more NY Fed payroll tax holiday comments
Posted by WARREN MOSLER on November 16th, 2009
>
> (email exchange)
>
> On Sun, Nov 15, 2009 at 12:12 AM, Roger > wrote:
>
> One can almost imagine the Rubin camp is trying to head off a
> possible move to follow logic – by baffling people with bull.
> Coming from the NYFed, this paper makes little sense. Could they really have a
> manipulative agenda?
>
No, not at all. This just somehow slipped through. They rejected full Ricardian equivalence years ago.
Ricardian equivalence states that a tax cut won’t get spent because people will ‘know’ it just means higher taxes later as they ‘know’ the federal budget ultimately has to be balanced, and therefore they will simply set aside any payroll tax holiday money in a savings account and not spend it.
This means, for example, that if you are behind on your mtg payment and your take home pay goes up due to a tax cut you will put that extra pay in a savings account and not bring your mtg up to date.
As I said, the Fed rejected all this many years ago.
I do agree the first take home pay increases received from a payroll tax holiday would largely be used to make mtg payments to avoid foreclosures, etc., and pay off other outstanding obligations, all of which is called ‘adding to savings’ which is what we need to happen in many cases before consumption can resume. And it also ‘fixes’ the banking system by stemming delinquencies and defaults.
And the longer we wait the deeper the hole we need to get out of.
>
> How does one call the Fed economists on such bull?
>
It would take a letter from a recognized scholar precisely pointing out the errors.
Meanwhile, unfortunately, it’s delaying consideration of what’s needed to restore output and employment.
One last thing-
In the neo classic (math) model, which doesn’t recognize the currency itself as a public monopoly, prices and wages instantly adjust such that there is never any unemployment.
The ‘New Keynesian’ school of thought pretty much agrees, except that they believe we get unemployment like what we have now because prices (and wages) are slow to adjust. So even they believe that we will gradually ‘automatically’ return to full employment.
Keynes, however, argued that if elevated ‘savings desires’ persist low aggregate demand and high levels high unemployment can persist even if prices and wages continue to fall, and it all can only be reversed by deficit spending to restore demand.
In this administration the ‘New Keynesians’ and neo classics are clearly winning, as they are seeing forecasts of slow, gradual, long term improvement in output and employment which fit with their understanding that this is a how the adjustment works, and that prices and wages will slowly adjust and automatically return us to full employment. The reason it takes so long is that prices and wages are ‘sticky’ and slow to adjust.
They are not willing to use the likes of a payroll tax holiday to restore aggregate demand because the believe that would be ‘borrowing from china and leaving our children that debt to pay’ and all that gold standard nonsense. Further to that point, they believe we’ve already done too much of that, though probably a necessary evil due to the circumstances, and we are rising falling into the ‘debt trap’ and all the rest of that type of fiscal nonsense.
Hence the recent pronouncements from the Obama administration proposing 5% across the board cuts in federal spending for next year.
As well as pronouncements that he wants less consumption, more savings, and more exports, which means lower standards of living in the face of the greatest and rapidly growing abundance of real goods and services in history.
>
> Assume, assume, assume – they obviously assume too much, which is no
> way to direct national policy.
>
They are relatively intelligent people who happen to be wrong in their basic assumptions, and they have near universal academic support. The few academics who do understand the monetary system (less then 30) are called ‘heterodox’ vs ‘orthodox’ and not taken seriously.
I call it a massive case of what Galbraith called ‘innocent fraud.’
[top]
November 17th, 2009 at 4:16 am
A better name for it is “bailing out asset holders”:
If a bank underwrote a household to buy a house at 6 times it’s wages, the solution is not to boost the household’s wages so that they can afford the house, but to first seize the bank, write down the bad paper, restructure/foreclose on the house, and only then should you institute a payroll tax holiday.
Otherwise government funds are going directly to MBS holders and bank shareholders as people use the government subsidies to repay debt.
Not only is this grossly unfair, but it continues the tradition of using demand-maintenance policies to bail out the wealthy and asset holders at the expense of the middle class. The result of these policies is growing inequality.
Any attempt to make debts payable or to insure paper is a crime against the middle class, as bank shareholders and creditors need to be zeroed out first.
If you don’t do this, you are going to end up in a Japan-style situation as everyone pretends the paper is good, and the government is forced to keep shoving enough money to the middle class so that they can hand that money over to asset holders. This only keeps the unsustainable inequality game going a bit longer, and does not serve the public purpose. The public purpose is served when those who make bad bets in the financial market are zeroed out, and there is a safety net for the middle class to help them rebuild. The key word is “rebuild” not make good on debts. In fact, I would make foreclosure a pre-requisite to any homeowner before they can receive a payroll tax holiday, as not a penny of those funds should be used to make MBS holders or banksters whole.
Reply
Floccina Reply:
November 17th, 2009 at 5:58 pm
“If a bank underwrote a household to buy a house at 6 times it’s wages, the solution is not to boost the household’s wages so that they can afford the house, but to first seize the bank, write down the bad paper, restructure/foreclose on the house, and only then should you institute a payroll tax holiday. ”
A payroll tax holiday will not save mortgages on 6 times wages. The worst banks would still fail as they should.
“Not only is this grossly unfair, but it continues the tradition of using demand-maintenance policies to bail out the wealthy and asset holders at the expense of the middle class. The result of these policies is growing inequality.
That is why this is not a direct bailout most of tax savings would go to prudent people who did not make or take bad loans. And BTW the people who took the loans should take some of the hit they acted imprudently.
Reply
November 17th, 2009 at 6:51 am
I see your point.
My position is that the currency monopolist working in the public interest is responsible to sustain sufficient aggregate demand to allow the real economy to employ everyone willing and able to work in the production of real goods and services.
If keeping gdp growing at potential (which the Fed is also charged to do, though it doesn’t have the tools, which is another story) means lenders who made home loans based on incomes solvent, I don’t have any problem with that.
If we want lenders to loan based on being able to stay solvent with periodic collapses of gdp, and then conducting policy to make that happen, that policy would have to be approved by Congress.
Also note that under my various proposals on this site I support a much narrower form of banking than is currently the case.
Japan’s problem is a lack of aggregate demand which could also be alleviated by the right tax cuts/larger deficits.
While there is public purpose to avoid moral hazard issues in the financial markets as you state, and I’ve supported many times, it’s an intermediate public purpose for the larger purpose of facilitating the production and consumption of desired real goods and services.
Reply
November 17th, 2009 at 1:29 pm
That is not enough. You also need people that can afford to buy the output, not just have jobs to make it. Preferably, they afford to buy the bulk of that output out of their wages — not from the shifting generosity of government. Government must always fund the productive investment needs of the private sector, but there are serious risks when consumption demand is disassociated from wages paid.
For example, workers can be given government vouchers to buy goods. As long as those vouchers are not offset with taxes, you are adding to consumption demand that does not come from wages, boosting profits more than would be sustainable. In this case, the workers are just passthrough for the demand. In the same way, employers can extend credit to “loan” their employees money to purchase output. As long as those loans keep getting rolled over — or increased — you again disconnect demand from wages paid. Then, when the banking crisis comes, the government will first funnel enough money to workers to make all those loans good — at which point the tax exemption is rolled back, and workers can continue to shop. The end result is a wealth distribution far in excess of what would be possible if demand was kept in line with wages.
It seems like a good thing — “boosting demand” — but historically, it is during recessions that the purchasing power of the middle class increases.
During expansions, that ratio falls, and the middle class becomes a bit poorer in terms of wage share each year that the economy expands. Demand is “sales”. Sales may be equal to National income, but it is not equal to average wage income. When the middle class feels it cannot continue to lose purchasing power — it deploys the one weapon that always works: it stops shopping and plunges the economy into a recession. In that case, business lowers prices to clear inventory, and the average wage improves in real terms. This is a fight that workers always win. If business cuts hours (or employment) by 10%, then sales fall by 30%. If hours are cut by 20%, then sales fall by 50%. Median wage shares will always rise, and sadly, this is one of the few circumstances in which they rise.
But when government intervenes and boosts demand beyond the amount necessary to maintain productive investment, you are funding lending on real estate, repayment of debt, or other techniques that allow output to be purchased apart from wages.
The net result may be an increase in hiring or even a short-run increase in output, but the purchasing power of the middle-class will deteriorate over time, unless you compensate the lack of price deflation with other wage boosting policies. These policies need to be just as vigorous as the demand boosting policies.
In the 50s and 60s, wage shares boomed without deflationary pressures. That required 90% marginal rates, tight bank regulation, and strong unions. The very year that the upper tax bracket was cut from 90% to 75% the purchasing power of the middle class began to decline, and within 4 years it fell 10%. By 1982 it was 15% from peak, and by 2006 it had declined by almost 40%. That was the effect of the “Great Moderation” on the middle class — a 40% drop in purchasing power per hour worked.
Capital adequacy does not have a “recession exemption”, and assets are not guaranteed by the government. I know this is a quaint view, but let’s not pretend it would take an act of congress to enforce the laws already on the books. FDIC is seizing small banks night and day and prompt corrective action is already a legal requirement — do you think Citi is exempt legally or illegally? Again, this is not so much a moral issue as a distributional issue. When one small group holds tens of trillions in unpayable claims on a shrinking middle class, then government creating enough money to make all those claims good will shift wealth in a dramatic way. Calling such a bailout “rebuilding private sector savings” is misleading.
Yes, this is good, but what is the public purpose of allowing banks to re-lend deposits at all? That is a gold-standard holdover. There is no shortage of coins so that we need to combine depositor funds with loans. Require 100% reserves, and have loans be funded fully by government, with banks serving as credit underwriters via pledged capital — cash only. They can do credit-analysis, so that loans themselves are not decided politically, but all loanable funds are first lent by government to banks. Then you can set any rate and break the association of bond sales with interest maintenance. Also, no one should be able to use an “FDIC credit model” to escape fat tail risk. That is why bank capital is in the first loss position. FDIC credit models must be used, but ultimately bank capital needs to be the sink for risk.
No, their problem is that they took out loans to buy real estate for $100,000/square foot, and then pretended these loans could be repaid. They gave 100 year loans to fishermen to buy condos in Kyoto. As a result, the government has spent the last 20 years building bridges to nowhere in order to funnel enough money to the public to bring those debts down by 1/3 — and it’s still not enough. This is evidenced by a lack of demand, but look deeper to see the reason for the collapse in demand — address that reason and close the banks on day 1 of the crisis. Otherwise, you distort the economy. A bridge should be built if it is needed, not to funnel money to banks.
Reply
November 17th, 2009 at 3:23 pm
That is not enough. You also need people that can afford to buy the output, not just have jobs to make it.
EXACTLY MY POINT.
Preferably, they afford to buy the bulk of that output out of their wages — not from the shifting generosity of government.
WITHOUT TAXES, THEY CAN BUY MORE THAN THEIR OUTPUT, AS GOVT BUYS SOME OF IT. THE PURPOSE OF TAXES IS TO TAKE AWAY SPENDING POWER TO LIMIT IT TO WHAT IS NECESSARY TO BUY THE OUTPUT GOVT DOESN’T BUY.
RIGHT NOW GOVT IS TAKING TOO MUCH, AND TAKING LESS ISN’T ‘GENEROSITY.’ IT’S JUST MANAGING DEMAND FOR PUBLIC PURPOSE.
Reply
November 19th, 2009 at 12:17 pm
[...] In the neo classic (math) model, which doesn’t recognize the currency itself as a public monopoly, prices and wages instantly adjust such that there is never any unemployment . The ‘New Keynesian’ school of thought pretty much agrees, …Continue [...]