Payroll tax holiday under discussion


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Obama, Democrats Reshape Tax Relief Measures in Stimulus Package

by Katherine Skiba

Jan 13 (US News) — Senate Minority Leader Mitch McConnell of Kentucky said an idea that emerged during the GOP senators’ lunch today was a two-year suspension of the payroll tax. “It would put a lot of money back in the hands of businesses and in the hands of individuals,” McConnell said. “Republicans, generally speaking, from Maine to Mississippi, like tax relief.”


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Krugman again


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In case you thought Krugman isn’t part of the problem.

From his recent column:

Ideas for Obama

by Paul Krugman

Jan 12 (New York Times) &#8212 OK, I’ll bite — although as I’ll explain shortly, the “jump-start” metaphor is part of the problem.

First, Mr. Obama should scrap his proposal for $150 billion in business tax cuts, which would do little to help the economy. Ideally he’d scrap the proposed $150 billion payroll tax cut as well, though I’m aware that it was a campaign promise.

Money not squandered on ineffective tax cuts could be used to provide further relief to Americans in distress — enhanced unemployment benefits, expanded Medicaid and more.

If he understood non-convertible currency, he wouldn’t make this statement.

First, it’s not a trade off.

Second, tax cuts not spent indicate the tax had no value in reducing demand in the first place.

Third, a tax cut that goes unspent is not ‘squandered’. Government squandering would take the form of wasting real goods and services (which does happen too often but that’s another story), not the funds spent per se.

There is not a finite pot of funds that government can spend. The limits of government spending are inflation tolerance, not any specific quantity. Government can do both tax cuts and relief payments if the political will is there, and if the tax cuts are ‘ineffective’ all the better as other government spending can be higher than otherwise without any extra movement of the inflation needle.

And why not get an early start on the insurance subsidies — probably running at $100 billion or more per year — that will be essential if we’re going to achieve universal health care?

Krugman is contributing to more real damage than the dynamite that funded his nobel prize.

If anyone reading this knows him, please forward, thanks!


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Innocent Frauds (draft in progress)


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The 7 Deadly Innocent Frauds of Economic Policy

Introduction

The term ‘innocent fraud’ was introduced by Professor John Kenneth Galbraith in ‘The Economics of Innocent Fraud’, which was the last book he wrote before he died. He used the term to describe fraudulent concepts that were being sustained by the ‘conventional wisdom’ (a term he created in a previous book). The presumption of innocence by those perpetrating the frauds is characteristic of Professor Galbraith’s cynically gracious approach.

This book reviews 7 ‘innocent frauds’ that I suggest are THE most imbedded obstacles to national prosperity. The first 4 concern the federal government budget deficit, the 5th addresses social security, the 6th international trade, and the 7th savings and investment.

I begin with the innocent frauds of the budget deficit, because they are the most pervasive and most damaging to both the US and the rest of the world’s standard of living.

Click here to read the rest of this post!


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WWII Deficit Spending


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This is from ‘Full Employment and Price Stability’ under ‘Mandatory readings‘ at www.moslereconomics.com:

Past Attempts at Government Sponsored Full Employment

With a private sector desire for H(nfa), and a government that fails to run a deficit large enough to accommodate that desire, the corresponding unemployment can be severe. It may eventually be reduced by a reduction in desired H(nfa) because of lower interest rates, or, as some contend, by falling wages. However, the time necessary to test this hypothesis is usually beyond human tolerance, and the pragmatic view of government employment arises.

For example, from 1931 to 1941 unemployment averaged well over 10% – the definition of a depression. It hit a high of 24.9% in 1933, and was still 14.6% as late as 1940. GNP reached a high of $203.6 (billions of 1958 dollars) in 1929; fell to a low of $141.5 in 1933, and by 1939, had crept up only to $209.4. Low interest rates were not enough to decrease desired H(nfa). Short term Treasury securities reached a high of just over 5% in May of 1929, were cut to the mid 3% range in November 1929 following the stock market crash, and were as low as about 0.5% by September 1931. Rates were increased to about 2.5% until May of 1932, and then remained well under 1% until 1948. Continuous low interest rates also did not seem to result in run-away asset prices. The Dow equity index price did not recover to its 1929 highs until 1958, the 1927 highs were not reached until 1946, and the low of 1930 was not surpassed until 1936.

In 1933, after several years of undesirable unemployment and depressed GNP, the Public Works Administration, the first public works program, was enacted. It was followed by the WPA in 1935. It is noteworthy that these programs did not come about until after several years of troubling unemployment, and fell short of solving the unemployment crisis and ending the depression. Work relief never reached more than 40% of the unemployed, and only 3 million of the 9 million unemployed participated in the WPA. The reason these programs were constrained was the reluctance to engage in government deficit spending. During the 1930’s, in spite of the high unemployment and depressed growth, budget balancing was never far from the forefront of political purpose. Belief in a balanced budget prevented government relief programs from ending the depression, and when Roosevelt honored his 1936 campaign pledge to balance the budget in 1937, the economy suffered a major setback with unemployment jumping back to 19.1% from a seven year low of 14.3%. Public works programs that were ‘paid for’ by other spending cuts or by tax increases could not reduce unemployment as there was never enough net government spending to accommodate desired H(nfa). The largest deficit of the 1930’s was 5.9% of GNP in 1934, and it was down to 0.1% of GNP by 1938. The U.S. was on a gold standard, and policy had to include managing the national gold supply. This led to various extremes such as suspending domestic convertibility in 1934, and making it illegal for domestics to own gold, as well as strong support for balancing the federal budget.

During WWII, a radically different approach was initiated. Government spending exceeded tax collections in 1942, 1943,1944, and 1945 by 14.5%, 31.1%, 23.6%, and 22.4% of GNP respectively. Unemployment was under 2% by 1943, and output increased from $209.4 (billions of 1958 dollars) to $337.1 by 1943. Prices were fixed, and government planning agents from the Office of Price Administration enacted rationing. Great effort was taken to ensure that rationing was perceived as equitable ensuring public support for the program. Patriotism kept Americans from black markets that may have otherwise drained resources needed for the war effort, and patriotism also became associated with nominal savings. The idea was to get desired H(nfa) up to the level of deficit spending in a low interest rate environment. In other words, hoarding of dollar denominated financial assets via government bond purchases was encouraged, allowing the government to purchase up to 60% of the real output without price competition from consumers. The desire of the American public to earn money and not spend it, which caused the unemployment of the previous decade, now dovetailed well with the public sector demands for war production, and unemployment was, for all practical purposes, eliminated.


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Re: IMF fiscal policy for the crisis


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Very good, thanks, looks like they’ve come a long way- still some rough edges, but not all that bad for this kind of organization!

Isn’t John Lipsky the head honcho there? We used to have long discussions about exactly this several years ago.

EXECUTIVE SUMMARY

The current crisis calls for two main sets of policy measures. First, measures to repair the financial system. Second, measures to increase demand and restore confidence. While some of these measures overlap, the focus of this note is on the second set of policies, and more specifically, given the limited room for monetary policy, on fiscal policy. The optimal fiscal package should be timely, large, lasting, diversified, contingent, collective, and sustainable: timely, because the need for action is immediate; large, because the current and expected decrease in private demand is exceptionally large; lasting because the downturn will last for some time; diversified because of the unusual degree of uncertainty associated with any single measure; contingent, because the need to reduce the perceived
probability of another “Great Depression” requires a commitment to do more, if needed; collective, since each country that has fiscal space should contribute; and sustainable, so as not to lead to a debt explosion and adverse reactions of financial markets. Looking at the
content of the fiscal package, in the current circumstances, spending increases, and targeted tax cuts and transfers, are likely to have the highest multipliers. General tax cuts or subsidies, either for consumers or for firms, are likely to have lower multipliers.

>   
>   On Fri, Jan 2, 2009 at 6:37 PM, Roger wrote:
>   
>   Hi Warren,
>   
>   Not sure if you saw this, but thought you’d be
>   interested.
>   
>   Best,
>   Roger
>   


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Macro effect of government MBS purchases


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The fed buying mortgages at, say, 5% and paying nothing on the balances it credits to pay for the purchases increases fed ‘earnings’/decreases private sector earnings,

So at the ‘income level’ it’s a tax that reduces aggregate demand.

Only to the extent private sector debt increases more than that due to lower interest rates is the macro outcome positive.


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Foreign dollar bond issuance increasing


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Not a lot yet, but $65 billion is something and counts as USD deficit spending as they are presumably borrowing to spend.

The Fed swap lines outstanding of something over $600 billion probably do not yet represent ‘borrowing to spend’ but there is no way to tell from current data.

Both, however, can be considered ‘selling USD’ in the FX markets, with the swaps preventing a possible forced dollar buying more than driving a selling of dollars.

‘Original Sin’ Returns as Emerging Markets Plan Bonds (Update3)

By Lester Pimentel

Dec. 31 (Bloomberg) — Developing nations plan to sell the most dollar-denominated bonds since 2005, reversing a shift into local debt, as commodities prices fall, foreign reserves diminish and emerging-market currencies weaken.

International sales may rise 68 percent to $65 billion next year, according to estimates by ING Groep NV. Mexico raised $2 billion in a Dec. 18 offering. Peru’s Finance Minister Luis Valdivieso met with investors in New York, Boston, London and Madrid this month to drum up interest for the country’s first foreign sale in almost two years.

Governments are growing more dependent on international markets after the six-month drop in raw materials reduced earnings from exports and caused budget deficits to widen. Dollar borrowing will increase foreign-exchange risk, a pattern that led countries across Latin America to default in the 1980s, saidRicardo Hausmann, director of the Center for International Development at Harvard University in Cambridge, Massachusetts.

“Countries will be forced to issue in dollars,” said Hausmann, a former Venezuelan planning minister who called developing nations’ reliance on foreign markets the “original sin” in a 1998 article in Foreign Policy magazine. “Debt structures will deteriorate again.”


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Senate Minority Leader McConnell to obstruct fiscal adjustment?


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McConnell Urges Caution in Debate on Economic Stimulus Measure

Dec. 29 (Bloomberg) — Senate Minority Leader Mitch McConnell said he wants to slow consideration of the economic stimulus package Democrats are drafting, warning that the measure sought by President-elect Barack Obama invites wasteful spending.

“A trillion-dollar spending bill would be the largest spending bill in the history of our country at a time when our national debt is already the largest in history,” McConnell, a Kentucky Republican, said in a statement. “As a result, it will require tough scrutiny and oversight. Taxpayers, already stretched to the limit, deserve nothing less.”

McConnell called for giving lawmakers and the public at least one week to review the legislation once it has been written. He also said he wanted Senate committee hearings on the measure, rather than immediate floor consideration.

His demand, in a Senate where minority Republicans will still have the power to block legislation, could stall a drive by Democrats to approve legislation soon after Obama’s Jan. 20 inauguration.


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