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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Time for a payroll tax holiday

Posted by Sada Mosler on September 29th, 2008


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Time for something they can all understand that would turn it all around like it never happened: a payroll tax holiday until the economy recovers.

It favors lower income workers.

It’s an immediate add to aggregate demand of over 3% per year annualized.

It lowers costs for businesses to help keep prices in check.

They can phase it back in to cool things down if the economy overheats.

And it would be a good time for Congress to put its full faith and credit behind promised social security checks regardless of the trust fund reserves.


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27 Responses to “Time for a payroll tax holiday”

  1. Mike Magoo Says:

    “immediate add to aggregate demand ”

    Until we get speed limits at 30mph – oil prices won’t come down if we keep demand sustained. Oil falling down to the 90′s today will hopefully translate into cheaper gas prices for me and my friends, I think that is a good thing.

    A lot of people need to start riding bicycles to improve their health or god forbid – even walking, I cannot support your payroll tax holiday Warren that will keep demand sustained until we have some of your energy policy suggestions implemented first. How far is the government away from passing a 30mph law Warren?

    Reply

  2. warren mosler Says:

    the 30 mph limit is not even close to being considered

    agreed that without it we drive up demand for gasoline and support prices at ever higher levels

    Reply

  3. Ted Says:

    It might just help. They need to do something and do it pronto!

    Reply

  4. Mike Magoo Says:

    Why? The sun will come up tomorrow, my granpappy said haste makes waste. Perhaps getting off the treadmill of keeping up with the jones’s is not so bad. Listen at some jimmy buffet and don’t panic.

    Reply

  5. warren mosler Says:

    4. Problem is, the currency itself is a public monopoly, and if the govt. doesn’t spend enough for us to pay the tax and meet our net savings desires, the result is a continuous contraction until the above terms are met.

    and at this point that could mean a lot of serious main street distress, unemployment, privation, etc. until the deficit gets high enough due to falling tax revenues and rising transfer payments, rather than a simple, pro active tax cut or spending increase.

    in otherwords, it all makes the treadmill turn faster, not slower, as we have to run harder to survive, until it turns

    Reply

  6. billy blog » Blog Archive » Employment guarantees in vogue – well not really Says:

    [...] sometime co-author and friend Warren Mosler has been advocating a payroll tax holiday in the US for the last few years to address the loss of jobs. He believe that by cutting them the [...]

  7. RSJ Says:

    It favors lower income workers.

    It definitely eases the pain, but there is no guarantee that the increased sales revenue will be passed onto median income workers in the form of increased wages, or be used to fund re-investment. The extra income might just be passed onto rentiers or top earners. In fact, this is what has been happening with the current stimulus.

    In other words, there should be a social contract, in which government guarantees that all output is sold at current prices during recessions only if business guarantees to keep median wages rising dollar for dollar with output during expansions.

    If you are not going to enforce both sides of this bargain, then it would be better long term to let unwanted output remain unsold during recessions up until deflation forces it to become cheap enough for workers to buy.

    In this case, the Job guarantee wage would be the same support price for both unwanted wages and unwanted output. This is better than a biased commitment to ensure that all unwanted output is bought at current market prices, while having a below-market support price for unwanted labor.

    Reply

    Scott Fullwiler Reply:

    It’s a direct 7.65% tax cut for anyone making less than about 115K. That much doesn’t matter regarding what employers do with wages . . . it’s like a 7.65% raise at a time when most aren’t getting raises. True, the other 7.65% that employers pay may not get passed on to employees, but at the very least it reduces the labor costs of each employee that employers keep on the payroll.

    Reply

    RSJ Reply:

    That much doesn’t matter regarding what employers do with wages . . .

    That’s the point! You are boosting sales without boosting wages paid by business.

    Look at the business side of the ledger:

    Surplus Profits, P = S (Sales) – W (wages paid) – R(re-investment) – TOPI

    You are increasing S, but not increasing W, R, or TOPI.

    As a result, P goes up.

    In a recession, P needs to fall — so this policy props up P, preventing it from adjusting downward.

    Ideally business would be more than happy if government”supplied every worker money to consume, as this would relieve business of the obligation of paying wages. In the extreme, all sales would go directly to surplus profits.

    So if you are going to run a stabilization policy that prevents P from falling too much during recessions, you need to prevent P from rising too much during expansions.

    If you don’t do this via surplus profit taxes and high marginal rates, then over time, median wages get out of line with per-capita output and your well-intentioned demand maintenance policies result in a shrinking middle class.

    Reply

    Matt Franko Reply:

    RSJ,
    I think you’re letting your perfect become the enemy of the good here.

    Warren overall wants to perform a fiscal transfer to the non-govt sector. I think a payroll tax holiday is a pretty fair/pragmatic way to do it (and politically bi-partisan). It directly benefits existing workers (7.65% raise) while it also leaves more money in business owners pockets much of which will undoubtedly go to retention/new hires and new investment. Only the foolish will use the funds to “splurge” on discretionary items in this environment if that is what you are concerned about with your class warfare. Resp,

    Scott Fullwiler Reply:

    First, after tax wages will have risen, which is more important to workers at any rate than before tax wages. Second, wages WILL rise as labor markets stop loosening and then eventually tighten during the expansion; the degree depends upon how much the expansion actually does lower unemployment rates. The tax cut can be withdrawn as an expansion occurs if desired. Overall, it seems quite silly to not cut taxes for lower income people because someone thinks it will raise sales but not raise their before tax wages.

    RSJ Reply:

    Matt,

    I am not trying to wage a class war, but rather point out that there are structural problems with the economy.

    Mosler is saying that the cause of structural unemployment is an insufficient level of government deficit spending in comparison with the private “sector”‘s desire to accumulate net financial assets.

    That is like saying that the it is raining so much because the ground is wet.

    It is technically true that the private sector experiences a surge in desire to net accumulate financial assets during financial crises, but only because the horizontal assets are going up in smoke and the private sector needs the government to step in and guarantee them. You can argue that this is due to the government supplying insufficient assets during expansions, but the private sector wants to accumulate infinite financial assets. So how is such an analysis meaningful?

    The underlying structure of the economy determines these desires, and when they start to grow in proportion to wages, you have an unstable economy that will end up in some form of financial crisis.

    Let me be more specific:

    Economists typically view rent-seeking in terms of a “goods” surplus — i.e. workers create X goods, but only consume X-P goods, with owners consuming P goods as profit. This is Kalecki’s adage “capitalists earn what they spend, workers spend what they earn”. That is the standard class war concern and it seems to be the only distributional concern here (I could be wrong..).

    This “goods surplus” is insignificant to the issues we are facing now. A goods surplus can never cause a demand-shortfall.

    In a monetary economy you can also have a financial surplus, in which top incomes do not consume more and more goods, but pile up more and more financial claims on everyone else.

    The financial surplus occurs when workers create X goods and consume X goods, but overpay by P. We have been overpaying for houses, autos, education, healthcare, and many other things, relative to our wages. The key to understanding the “savings needs” of the private sector is in the financial surplus.

    Historically, this credit cycle has dominated the business cycle, with huge inflations of prices relative to wages followed by banking failures and equally huge deflations. On the way up, you have asset bubbles and financial windfalls, and on the way down the top incomes find their claims go up in smoke. Obviously this hampers the ability to make long term capital investments, and the resulting fall in demand causes mass unemployment.

    After the depression, we ended this cycle with a “New Deal”, followed by Eisenhower’s “Fair Deal”, in which government stepped in to purchase excess inventory during contractions with the proviso that the private sector would not accumulate a large financial surpluses during expansions. Both wages and prices were supported. This was achieved by high marginal rates and surplus profit taxes, as well as rigid control of bank lending. That is all I am advocating for.

    Over time, the second half of that deal was dismantled. The predictable result was a cycle of wage shares decreasing during expansions, but not increasing enough duration contractions, as government stabilization policy prevented the deflations from occurring. But this means that you are still overpaying — so the only possible way to get growth going again is by restarting the borrowing game. Recession fighting became a policy of reflation as asset price-to-income multiples kept climbing higher on a peak-to-peak basis. That is a mathematical requirement if the average wage share of output keeps falling.

    Hence the decline in yields is not something positive — you may think it “squeezes” the rentier of goods surpluses (in reality it doesn’t), but falling yields (for both equity and debt) are a sign of increasing financial surpluses.

    This strategy of keeping the economy on life support with fiscal spending until debt growth resumes is the strategy currently adopted by the administration — it is the only thing they know how to do, as the very idea of limiting the accumulation of financial surpluses is completely foreign to them.

    It seems to also be foreign here, and so I am trying to advocate for an inclusion of these concerns, rather than what I believe is a misguided policy of trying to push down yields.

    Now comes MMT, and declares — government is not revenue constrained so we can just permanently keep tiding people over with deficit spending. In the process we will eliminate income taxes and other checks on the accumulation of financial claims altogether. My position is that such an approach is harmful, long term.

    If government *only* steps in and makes all those claims good by boosting incomes, then you do manage to avoid mass unemployment, and you can also achieve price stability, but the price you pay is an economy in which the financial surplus keeps growing, and wages become unmoored from prices. A side effect is a massive wealth transfer as government guarantees all the imprudent paper (I think a 1% fee is suggested in one of the proposals). The middle ages also had price stability and full employment, as do slave societies. You need price stability, full employment, and a growing healthy middle class.

    The way out is to have a public dialogue in which each cohort within the private sector agrees to incur certain obligations to each other in exchange for government support.

    Government can guarantee all inventory is sold during contractions provided that employers also guarantee wages grow with prices during expansions. You also need to cross out a lot of those claims, because the wealth transfer needed to make them good would not be in the public interest. If you do this, you will discover that private sector desire to hold net financial assets is a relatively constant share of GDP over the business cycle, as the level of financial surpluses is also a constant share of GDP.

    knapp Reply:

    Scott,

    Perhaps a second-best solution to ELR would be a floating-rate, counter-cyclical payroll tax that adjusted to levels of unemployment.(and at some level, say 10%, drops to 0%).

    It takes the discretion away from Congress, adding to the auto-stabilizing component of tax policy.

    Reply

    Jim Baird Reply:

    I think this falls into the category of “good idea but politically infeasible”. While the payroll tax is regressive and economically counterproductive, history has shown that the only way to maintain support for an income transfer program like SS is to maintain the fiction that it is “funded by contributions”. A payroll tax holiday along the lines that Warren proposes would be a great idea, but I think there is a lot to the Democrat’s fears that it would be used as a pry bar by the Republicans to alter or abolish SS, which has been their goal ever since it was created.

    warren mosler Reply:

    misses key elements of my $8 job proposal

    1. an employed bufferstock is a far superior price anchor/more liquid than an unemployed buffer stock.

    2. the private sector, with increased demand, hires from the ‘top down’ while govt hires from the ‘bottom up’ to full its ‘presumed desire ‘ of employing those it removed from the private sector with its tax liabilities.

    take another look at ‘full employment and price stability’ on this site

  8. Employment gaurantees in vogue - well, not really » New Deal 2.0 Says:

    [...] sometime co-author and friend Warren Mosler has been advocating a payroll tax holiday  in the US for the last few years to address the loss of jobs. He believes [...]

  9. Floccina Says:

    Jim Baird wrote:

    “A payroll tax holiday along the lines that Warren proposes would be a great idea, but I think there is a lot to the Democrat’s fears that it would be used as a pry bar by the Republicans to alter or abolish SS, which has been their goal ever since it was created.”

    The Republicans like the Democrats will try to stay close to but on their side of the median voter. The median voter would not vote to eliminate SS but to welfarize it. SS is not the only welfare program that exists (think k 12 schooling, AFDC, food stamps, ag subsidies) and none of the other need the the fiction that it is “funded by contributions” to persist. I think that a welfarized SS would pay the same amount to all beneficiary rather than the current bizarre formula that pays out more to the rich. Medicare does not payout based on how much an individual paid in why should SS.

    But you are correct the Democrats fear loss of the fiction and so a FICA holiday is politically dead. We would have a slightly better chance to get them to go for a FICA cut.

    Reply

  10. Scott Fullwiler Says:

    RSJ. . . . if you think that that is our ONLY proposal, then you haven’t been paying attention.

    Reply

    RSJ Reply:

    Scott,

    If you have a substantive point to make then I would be happy to engage you, but let’s be honest, this is a couple of times now that you replied to my posts with non-sequiturs. No biggie — it’s an informal forum, but why reply to my posts if you’re not going to engage substantively?

    FYI, I’ve read all the proposals and I think my summary is pretty accurate. VCP, Talf Alternative, Geithner Alternative — it is one bailout after another. Then add to that elimination of income taxes, etc. Same for the required readings — I haven’t detected any proposal or statement to the effect that a spike in the desire to acquire net financial assets in excess of real investment needs is caused by growing income inequality, or a set of proposals aimed at reducing these spikes. Maybe this will be forthcoming in other proposals — that would be good to see. Of course ELR and many other proposals are excellent.

    Reply

    Scott Fullwiler Reply:

    1. I think you are repeatedly mischaracterizing the proposals. They are NOT intended to “tide over” the private sector. Rather, the private sector desires to PERMANENTLY net save on average and we advocate policies that would enable that to happen while maintaining full employment.

    2. Warren’s and other like minded proposals are not “one bailout after another.” There are obviously proposals for the current crisis. But there are proposals here, on Bill’s blog, and in research at Levy regarding re-regulating the financial system that have little or nothing to do with bailouts, and indeed are aimed at mostly avoiding financial instability (to the degree that this is even possible) and subsequent bailouts. There is also an overarching view that the financial sector must be downsized along with financialization and its disproportionate share of the national income that is clear in the proposals from the three sources I mentioned.

    3. Many of the policies like ELR and payroll tax holidays (BTW, there is no advocacy of elimination of income taxes . . . aside from replacing them and various regressive taxes with a particular type of progressive property tax that I may be somewhere on this site; there is advocacy of elimination of payroll taxes, which is quite different) are geared toward targeting the lower and middle income earners. The general view is that most income inequality (at least at the bottom end) is due to slack aggregate demand, not enough jobs, problems with the spatial dimension of macroeconomic plicy (Bill, in particular, has published a lot on this), etc. Jamie Galbraith’s book, “Created Unequal,” made much the same case, and there are a number of publications on this authored or co-authored by Randy. You might be particularly interested in one by Randy’s students here (http://www.levy.org/pubs/wp_548.pdf) that goes directly at the issue of relating the financial crisis to inequality.

    4. I would agree that, aside from the proposals for re-regulation and downsizing of the financial sector, that most of the proposals for addressing inequality are “bottom up,” rather than top down. But I don’t think the former would be an insignificant contribution to a “top down” reduction in inequality.

    I doubt this alleviates all of your concerns, but there’s perhaps something to go on for now.

    Best,
    Scott

    Reply

    Ramanan Reply:

    RSJ,

    Don’t mean to interrupt Scott – he is the expert. You may have to check out the US government (and all other govts too) policies’ impact on the society. One would have loved to have a system in which the government does not inteerfere but unfortunately modern money works the way it does. We have debated on other things at Billy Blog and you have shown me good data (e.g., households expenditures vs income) but just think about how the data is what it is in the first place. Governments all over went into fiscal austerity for many years now and this has deeply impacted our societies in a negative way. It has hurt the lower class more than the upper class. The severity of the fiscal austerity has been really high. At Zeroth order, the government has to spend much more and tax much less. This is necessary condition! No way out – matter of simple accounting done with stock-flow consistency. And of course as Scott says its not a bailout. Always good to keep in mind: The government ‘debt’ has to such that the private sector saving desire is fullfilled.

    Reply

    warren mosler Reply:

    my proposals for banking, tsy, fed (and financial sector in general) go a long way to eliminating a large source of the income issues that concern you.

    also in the ‘literature’ I point out the lack of focus on distribution of consumption vs distribution of issue, which I suggest
    is of more consequence

    Reply

  11. warren mosler Says:

    quick one from the road:

    with a payroll tax holiday competitive pressures will likely cause business to cut prices medium term with its savings

    so it adds to demand as well as cuts supply side costs to contain prices

    Reply

    RSJ Reply:


    with a payroll tax holiday competitive pressures will likely cause business to cut prices medium term with its savings

    The payroll tax and other demand boosts — that’s all fine during contractions, and you will never succeed in supporting prices completely, so they will fall a bit. They would need to fall by about 40% to restore middle class purchasing power — a great depression type adjustment would be needed, which we are understandably preventing.

    The danger lies with not supporting median wages during expansions. The middle class disappears during expansions, not contractions, so you need to support them too. Historically we did this with punitive tax policy to make median wages cheaper, etc. A side effect was a relatively constant deficit/GDP across cycles.


    my proposals for banking, tsy, fed (and financial sector in general) go a long way to eliminating a large source of the income issues that concern you.

    I agree distribution of consumption is the key.

    I haven’t seen lending limits or similar provisions in your proposals, but rather FDIC credit models. The issue there is that loans are always repaid when asset prices are rising, and they will rise as a result of more lending.

    So you don’t want to use a credit model but have a public policy restricting borrowing to fixed income multiples or other fixed multiples “just because” — even if the bank will make money by loaning greater amounts. That is a hard sell, operationally. Particular with free unlimited lending to banks at zero cost, even in times of moderate inflation..

    Moreover, lending also boosts incomes, which boosts greater lending, etc. So even fixed debt/income limits are problematic. Perhaps you have found ways around these problems.

    I think attacking the problem on the revenue side as well as on the lending side is more effective. You have two checks, and also promote a middle class, as you suppress the payoffs for windfall-seeking from the economy as a whole. That is why I also think that bank costs of funds should be positive. I think this is neutral for rentier incomes and is another check. This is money — we need multiple overlapping checks, and then checks on those checks, etc.

    Reply

  12. Ralph Musgrave Says:

    There is support for the payroll tax cut idea here:

    http://www.nytimes.com/2009/12/13/business/economy/13view.html?_r=1 and scroll down to para starting “When devising its fiscal package…..” (About half way down).

    It seems tax cuts have a bigger GDP increasing effect than previously thought.

    Reply

  13. Symmetry Capital Management, LLC » Like medicine for the healthy Says:

    [...] Again, one of the better policy prescriptions for (1) a household sector trying desperately to repair balance sheets and (2) an economy facing a shortfall in demand is an immediate payroll tax holiday of one year or more, like Warren Mosler has prescribed.  [...]

  14. Symmetry Capital Management, LLC » Midterm Election Reflections and Outlook Says:

    [...] hopeful side, former Clinton advisor Paul Begala mentioned a payroll tax holiday on CNN last night, possibly the best stimulus in our arsenal for current conditions, and an eminently bipartisan idea. On the pessimistic side, there’s now a [...]

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