Friday, September 2, 2011

Bruce Bartlett opposes a payroll tax reduction.

As Dean Baker put it “In elite Washington circles ignorance is a credential.” This seems to be particularly true of “elite members of the elite”: former presidential advisors, e.g. Martin Feldstein and Bruce Bartlett.

Bartlett in a New York Times article tries to argue against a payroll tax reduction, and gives some hopeless arguments to back his case. Plus a payroll tax reduction is one of the main measures advocated by adherents to Modern Monetary Theory, Warren Mosler in particular. So this is an additional reason for looking at the alleged weaknesses in payroll tax reductions put by Bartlett. Bartlett’s first argument is thus (in italics).

First, the tax cut only helps those with jobs. While many have low wages and undoubtedly are spending all their additional cash flow, those with the greatest need and most likely to spend any additional income are the unemployed.

Well obviously a payroll tax reduction doesn’t help EVERYONE: for example pensioners are not assisted by this tax reduction. A mentally retarded six year old can think of groups not assisted by a payroll tax reduction. But the important point about a payroll tax reduction is that it channels money into the pockets of a VERY LARGE group of the sort of people who are likely to spend a fair proportion of any increased income, that is, middle and lower income groups.

Having done that, if a government wants to assist the groups NOT ASSISTED by a payroll tax reduction (e.g. pensioners), then so much the better.

Perhaps Bruce Bartlett prefers the main stimulatory measures taken to date: QE and giving billions to banksters. The latter two measures shovel VAST amounts of money into the pockets of a MINUTE portion of the population. And not only that, but the recipients of the money include the wealthiest people in the country – exactly what Bartlett argues against! God first makes mad those he wishes to destroy.

Bartlett’s second and third reasons are that the payroll tax reduction will simply be saved by employees rather than spent. He does not cite any evidence to back this point. Well I can cite evidence. The evidence is that (surprise, surprise) peoples’ weekly expenditure varies with their income!

Of course, and equally obviously, A PROPORTION of any increased income will be saved. That is entirely predictable. For actual studies of household reactions to changes in income (temporary and permanent) see:

Bartlett’s reason No. 4 is that cutting the cost of employees will not work in that labour costs are nowhere near as big a problem for employers as lack of demand or lack of sales. At last: a half intelligent point. A significant proportion of the elite in the US and Europe have not tumbled to the blindingly obvious point that sales create jobs. But at least Bartlett has. So congratulations are in order there.

Bartlett’s fifth and final reason is that the payroll tax finances benefits of one sort or another, thus a reduced payroll tax will induce employees to save in order to compensate for the loss of those benefits.

The first flaw in that argument is that it fails to distinguish between saving in the form of accumulating cash, and in contrast, saving in the form of storing up other assets, like a house, qualification, etc.

When people save for pensions, a significant portion of the saving is not just plonked in deposit accounts and left there, which WOULD be deflationary. The latter effect is what Keynes called the “paradox of thrift”. What actually happens is that a significant portion is invested in real assets: office blocks, factories, etc.. And the effect of the latter saving is stimulatory.

Moreover, even if for some strange reason it was impossible to invest peoples’ savings in office blocks, factories, etc it is highly unlikely that employees would allocate ALL their increased cash holdings to boosting their bank deposit accounts. That is, it is EXTREMELY unusual where a cause has two possible effects for just one of the effects to be in evidence.

Take the above mentioned evidence as to what households do with increased income. It is POSSIBLE they’d spend it ALL, and save none of it. But the evidence is that they do a bit of both.

Or again, suppose the price of apples rises. One extreme possibility is that consumers react by buying exactly the same volume of apples and ignore the price increase. The second extreme possibility is that they spend EXACTLY THE SAME amount as before on apples, and do all the adjustment via cutting the volume of apples purchased. But the latter is a highly unusual effect. What nearly always happens when consumers face a price increase for a particular commodity is a compromise between the above two extremes.

Conclusion: nine out of ten to MMT and one out of ten to Bruce Bartlett.


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