more NY Fed payroll tax holiday comments

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>   (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.’