The Center of the Universe

St Croix, United States Virgin Islands

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

Spending Cuts, Not Tax Hikes, Best for Deficit: NABE

Posted by WARREN MOSLER on August 22nd, 2011

Spending cuts have higher multiples, but in any case it’s all beside the point.

The problem is the deficit is too small, not too large.

After the post S&P downgrade discussions, where all agree the US govt ‘prints the dollar’
the argument that there could be a Greek like financial crisis has quietly vanished.

The only remaining case against the deficit,
which no one is making,
for obvious reasons,
is that inflation from ‘overspending’ is too high, and even higher levels of unemployment are needed to fight inflation.

Spending Cuts, Not Tax Hikes, Best for Deficit: NABE

August 22 (AP) — The majority of economists surveyed by the National Association for Business Economics believe that the federal deficit should be reduced only or primarily through spending cuts.


The survey out Monday found that 56 percent of the NABE members surveyed felt that way, while 37 percent said they favor equal parts spending cuts and tax increases. The remaining 7 percent believe it should be done only or mostly through tax increases.

As for how to reduce the deficit, nearly 40 percent said the best way would be to contain Medicare and Medicaid costs. Nearly a quarter recommended overhauling the tax system and simplifying tax rates and exemptions. About 15 percent said the government should enact tough spending caps and cut discretionary spending.

The latest survey by the NABE was conducted in the two weeks ending Aug. 2, the day that the Senate passed and President Obama signed legislation to cut spending by more than $2 trillion and raise the nation’s debt ceiling.

The agreement managed to avert a potential default, but Standard & Poor’s downgraded U.S. credit from AAA to AA+, citing the political wrangling over the deal as a reason.

According to the survey of 250 economists who are members of NABE, nearly 49 percent of those responding said the country’s fiscal policy should be more restrictive, while nearly 37 percent said they believe the government should do more to stimulate the economy. The remainder said fiscal policy should remain the same.

At the same time, more than 70 percent of the people that responded said they expect U.S. fiscal policy to be more restrictive over the next two years.

34 Responses to “Spending Cuts, Not Tax Hikes, Best for Deficit: NABE”

  1. PJ Pierre Says:

    Nicely put Warren,very succinct, keep it up. It seems that it is getting harder to hide behind the innocent frauds.

    Reply

    roger erickson Reply:

    @PJ Pierre,

    Center of the Universe needs only more PR. Otherwise, the electorate’s train of thought remains boarding at the station for so long … that some opportunists just bribe the driver to leave.

    Gotta sympathize with the spirit if not the intelligence of the motivated bribers, yet they’re so narrow-minded that they’re always leaving an insanely large Output Gap on the platform! There is a better way.

    Either you can see an Output Gap, or you can’t.

    Reply

    WARREN MOSLER Reply:

    thanks!

    Reply

  2. RJ Says:

    Here’s a simplified combined banks balance sheet for the US

    ASSET

    aa Govt bonds or central bank credit + Notes and coins (Govt debt)
    bb Non Govt bank borrowing (Non Govt debt))

    LIABILITIES

    cc Customer deposits for consumption
    dd Customer deposits for financial savings

    If aa is low then bb must be higher to compensate. This will eventually create a burden on the non Govt sector. and also result in cc and dd being too low as well over time.

    Questions.

    1 Is the above simple explanation adequate
    2 What are the current approximate figures for the US for aa bb cc and dd.
    3 What should aa and bb be and how should this split be calculated eg on the proportion of spending in the economy or just raise aa (through Govt deficits) until cc and dd are at adequate level etc.

    Or is there a MMT paper that covers this.

    Reply

  3. Unforgiven Says:

    Warren -

    Hope Irene isn’t ripping things up too badly down there..

    Reply

  4. Mario Says:

    Never thought of the multiplier effect with spending cuts. Great point. If spending cuts have higher multiples then you’d either want to cut alot less of them than what they are considering if you cut them at all. And you’d also need to consider that when attempting to cut taxes instead of increase or maintain spending to hit a certain deficit target.

    another case against spending cuts is that government is bad and should be limited in size. It appears that this is the line they are attempting to push now to justify entitlement cuts over tax increases.

    Reply

    WARREN MOSLER Reply:

    and it means if you do cut spending, you have to cut taxes that much more just to ‘break even’!

    Reply

    Mario Reply:

    @WARREN MOSLER,

    exactly.

    @JCD, @ESM, @Djp

    this is another reason cutting spending is “counter-productive” if already admit you do want a larger deficit.

    Reply

    ESM Reply:

    @Mario,

    I don’t see why having a different or higher multiplier makes cutting spending “counter-productive.” You just cut taxes that much more. Is it so hard to multiply or divide?

    It’s important to understand what kinds of policies have negative effects. Clearly, income taxes have negative effects: they discourage people from earning money; they burden people with record-keeping and intrusion from the government; and they incentivize people to do uneconomic things in order to minimize their tax bill. You have to be creative to come up with positive effects deriving from an income tax.

    While government spending can have many positive effects, it is quite easy to find examples where the effect is negative. One of the reasons is that many government spending decisions involve the allocation of real resources by a political process. That is not the best way to optimize their use. That’s how you get airports in western Pennsylvania that nobody uses, or highways in West Virginia with no traffic.

    Another reason is that incentives are easily skewed, especially for entitlements. If you give a person a stipend when he loses his job, he is less motivated to find a new job, for example.

    I’m not saying I’m against all government spending. Just saying that the country would be better off if it were lower (assuming taxes were lowered appropriately to maintain aggregate demand) than where it is right now. If federal government spending were 12% of GDP, I might feel it was too low, and I would be in the liberal camp. It’s all relative.

    WARREN MOSLER Reply:

    recognizing of course, that govt spending and govt funding can be two different things.

    Mario Reply:

    @ESM,

    You just cut taxes that much more.

    After you cut out FICA fully, there isn’t actually THAT MUCH more in taxes to pare down when you consider exemptions, deductions, adjustments, and credits, etc. Sure we could lower the income tax brackets down a notch or two but if you wanted to seriously slash the Dept. of Education and Defense and Energy for example, I think you’d be hard pressed to find enough in taxes to offset such a huge cut in spending when you factor in the multiples. With FICA cut out (on both employee and employer) you’ve already slashed total tax revenue in half. That’s HUGE man and doesn’t leave as much room as you’d think for further tax cuts. In all fairness much of the tax structure (not the rates but the structure) is actually quite fair it seems to me. That’s actually one reason why they are so complicated…they take into consideration just about every possible outcome an individual tax payer could be in for each possible exemption, deduction, credit, adjustment, anomaly, etc, which is why it can be rather confusing at times. We could slash sales taxes and that would likely have a very high multiple attached to it, but then you’ve got to consider if the states have the proper funding they need, etc. I honestly don’t know the answer to that, it might be a good option, I’m just thinking out loud.

    That’s how you get airports in western Pennsylvania that nobody uses, or highways in West Virginia with no traffic.

    If you give a person a stipend when he loses his job, he is less motivated to find a new job, for example.

    okay ESM whatever you say.

    It’s all relative.

    Yes it is all relative…to our output gap, inflation, and UE rates. Nothing else.

    Mario Reply:

    @ESM,

    I used to live in Pittsburgh ESM. Here’s some stats for you about the PIT airport from wikipedia. You do realize that the PIT ariport is one of the largest hubs for US Airways right? http://en.wikipedia.org/wiki/Pittsburgh_International_Airport

    It is owned and operated by the Allegheny County Airport Authority which also operates the Allegheny County Airport. PIT is primarily a passenger airport serving the Pittsburgh metropolitan area, providing 160 non-stop flights per day to 36 destinations with twelve airlines.[4] It also serves as the home of Pittsburgh Air Reserve Station, a combined facility of the Air Force Reserve Command and the Air National Guard, providing aerial refueling, air mobility and tactical airlift support to the U.S. Air Force and other U.S. Department of Defense activities. Finally, the airport also has a robust air cargo facility and supports extensive general aviation operations.

    PIT is the second busiest passenger airport in Pennsylvania and 47th-busiest in the United States,[5] serving 8,710,291 passengers in 2008 on 167,729 aircraft operations.[6] The airport has the longest runways of a commercial airport in Pennsylvania at 11,500 feet (3,500 m). Until 2004, US Airways operated its largest hub at PIT. As of 2010, the airline remains PIT’s largest carrier (handling 26 percent[7] of passengers), though once the merger between Southwest Airlines and AirTran Airways is completed, the merged carrier is expected to become the largest carrier.[7] US Airways currently utilizes ten gates, more than any other airline at PIT, followed by Delta which operates five gates.

    Clonal Antibody Reply:

    @Mario,

    Pittsburgh has another interesting aspect. It is one of the few cities in the US to use “Land Value Taxation”

    Also, Michael Hudson has a good article today – Michael Hudson on the State and Local Budget Crisis

    ESM Reply:

    @Mario,

    “You do realize that the PIT ariport is one of the largest hubs for US Airways right?”

    I did realize that, although I had no idea that PIT was so small. It carries fewer than 1/3 of the passengers annually as BOS.

    In any case, I’m fine with Pittsburgh having an airport. And even a football team.

    I was referring to the late King of Pork and his eponymous pork chop of an airport

    Mario Reply:

    @ESM,

    “I was referring to the late King of Pork and his eponymous pork chop of an airport”

    LOL. I am not disagreeing with you there but I would say it’s less than peanuts relatively speaking. Pittsburgh’s a great place and I had nothing but a good time there…it’s so darn cold and so little sunlight for too long! Now I’m in LA of all places go figure!

    Mario Reply:

    @WARREN MOSLER

    @ESM,

    recognizing of course, that govt spending and govt funding can be two different things.

    yes good point indeed!

    Tom Hickey Reply:

    @Mario,

    ESM: “I don’t see why having a different or higher multiplier makes cutting spending “counter-productive.” You just cut taxes that much more. Is it so hard to multiply or divide?”

    Tax policy should be designed to take advantage of the two functions of taxation, 1, withdraw NFA from non-government iaw functional finance, and 2. to discourage negative externality and behavior.

    Taxes should be eliminated on what contributes positively to the economy and increased on what creates an economic drag, as well as on what is socially destructive and disruptive.

    djp Reply:

    @Mario,

    You see what you want to see.

    A group of dudes says they believe A is what should be done to achieve X.

    These same dudes say it is clear that X is desirable.

    You then claim they have somehow validated that doing -X is clearly what we should do to achieve -X. They are so smart, and agree with you.

    The only problem is, they believe that X is the goal and you believe -X is! So whatever logic they are using is clearly inconsistent with yours, why should you accept their other conclusions. It’s not even clear that if you independently asked these same people how best to achieve -X that they would say -A!!

    On taxes ( a different topic ):
    Many people on both sides of the aisle, and many economists agree that the complications of the tax code are an enormous drain on real resources. I really don’t understand how you can think that the current, ridiculously complex code is a good thing. One thing that many people do have right on this blog is the difference between busy work (digging holes and refilling them) versus real output (making a better strawberry). Having people waste time and resources navigating the tax code seems worse than hiring people to dig for gold, melt it down, and bury it.

    The tax code is also a bigger destruction of real output than it might at first seem, since the more productive you are, the more time the gov wants you to spend doing taxes. Doing taxes isn’t an $8/hr job…

    Mario Reply:

    @Djp,

    right but we all agree on the same conclusion (X) which is larger deficits. So nobody here is for -X (smaller deficits).

    We are simply arguing over the means to get there. You guys seem to think that slashing spending all over the place is no problem for achieving X b/c you can always just cut taxes. I am saying that mathematically and logistically that’s not really accurate.

    I know. I am not expecting everyone to agree with me on the tax code stuff for sure. It’s not to say that I’m against tax revisions either but I am studying the tax code as we speak in depth and I honestly so far everything makes sense and is reasonable to me. I mean when you have 300 million people in one place the various living and income possibilities are QUITE extensive and in order to be fair to each particular scenario you need adjust your tax code accordingly. In some weird sick way, I guess I see it as an act of kindness and consideration to people. I know call me crazy I won’t blame you there!!! LOL But that’s just what I see with it at this time.

    The tax code is not a destruction of real output since accountants (which I am becoming fyi) are employed in those endeavors as well as others through the multiplier process. So it’s good for GDP in that sense. Yes I agree with you and am very glad that taxes is not an $8/hr job. ;)

    ESM Reply:

    @Mario,

    “…but I am studying the tax code as we speak in depth and I honestly so far everything makes sense and is reasonable to me.”

    I don’t think I’ve ever heard this sentiment expressed in my entire life. The income tax code is a monstrosity. It is a terrible offense against mathematics and logic and rigor and the law. The original sin is that it is virtually impossible to define income rigorously and to distinguish it from return of capital, or compensation for damages, or from a gift. Another problem is that when you have two counterparties who face different marginal tax rates, it leads to transactions that would not occur (because they would be uneconomic) in a world without an income tax. That is not a good thing.

    “The tax code is not a destruction of real output since accountants (which I am becoming fyi) are employed in those endeavors as well as others through the multiplier process. So it’s good for GDP in that sense.”

    Of course it is. You are employing very smart people essentially to dig holes and fill them in again. How does society benefit from the unending competition between the tax accountants/lawyers trying to find ways to minimize taxes for their clients and the accountants/lawyers for the government trying to maximize those same taxes? They could be employed finding new and better ways to allocate capital to investment instead.

    It’s kind of crazy when you think about it. I mean why tax income in the first place? If you want to redistribute wealth, shouldn’t you just tax wealth instead? There are some people (and businesses) who earn very high incomes for only a short period of time and actually lose money (or at least earn very little) for long periods of time. Does it seem fair to punish them for having unsteady income by taxing their windfall years so heavily? Also, why punish people for being productive? You should punish people for being idle, or for consuming too much. Don’t you think?

    Mario Reply:

    @ESM,

    LOL. Yes I know. I’m not expecting anyone to agree with me about my perceptions of the tax code. I see the various filing statuses and dependent clauses and credits and deductions all as acts of kindness to those types of people so that they can get the greatest reasonable tax break in our system possible. Call me crazy and I totally understand!! LOL

    There’s always a better job to be done somewhere in the land of potentials. Instead I’ll just focus on being the greater contributor to aggregate demand I’d like to be and help out my economy that way. It’s always best to theorize and propose a better world after you’ve taken care of yourself and yours. ;)

  5. Vincent Says:

    I met up with committed progressive democrats (ivy league grads) last night and suggested an immediate suspension of FICA. I lamented that we’ve bailed out the banks, but not the people. Their response centered around Weimar Germany……… This is not a isolated experience for me. More like the norm. But, I’ll keep trying. (And people fret about the Tea Party.)

    Reply

    Mario Reply:

    @Vincent,

    keep trying!!! Explain to them the difference in foreign denominated debts. People instinctively get that and also perk up when they realize that they are comparing apples and oranges. Keep it up!!

    Reply

    Clonal Antibody Reply:

    @Vincent,

    See also this excellent post by Arun Dubois -Mythologies: Money and Hyperinflation

    In an earlier post, Marc Lee mentioned in passing the German hyperinflation episode of the 1920s. It’s remarkable that this event still holds such sway over the popular imagination despite other more recent instances of hyperinflation. Certainly, the imagery is powerful: German citizens pushing wheelbarrows full of worthless paper money around for everyday purchases, banknotes used as wallpaper, or dramatic charts showing a hyperbolic spike in the price of gold measured in German marks.

    The policy conclusion is equally dramatic: under no circumstances must central banks countenance the idea of “printing money” to support government spending. Mankiw’s textbook is illustrative of the common interpretation of this event: “When the quantity of money started growing quickly, the price level followed, and the mark depreciated relative to the (US) dollar (and gold).” Translation: the quantity theory of money holds: MV = PY where V and Y are assumed constant such that any chance in M (money) drives P (prices).

    So how to reconcile what we know happened in Germany (money printing, hyperinflation) with MMT views? After all, MMT theorists tend to downplay worries about “money printing” (a misnomer in the modern world but we’ll let it pass for now). In fact, I wrote a blog post around the time of the first round of quantitative easing where I suggested that resulting concerns about inflation were misplaced and based on a faulty understanding of monetary policy and inflation.

    A little more history helps reconcile the MMT view to the standard historical account. Before exploring that alternative story, an acknowledgement: the information used in this post is from a very smart federal bureaucrat who for reasons related to his position, would prefer to remain anonymous. This bureaucrat drew much of his insight from a fascinating historical piece by the St. Louis Federal Reserve, a bastion of monetarist thought and no obvious friend of MMT.
    .
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    Reply

    Vincent Reply:

    @Clonal Antibody, Thanks everyone, and in particular for the link to Arun DuBois’s piece. I’m a little sketchy on why the introduction of the Rettenmark was a positive turning point.
    Thanks!

    Reply

    mike norman Reply:

    @Vincent, I would say, if people had more money to spend, wouldn’t that be offset by businesses producing more “stuff” for them to spend their money on? More supply balances out the additional money, so Weimer doesn’t figure.

    I mean, why do they necessarily think that more money would not equate to a higher output of goods and services? Is industry broken? Is our capacity to produce “maxed out?” Are monopolies in effect, everywhere?

    Reply

    Neil Wilson Reply:

    @mike norman,

    PY = MV

    Write it that way around and it drives them potty.

    Because then the production equals the money.

    Reply

    Tom Hickey Reply:

    @Neil Wilson,

    Right. In MV = PY, the causation is backwards in their argument based on choosing the independent and dependent variables.

    Mario Reply:

    @Neil Wilson,

    beautiful spin! I love it!

    @Tom

    P & Y are the independent variables then? Is that what you’re saying? They are the cause that is to say and M & V are the effect.

    Tom Hickey Reply:

    @Neil Wilson,

    Mario, for monetarists, M (money supply) is the independent variable, changes in which influence the others, so according to them it needs to be controlled through changes in interest rates, which affect the relationship of saving and investment. For fiscalists Y (income) is the independent variable that affects the others through effective demand, it needs to be controlled through fiscal policy, e.g., as MMT outlines in terms of sectoral balances and functional finance.

    This is the basic kerfuffle. Strict monetarists reject fiscalism in toto as ineffective. New Keynesians accept fiscalism in so-called liquidity traps but not at other times. Fiscalists reject monetarism in toto in a non-convertible floating rate system as inefficient if not also ineffective.

    Mario Reply:

    @Tom Hickey,

    ah yes. Thank you.

  6. Mario Says:

    Warren

    I just heard about Branson’s house going into flames over on Necker Island. I hope you guys are okay down the way!

    Reply

    WARREN MOSLER Reply:

    yes, all’s well thanks. and i wasn’t anywhere near necker when it happened…

    Reply

  7. SethM Says:

    Who cares about tax hikes, the money supply, aggregate demand and all the rest, global financial stock has never been higher: 212T http://www.mebanefaber.com/2011/08/22/all-the-stock-and-bonds-in-the-world-212-trillion/

    No wonder the financial industry is where the action is, it’s the only place where money is growing.

    Reply

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