants where public purpose and public goods and utilities apply, such as defense, education, health care, infrastructure, R&D, etc., while providing for the administrative needs as well.
There's a lot of room for political choice based on ideological preference in there, but an economic case can be made for most choices, too.
But that goes way beyond monetary economics, which is what MMT economists specialize in.
Dan K makes a good point. Anyway, it's worth pointing out that taxes always and everywhere 'finance' federal expenditures in real terms (i.e., with respect to its utilization of productive capacity), just not in nominal terms.
This holds true under the MMT or Old Keynesian paradigm (Robert Eisner liked to bring it up from time to time).
Does anybody here really believe that increasing taxes on the wealthy is an effective inflation hedge?
Lets say that we live in a world with full MMT implementation. We have full employment and a $20T GDP with $5T in Govt spending and $4T in taxation.
Now lets say we want to do a $500 B investment in renewable energy this year and we must have a tax offset for the sending since we are at full capacity.
Which type of tax will have a greater deflationary bias?
A $500 B tax increase on the .1% or A $500 B FICA tax increase on the middle class?
I would venture to say the wealthy have almost no impact on inflation and thus taxing them has almost no deflationary impact either. Meaning its ineffective to tax the wealthy for that purpose and thats just further evidence that spending decisions should be separate from income redistribution decisions. In an MMT world, the middle class will always ultimately be responsible for maintaining an effective inflation hedge. In other words, I believe that the middle class and not the .1% would have to be ready to pay higher taxes for increased Govt investment in an MMT economy.
If we could use a magic wand and take national income shares back to their 1950s and 60s levels than we would not need such a large deficit to fulfill "savings desires" (another way saying that the wealthy have too high a share of income)and maintain full employment.
So in a present day full employment MMT environment either we can A) maintain a status quo income distribution and have really large deficits
or
B) deficits probably wouldn't need to be much bigger than the trade deficit if we implemented a vast program of income redistribution.
These are the two options, which one could be implemented easier? Faster? more effectively? politically? economically?
Dan- it seems like you would lean towards B, and there is nothing wrong with that. I personally think it will be easier to implement A given how much Americans hate taxes and redistribution.
And also I was not thinking here about taxes as an inflation hedge. I think we should tax the wealthy for the simple reason that we need to level wealth inequalities, and higher taxes are one tool for taking their money away.
The top quintile typically accounts for about 40% of consumer spending in the US. The top tier may save a lot but they spend a lot too.
In addition their saving tends to increase asset values, hence the wealth effect. Studies reveal that when the class above spends more, so does the class beneath to keep up with lifestyle.
So it seems to be the wealthy that drive both consumer spending and asset values most.
I'm not questioning that 40% of consumer spending number.
I'd just like to point out that I assume all the goods and services that encompass that consumer spending number do not factor in to inflation calculations.
For example, if the price and number of sales of expensive art go up because of increased .1% incomes, (correct me if I'm wrong) this would be included in the "40% of consumer spending" figure but this would have no impact on inflation as art is not included in that index:
http://stats.bls.gov/cpi/cpifaq.htm#Question_7
From a logic POV (not backed up by references since I don't want to spend the time looking),
One household with 1000X the income of the median household could never buy 1000X the TV's, food, apparel, etc and therefore they can't have a impact on inflation in relation to their higher income.
I would put this in the category of nominal vs real. Nominal price wise, the top 10% may account for that much consumer spending, but that doesnt mean they are using 40% of the real goods and services available.
WRT asset price wealth effects and the "keeping up with the joneses" dynamic. I personally believe that period is over.
Without a significant increase in middle class income, there will be no hope of increased demand in the intermediate term.
We can't fall back on an increasing labor participation rate with dual income households anymore, that phase has run its course.
We can't rely on debt financed consumer sending by the middle class as much as before seeing as we're starting this expansionary period from an already elevated 250% of GDP private debt level.
Between, 1980 and today private debt increased by $38 trillion (1000%) to fund consumption even though real wages have stayed the same. Can we realistically expect another 1000% increase in private debt levels to fund another 30 years of consumption with stagnant wages?
The point I am trying to make is that your claim is that when the wealthy earn more money, the income groups below try to spend more money to keep up and this is evidence that the 1% actually do have a large impact on inflation contrary to my earlier claim. This may have been partly responsible in the past, but I don't see this as being some sort of universal rule that is always going to be true, I see this as a very niche effect that only applies under certain conditions.
But when the gains are going disproportionately to the upper quintile and above, how is it that increased spending will drive demand across the board.
What would need to happen is for demand to increase across the board owing to rising wages in response to higher prices, but that's unlikely with increased productivity due to tech innovation and global labor being fungible.
More reasonable would be for energy prices to rise, putting a cap on expansion. This seems to be the dynamic that is operative now. As the global economy heats up, resource prices, especially energy rise, inducing contraction instead of resulting in cost push inflation.
Where we see price volatility is in food, energy, and other commodity markets now that hedge funds are treating commodities as another asset class. I don't think we need to be concerned as much with inflation as a continuous rise in the price level as the rising volatility of vital resources (and who controls them).
20 comments:
Important poll. Unfortunately, Auburn doesn't "get" the Kaleckian implications of the poll and instead falls back on the old MMT fantasy that the class war is obsolete because we don't need to tax the rich to pay for progressive policies.
Kalecki gets it, Rodger Mitchell gets it, MMT as a whole does not get it.
And BTW, I've yet to see an MMT budget that creates a 1st world safety net, a 1st world infrastructure, and a 1st world educational system without raising taxes.
I think that if you added up the cost of all of Warren's policy proposals you'd find that it exceeds the size of a full employment deficit, so increased tax revenues might be necessary.
I think that Warren would likely admit that point about the need for taxes to dampen increasing demand owing to deficits. His answer to the increased taxation and addressing inequality resulting in a power elite is a land tax. I would prefer to see economic rent taxed away more broadly.
Hat tip to you Dan for finding that poll. I saw it originally because of your tweet.
Anyways, how much income is too much income for the middle class? Thats a very important question and one whose answer cant be known by theorizing. Thats why MMT generally states the relationship as full employment or savings desires.
We should simply suspend FICA for a while and see where we are at to start.
If productivity gains have continued apace since 1980 and yet real income gains have stayed basically flat, then I'd venture a guess that incomes should be about as high as productivity gains. If it worked for all those decades before 1980 without causing problematic inflation, I don't see why the present should be any different.
https://rwer.wordpress.com/2010/11/20/graph-of-the-week-usa-productivity-and-real-hourly-wages-1964-2008/
Especially considering now the entire world's population is practically available to provide enough supply for just about any level of increase domestic demand via our free trade policies.
But we can't know until we try increasing private sector incomes substantially, and we wont try as long as the population is ignorant and the wealthy control the system. As you've seen what the wealthy's views are.
All good points, Auburn and Tom. :-)
Dan, I don't think that a comprehensive policy proposal will be forthcoming from MMT economists speaking for the MMT POV. I think that they will continue to speak generally and probably the only specific policy proposal they will push as MMT is a JG.
I think that this is a good idea to leave MMT as a monetary economic theory open rather than closed wrt to policy, leaving it up to individuals or groups to propose specific policy within the MMT framework. After all, this cuts across countries and other contextual factors that influence policy.
I would like to see an economist conversant with MMT, Post Keynesianism, and institutionalism update Galbraith's The Good Society (1996) for today's context. It's a useful template with somewhat dated and a bit out of paradigm, but overall he covers the ground pretty well and it's a good template to start from for a comprehensive progressive policy proposal.
Tom:
I think Tom should write something on regarding updating Galbraith's book :)
You're a philosopher, what better qualifications for thinking about the good economy?
Dan Lynch,
Could you be specific in regard to Kalecki?
What Kaleckian implications?
Thanks,
Jason's Mom
I think Tom should write something on regarding updating Galbraith's book :)
You're a philosopher, what better qualifications for thinking about the good economy?
Philosophers are concerned with the good society rather than the good economy, which is not their field. It really takes an economist to argue for "the good economy" convincingly in detail by appealing to both economic theory and evidence.
Actually, the question, What constitutes the good life for an individual has been the fundamental question of ethics since ancient times, and what constitutes the good society and how to achieve it are the fundamental questions of social and political philosophy. A lot of ink has already been spilled over them.
Galbraith approaches the question in terms of the US political context, differentiating the conservative view based on the individualism of classical liberalism that seeks to minimize the role of government in the economy and the institutional approach of modern social liberalism that sees activist government as being necessary socially, politically and economically. He says that instead of arguing the positions, he will simply set forth the economic thinking of the latter POV wrt to achieving a good society institutionally.
As a philosopher I would be much more interested in the aspect of the problem that Galbraith treats as decided from his POV. The addition of MMT dispenses with the funding problem and turns the focus on availability of real resources.
What is also needed is a book of articles from philosophy and the relevant sciences, as well as economics, exploring what constitutes the good for an individual and a good society, and how to achieve these objectives.
An homogenous presentation would take a group of people with very similar points of view. It would also be useful to have a debate among people with different points of view.
There's actually a lot of material on this out there already that is just waiting to be collected and organized.
I also think that there are separate issues involved philosophically. The first issue is an investigation of the questions as such. This depends on one's POV which is determined by ontological, epistemological and ethic assumptions first and foremost and then subsidiary assumptions. The result is a clash of points of view based on different fundamental assumptions.
The second issue is practical. We live in a pluralistic society and solution therefore have to be reasonably pluralistic to be adopted and endure. So no one POV is likely to dominate, at least for long. How to achieve a compromise position in a pluralistic environment is necessary but difficult in that most people think that their POV is the only correct one, or the most correct.
Warren has consistently stated that the question of the size of government - roughly the total volume of spending - is a political question. From the MMT perspective, the government deficit needs to be big enough to satisfy private sector savings desires and permit sufficient demand to generate full employment. But you can get a $1 trillion deficit with $1 trillion in taxes and $2 trillion in spending, or with $4 trillion in taxes and $5 trillion in spending.
For some reason, many progressive MMTers seem to have taken it upon themselves to convince other progressives not to increase taxes on the wealthy. But I think their efforts would be better spent in trying to convince other progressives to increase public spending and expand public enterprise to offset the tax increases, and not to use the tax revenue to pay down the deficit.
Also, some MMTers sometimes resist the term "redistribution" to describe what is happening when the government increases taxes and spending at the same time, on the theory that the money that is spent is in some way operationally independent of the money that is taxed. But I don't think that matters. If the combined tax and spending program leads to a different distribution of wealth than existed before, it is accurate to describe the net effect as "redistributive".
It's not just philosophy v. economics. For example, Stiglitz's book and Galbraith's book both go into the economic harms caused by inequality. This is an issue MMT just hasn't studied that much. Other post-Keynesian's have also neglected. it.
The basic MMT policy stance is that a full employment economy is necessary condition for a good economy, following Keynes: “Look after unemployment and the Budget will look after itself."
However, I don't think that this implies also sufficient. Clearly there is more to public purpose and provision of public goods than simply full employment.
For example, MMT holds that the constraint on government is real resources in the present and for the future. The policy challenge is to ensure that public policy is sufficiently employing real resources in the present to take care of future needs and wants where public purpose and public goods and utilities apply, such as defense, education, health care, infrastructure, R&D, etc., while providing for the administrative needs as well.
There's a lot of room for political choice based on ideological preference in there, but an economic case can be made for most choices, too.
But that goes way beyond monetary economics, which is what MMT economists specialize in.
Dan K makes a good point. Anyway, it's worth pointing out that taxes always and everywhere 'finance' federal expenditures in real terms (i.e., with respect to its utilization of productive capacity), just not in nominal terms.
This holds true under the MMT or Old Keynesian paradigm (Robert Eisner liked to bring it up from time to time).
Dan-
I'm not sure if your comment is directed at me personally or if your criticism is directed at me or "progressive MMTers" as a whole?
If you are talking to me specifically, then the argument you are making is simply false.
There is a very big difference between:
1) Raise taxes on the wealthy so we can get the money to spend on progressive economic policies
and
2) Raise taxes on the wealthy in order to affect income distribution.
Progressives think we need to do #1. I am simply pointing out that #1 is a logical fallacy.
I personally advocate for an effective income ceiling, 75 - 90% tax rate on all income over $15 to 20 million per year.
But this tax has absolutely nothing to do with hiring more NASA scientists and going to Mars (another thing I want to do).
Does anybody here really believe that increasing taxes on the wealthy is an effective inflation hedge?
Lets say that we live in a world with full MMT implementation. We have full employment and a $20T GDP with $5T in Govt spending and $4T in taxation.
Now lets say we want to do a $500 B investment in renewable energy this year and we must have a tax offset for the sending since we are at full capacity.
Which type of tax will have a greater deflationary bias?
A $500 B tax increase on the .1% or
A $500 B FICA tax increase on the middle class?
I would venture to say the wealthy have almost no impact on inflation and thus taxing them has almost no deflationary impact either. Meaning its ineffective to tax the wealthy for that purpose and thats just further evidence that spending decisions should be separate from income redistribution decisions.
In an MMT world, the middle class will always ultimately be responsible for maintaining an effective inflation hedge. In other words, I believe that the middle class and not the .1% would have to be ready to pay higher taxes for increased Govt investment in an MMT economy.
If we could use a magic wand and take national income shares back to their 1950s and 60s levels than we would not need such a large deficit to fulfill "savings desires" (another way saying that the wealthy have too high a share of income)and maintain full employment.
So in a present day full employment MMT environment either we can
A) maintain a status quo income distribution and have really large deficits
or
B) deficits probably wouldn't need to be much bigger than the trade deficit if we implemented a vast program of income redistribution.
These are the two options, which one could be implemented easier? Faster? more effectively? politically? economically?
Dan- it seems like you would lean towards B, and there is nothing wrong with that. I personally think it will be easier to implement A given how much Americans hate taxes and redistribution.
No Auburn, my comments weren't directed at you.
And also I was not thinking here about taxes as an inflation hedge. I think we should tax the wealthy for the simple reason that we need to level wealth inequalities, and higher taxes are one tool for taking their money away.
The top quintile typically accounts for about 40% of consumer spending in the US. The top tier may save a lot but they spend a lot too.
In addition their saving tends to increase asset values, hence the wealth effect. Studies reveal that when the class above spends more, so does the class beneath to keep up with lifestyle.
So it seems to be the wealthy that drive both consumer spending and asset values most.
Tom-
I'm not questioning that 40% of consumer spending number.
I'd just like to point out that I assume all the goods and services that encompass that consumer spending number do not factor in to inflation calculations.
For example, if the price and number of sales of expensive art go up because of increased .1% incomes, (correct me if I'm wrong) this would be included in the "40% of consumer spending" figure but this would have no impact on inflation as art is not included in that index:
http://stats.bls.gov/cpi/cpifaq.htm#Question_7
From a logic POV (not backed up by references since I don't want to spend the time looking),
One household with 1000X the income of the median household could never buy 1000X the TV's, food, apparel, etc and therefore they can't have a impact on inflation in relation to their higher income.
I would put this in the category of nominal vs real. Nominal price wise, the top 10% may account for that much consumer spending, but that doesnt mean they are using 40% of the real goods and services available.
WRT asset price wealth effects and the "keeping up with the joneses" dynamic. I personally believe that period is over.
Without a significant increase in middle class income, there will be no hope of increased demand in the intermediate term.
We can't fall back on an increasing labor participation rate with dual income households anymore, that phase has run its course.
We can't rely on debt financed consumer sending by the middle class as much as before seeing as we're starting this expansionary period from an already elevated 250% of GDP private debt level.
Between, 1980 and today private debt increased by $38 trillion (1000%) to fund consumption even though real wages have stayed the same. Can we realistically expect another 1000% increase in private debt levels to fund another 30 years of consumption with stagnant wages?
The point I am trying to make is that your claim is that when the wealthy earn more money, the income groups below try to spend more money to keep up and this is evidence that the 1% actually do have a large impact on inflation contrary to my earlier claim. This may have been partly responsible in the past, but I don't see this as being some sort of universal rule that is always going to be true, I see this as a very niche effect that only applies under certain conditions.
Anyways, thats my take on it.
But when the gains are going disproportionately to the upper quintile and above, how is it that increased spending will drive demand across the board.
What would need to happen is for demand to increase across the board owing to rising wages in response to higher prices, but that's unlikely with increased productivity due to tech innovation and global labor being fungible.
More reasonable would be for energy prices to rise, putting a cap on expansion. This seems to be the dynamic that is operative now. As the global economy heats up, resource prices, especially energy rise, inducing contraction instead of resulting in cost push inflation.
Where we see price volatility is in food, energy, and other commodity markets now that hedge funds are treating commodities as another asset class. I don't think we need to be concerned as much with inflation as a continuous rise in the price level as the rising volatility of vital resources (and who controls them).
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