Comments on Obama and the economy
It’s like having the job of driving the bus and fixing it when it breaks, and much of the election was about who can fix the broken bus and how they are going to do it.
This bus can be immediately fixed by anyone who knows how it actually works and what it needs to get rolling again.
We suffer from a lack of demand which is easily remedied by an immediate fiscal response.
Quantitative easing, for example, is at best like installing a second battery to give the car more power. It completely misses the point.
He didn’t just show up for the job-
He volunteered for the job insisting he could fix the economy.
He pushed the TARP (as a Senator and a candidate) not recognizing giving capital to banks was nothing more than regulator forbearance and instead believed it was deficit spending.
His stimulus package came after the automatic stabilizers hiked the deficit to muddle through levels and has proven far too small to keep millions from losing their jobs and their homes.
And now the talk has turned to deficit reduction after proclaiming on multiple occasions “the US government is out of money”
which is like moving forward with the engine at idle speed not understanding that his foot on the brake is keeping the bus from getting up to cruising speed.
Obama and his administration is in this way over their heads.
Unfortunately, the mainstream opposition is probably worse.
Risking overstatement, McCain’s proposal was to not have a bus driver.
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Mr Mosler,
Great site. Found you through Billy Mitchells blog via Winterspeak. Discovering this Chartalist thinking is quite enlightening. It is like we are needlessly punishing ourselves by restricting that which we have unlimited access to. Vestiges of some sort of sick protestant idea that we need to be broken down before we can be built up……….(sigh)
You are right about our current govt and its ineffectiveness, but I read it a little differently. Obama and his guys would probably eagerly embrace much of what you say but they wet their pants fearing being called socialists by the tea baggers and the religious reich. The republicans on the other hand are like a broken record “tax cuts, tax cuts, tax cuts” who have no interest in understanding the difference between the vertical transactions of govt and private sector (as Mr Mitchell terms it) and the horizontal transactions of the private sector itself. They see all that as “elitest academic mumbo jumbo” and just want to act like we are still on some sort of gold standard currency peg.
You are correct though that as bad as Obama has been the other side, right now, would be much worse.
Why do we have to settle for the least terrible?
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In this case, end the regulatory forbearance,
TOO LATE FOR THAT AS THEY NO LONGER NEED IT.
HOWEVER, SHAREHOLDERS HAVE LOST IN MOST CASES, SO WHAT’S LEFT IS PUNISHING AND/OR REPLACING MANAGEMENT, WHICH AT THIS POINT IN TIME IS ALSO PROBLEMATIC.
seize the banks,
THE BANKS ARE ALREADY FULLY REGULATED. I SEE NO REASON TO CLOSE THEIR BRANCHES AND CUSTOMER SERVICE FUNCTIONS? STOP THEM FROM LENDING?
zero out the bad paper
IT’S ALREADY MARKED TO MARKET OR MODEL. IF REGULATORS ARE FAILING IN THOSE RESPONSIBILITY THEY SHOULD BE REPLACED AND PROSECUTED.
in an orderly foreclosure/restructuring process,
THAT’S A MESS. MY PROPOSAL WOULD HAVE BEEN A LOT BETTER, IMHO.
and afterwards institute a payroll tax holiday.
IN MANY WAYS IT’S ALREADY ‘AFTERWARDS’
FOR THE MOST PART, BANKS WERE COMPLYING WITH THE EXISTING LAWS, AND REGULATORS HAD FULL ACCESS AS WELL. SHAREHOLDERS LOST MOST OF THEIR EQUITY. THE MAIN PROBLEM WAS FRAUD WHICH WAS AT LEAST PARTIALLY A FUNCTION OF THE REGULATORY SYSTEM SET UP BY GOVERNMENT, AND A COLLAPSE OF AGGREGATE DEMAND WHICH IS THE FAULT OF GOVERNMENT.
Do not allow anyone to receive a payroll tax holiday that is behind on their mortgage until their debts are restructured, and then use the payroll tax holiday/JGB to help them rebuild after they default.
I DON’T AGREE, AS ABOVE. IF THE BANKS MADE LOANS ON ILLEGAL TERMS THAT’S A DIFFERENT ISSUE. IF THE LOANS WERE MADE LEGALLY AND ARE ‘UNFAIR’ THAT’S ANOTHER FAILURE OF GOVT.
If someone is not behind on their payments and the loan is performing, then they can get the payroll tax holiday.
DON’T AGREE, AS ABOVE.
At the same time, you should prevent the payroll tax holiday or JGB from subsidizing employers. 90% marginal tax rates and excess profit taxes as we had in the 50s and 60s do wonders in this area.
WHAT DOES THAT ACCOMPLISH? CORPORATIONS ARE JUST PASS THROUGH ENTITIES. IF IT IS THE CASE OF ‘MONOPOLY PRICING’ THAT’S A DIFFERENT STORY WITH DIFFERENT OPTIONS.
If you do not do this, then you are cutting the relationship between demand and wages; boosting demand while wages stagnate.
I DON’T SEE HOW BOOSTING DEMAND DOESN’T ULTIMATELY SUPPORT WAGES.
Recessions and depressions happen for a reason, they are nature’s way of reducing income inequality when workers decide their wages are too low and decide to stop shopping.
WITH A CURRENCY MONOPOLY, THEY ARE A FAILURE OF GOVT TO SUSTAIN SUFFICIENT AGGREGATE DEMAND. MONOPOLY IS NOT SELF REGULATING.
If you bail out employers by having the government augment worker income or purchase output directly, then the result is a decrease in the wage share of the middle class.
THE REAL, TAKE HOME PAY GOES UP.
IT WAS THE MONOPOLIST ARTIFICIALLY CONSTRAINING IT’S OUTPUT OF NET FINANCIAL ASSETS THAT CAUSED THE COLLAPSE IN DEMAND IN THE FIRST PLACE.
You end up pushing down living standards for the average person in the name of avoiding output gaps.
INCREASING NET INCOMES DOESN’T REDUCE LIVING STANDARDS UNLESS PRICES GO UP MORE THAN THAT. AND THE PAYROLL TAX HOLIDAY WORKS TO LOWER PRICES AS BUSINESSES COMPETE WITH LOWER COSTS.
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In this case, end the regulatory forbearance, seize the banks, zero out the bad paper in an orderly foreclosure/restructuring process, and afterwards institute a payroll tax holiday. Do not allow anyone to receive a payroll tax holiday that is behind on their mortgage until their debts are restructured, and then use the payroll tax holiday/JGB to help them rebuild after they default. If someone is not behind on their payments and the loan is performing, then they can get the payroll tax holiday.
At the same time, you should prevent the payroll tax holiday or JGB from subsidizing employers. 90% marginal tax rates and excess profit taxes as we had in the 50s and 60s do wonders in this area. If you do not do this, then you are cutting the relationship between demand and wages; boosting demand while wages stagnate. Recessions and depressions happen for a reason, they are nature’s way of reducing income inequality when workers decide their wages are too low and decide to stop shopping.
If you bail out employers by having the government augment worker income or purchase output directly, then the result is a decrease in the wage share of the middle class. You end up pushing down living standards for the average person in the name of avoiding output gaps.
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agreed in general.
“I agree that in the long run, if the government does not tax, then people could abandon the currency and you will have chaos. But in the short run, a decrease in taxes will only boost output to the degree that is meets people’s balance sheet goals on day 1.
***Agreed.
At 0% payroll taxes, it could take 10 years. In the meantime, government will need to purchase output directly or let it fall to a lower level.”
***Agree that’s a possibility. But I think the combination of a payroll tax holiday and per capita revenue distributions to the states could turn the tide of the real economy in short order.
It’s just my humble opinion, and I agree that if it doesn’t work after 90 days direct govt spending would be in order.
That means that my payroll tax holiday and revenue sharing and $8/hr job and housing proposals would have taken effect last August (and fed and tsy and banking proposals the year before that), and, if needed, additional ’emergency’ govt spending before year end.
I agree it makes no sense to sustain financial sector bubbles, but it does makes sense to sustain real output and employment (also qualified as a lot of today’s non financial real output is also a waste of human endeavor).
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It is not just that tax cuts have a lower multiplier, but that this multiplier could be zero if people receiving the cut are trying to repay debt. If the public en masse desires to repay debt, then output is in the first loss position; if people want to save $60 Trillion, and the government gives them $59 Trillion, then output can still fall by $1 Trillion.
This is why in the NIPA accounting, the “G” is government purchases of output, not government expenditures. In the same way, the NIPA “TX” is not income taxes, but only taxes on the production and import of purchased goods. There is no reason why deficit spending in the flow-of-funds sense needs to show up as a boost in purchases.
It could just be directly diverted to debt-repayment, in which case you are conducting a form of monetary policy in which government issues currency to extinguish private sector claims with the proceeds deposited in excess bank reserves. Output can be bypassed completely.
I agree that in the long run, if the government does not tax, then people could abandon the currency and you will have chaos. But in the short run, a decrease in taxes will only boost output to the degree that is meets people’s balance sheet goals on day 1.
At 0% payroll taxes, it could take 10 years. In the meantime, government will need to purchase output directly or let it fall to a lower level.
The second issue is that when you cut the loop and allow government to always supply all income needed to maintain demand, then you break the relationship between wages and demand, and also between financial claims on income and the underlying income.
In the .com era when the value of claims on tech stocks was way out of proportion with their earnings prospects, it was healthy to have most of that value go up in smoke, rather than have government boost the underlying income of tech stocks in order to prop up investors.
In the same way, if the economy has devolved into a state where there are unrealistic MBS and Bank paper claims on households earning too little, then most of those claims need to be adjusted downward *before* the government boosts household incomes. Any income boosts that occur prior to debt restructuring will be channeled directly to claim holders, and will amount to government subsidy of asset holders.
Government needs to oversee this in an orderly manner, and the way to start is by enforcing the prompt corrective action laws and ending the various extend-and-pretend programs, together with ending government guarantees of private paper. There is no public purpose served by the government guaranteeing that any traded private security will perform, which is why I am troubled by the FDIC insurance proposal.
There is a similar risk with employers not paying their workers enough to maintain demand, and then having government make up the difference by augmenting employee wages via a payroll tax holiday.
It would be nice to see a whole package of reforms that address how you can maintain output while limiting these distortions, otherwise the income maintenance policies will end up putting downward pressure on wages and upward pressure on asset prices.
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we know that if taxes go to zero prices go up in a hyper inflationary spiral that puts an end to any deflation that may have preceded it.
Increasing govt spending ‘work’s and increases public consumption and public investment and subsequently private consumption and investment as well.
cutting taxes also ‘works’ and adds to private consumption and private investment.
public spending has a higher ‘multiple’ which means you have to cut taxes more than you have to increase govt spending to get the same effect.
right now I vote for the larger tax cut to support private sector demand while longer term supporting essential govt services and infrastructure.
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A liquidity trap is one in which the demand for income greatly exceeds the demand for output. As loans create deposits and not the other way around, no one “gets” the money used to repay debt. This money is not available to purchase output.
In such an environment, boosting income will not boost output, and government will need to purchase output directly, or engage in public-private partnerships such as cash-for-clunkers programs. I don’t view this as part of a capitalistic system, and neither is regulatory forbearance for banks.
The turnover is not occurring because the banks are pretending the loans are sound, and government is pretending the banks are sound.
In this case it is Hoover-esque to just assume that the turnover will spontaneously occur. Government, as bank regulator, needs to enforce prompt corrective action, set bank capital to zero, and force an orderly mass debt-restructuring.
You can play a game in which everyone is foreclosed upon and then rents their own house at a reduced mortgage rate, or you can play a game in which debts are reduced and any sale proceeds above that amount are captured, or you can just foreclose on everyone and they will buy the house next door — all these solutions are basically equivalent. The point is that government needs to coordinate this balance sheet adjustment and clear the unpayable debt. In the process, all bank capital and bondholders need to be zeroed out. After the debt is reduced, an income boost will be more effective.
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“But artificially boosting incomes to pay down debt will not increase demand at all. You are just bailing out the banks. First, clear the excess debt, and only at that point will an increase in incomes result in an increase in demand.”
my proposal is to sustain incomes sufficiently to sustain aggregate demand for output and employment. that doesn’t mean enough to pay down all debt. there will still be bankruptcies, and the usual turnovers found in a capitalistic system.
there will also be sufficient demand to employ people in alternative endeavors when any one fails.
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it’s one thing to lose by personal irresponsibility and other to lose due to a govt blunder (failing to sustain demand)
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mostly agreed but as a matter of ‘fairness’ i’d sustain incomes with the payroll tax holiday and revenue sharing rather than forgive debt.
but the numbers work either way
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zanon Reply:
November 14th, 2009 at 2:13 pm
Agreed — it is more fair. No one wants to bail out their irresponsible neighbor, and the US policy of rewarding idiocy and banker-greed has already caused great distortion and incalculable long-term harm to the Republic.
The “smart, responsible” household that did not buy in the bubble has seen homes remain out of reach, propped up by the Govt, and had to tolerate incredible volatility in the 401(k). How has being “smart” and “responsible” helped them?
They feel like suckers and they should because they are.
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RSJ Reply:
November 14th, 2009 at 5:47 pm
It is not a question of fairness. If a household pays 2X for an asset believed to be worth 2X, but the asset is marked down to X, then you can mark down the liability to X, and convert the remaining liability to a tax obligation associated to the house, but not to the buyer. The liability is subordinate to $X of resale.
In this case, the balance sheet of the household is not improved since before the sale. They are not benefitting in terms of an improved net worth since before the crisis, they are only benefitting from having their mispricing mistake rolled back. We are not talking about professional investors here buying bonds, but households buying opaque idiosyncratic “assets” that generate no cash-flow, and these prices were validated by appraisers and lenders. You need to choose between the joy of watching these households thrash about for a few decades versus the joy of living in an economy not on government life support and with fairly priced assets.
In this proposal, house prices are instantly cut in half (due to the tax liability) — something that benefits Zannon’s prudent homebuyers, who now also benefit from lower rates and a payroll tax holiday, and a history of spending less to rent that to buy as they waited things out. All of that is fair.
Moreover, you are seizing the banks and zeroing out bondholders, not bailing them out. That is a powerful lesson for future lending bubbles.
Once you do that, the loans become assets held by government, and should be disposed of in a way that promotes the public purpose. They are claims on households held by government.
It does not serve the public purpose to have huge fiscal spending projects to give the household sector enough money to repay these claims.
And to the degree that households are recapitalized by a payroll tax holiday without seizing the banks, then you are subsidizing the banks as people pay down debt. You have to choose between the claims or output, and payroll tax holidays will be diverted to claims first. So the government will be forced to directly purchase output and engage in stimulus spending (a la cash for clunkers) to maintain output. This means the government takes control of the economy which also does not serve the public purpose.
It is always the financial claims that need to adjust to the underlying cash-flows, rather than have the government boost household cash-flows in an attempt to support financial claims.
Moreover, to the degree that the debts succeed in being repaid as a result of stimulus spending or tax holidays, then house prices will be prevented from falling artificially. So you take receivership of the banks first, adjust the claims, and then boost payroll income to close the 30 years of stagnant wages. Then you auction off the banks as part of a narrow banking system holding reduced claims.
You need both — balance sheet adjustment and stimulus, but you do not want to use stimulus to retire a GDPs worth of excess claims, dollar by dollar.
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warren mosler Reply:
November 14th, 2009 at 9:26 pm
“And to the degree that households are recapitalized by a payroll tax holiday without seizing the banks, then you are subsidizing the banks as people pay down debt.”
the loans in question went bad because the govt allowed demand to collapse. It’s their job to manage their money monopoly for public purpose. I don’t look at restoring demand that allows people working for a living to make their payments as bailing anyone out. If you stand on someone trying to swim and he starts drowning, and you jump off, i don’t look at that as bailing him out. just my point of view.
And yes, tax adjustments can restore demand both quickly and sufficiently for full employment and high levels of output no matter what the debt situation is.
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RSJ Reply:
November 14th, 2009 at 10:05 pm
What you are saying is that if the price to income doubles, then it is the responsibility of the government to double people’s incomes in order to allow them to service the loan.
This is setting yourself up to fail.
Certainly the government is responsible for letting the banks be in control and get away with poor underwriting standards, and the government is also responsible for insufficient demand management in many ways.
But artificially boosting incomes to pay down debt will not increase demand at all. You are just bailing out the banks. First, clear the excess debt, and only at that point will an increase in incomes result in an increase in demand.
I think this is insufficient. We suffer from a balance sheet problem and a wealth distribution problem. For the last thirty years, median real earnings have been flat, and median household earnings were growing at negligible rate. Households fooled themselves into thinking that they were staying above water by borrowing to purchase assets, and discovered that they were not, because their houses and other financial assets were mispriced. As a result, there is a huge balance sheet hole — about 20 Trillion dollars. The output gap is too small to fill this hole via fiscal spending in any reasonable time period. Even at 10% unemployment, filling this hole will take very long time. At $8/hr, it will never be filled.
Keep in mind that the bottom 75% of households (by income) have negative net financial assets. This includes indirect assets such as pension fund benefits. This data is from 2007 — before the crisis. So households were assuming that their house would swing them to a positive financial position and fund retirement. If you thought that your house was worth 5 times your income and discovered that it is worth 3 times your income, then a 15% payroll tax holiday will take you 13 years to plug the hole. Of course, you were assuming that your assets would appreciate with GDP over that time. By the way there is a lot of age discrimination going on, so finding a good paying job if you are 50 is hard to do. In many fields, keeping a good paying job at 55 is hard to do. So these are the kinds of pressures that households are thinking about as they make their spending plans.
I think a more effective mechanism is to end regulatory forbearance, seize the banks, zero bank capital, and forgive debts by a large enough margin so that median household balance sheets are restored to a positive balance. If you combine the balance sheet adjustment with the demand augmentation measures that boost median wages by 1/3 or so, and have a commitment to keep them growing with GDP going forward, then you can have a sound narrow banking system together with positive GDP growth. Otherwise, you can certainly boost output as a result of fiscal spending, but you will not boost private sector demand. That is how you get into the Japanese situation of start and stop “stimulus” spending that never seems to have a lasting effect. This type of spending, spread over a decade, is an enormous distortion to the economy.
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Curious Reply:
November 14th, 2009 at 8:25 pm
“…their houses and other financial assets were mispriced”
RSJ, if you believe that assets were mispriced, that implies that you know what their correct price is.
So I have to ask: What is it and why?
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