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:



http://onlinelibrary.wiley.com/doi/10.1111/j.1745-6606.1984.tb00322.x/abstract

http://www.nber.org/digest/mar09/w14753.html



http://www.kellogg.northwestern.edu/faculty/parker/htm/research/johnsonparkersouleles2005.pdf



http://finance.wharton.upenn.edu/~rlwctr/papers/0801.pdf



http://ideas.repec.org/p/kud/kuiedp/9611.html



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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Andrew Sentance and the confidence fairy.

The so called “confidence fairy” is a term used for the most part by advocates of Modern Monetary Theory (MMTers) to describe a popular but largely mythical obstruction to economic growth. This is the extent to which business confidence in government finances impinges on economic growth.



So far as I can see from actual surveys of business opinion, this confidence or lack of it is near irrelevant compared to other problems which entrepreurs face or think they face, e.g. lack of orders, shortage of skilled labour, taxes, etc etc. E.g. see page 18 here.



This survey gives entrepreneurs main problems as being, first, poor sales, and second, taxes.



See also page 26 here.



This gives excess regulation, tax and lack of demand as the main problems.



The URL of a third survey giving similar results is thus:



http://www.blumshapiro.com/pub/articles/BlumShapiroCBIASurvey.pdf



But the latter was unavailable when I put this post online. Might be a temporary problem.



But empirical evidence, the truth, reality and so forth, are of no great concern to a large portion of the human race, in particular those who believe in fairies, unicorns, astrology etc. Andrew Sentence in an article in today’s Wall Street Journal appears to be a firm believer in unicorns – sorry I meant the confidence fairy. He cites no evidence to back his claim: presumably this is because the evidence does not exist. For some strange reason, Andrew Sentence was a member of the Bank of England’s Monetary Policy Committee.

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Afterthought, 4th Sept: Just noticed Brad de Long making a similar point.















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Economic fluctuations since 1870.

This chart is from a Financial Times article by Samuel Brittan. Fluctuations seem to have moderated a bit since the 1800s. The chart appeared on the hard copy version of the article but not on the internet version.

The economics of degrees.

A report in today’s Guardian cites an Office for National Statistics (ONS) study which shows that those with degrees earn more than those without. As is entirely predictable, someone then jumps to the conclusion that this shows that getting a degree is worthwhile.



In this case, it is Nicola Dandridge, chief executive of Universities UK – at least she very much seems to imply that the ONS study demonstrates that getting a degree pays off.



The problem with the above line of argument is thus. Those with degrees tend to come from stable and/or middle class backgrounds, and these sort of people tend to earn more even when they DON’T have degrees. Thus to prove to what extent having a degree pays off financially, it is necessary to control for family background: something the ONS study does not do.



The only study I know of that DOES control for family background shows (as might be expected) that getting a degree DOES pay off, but the pay-off can be undramatic. In particular arts degrees for men are a waste of time from the purely commercial point of view.



As if to prove the point, the above Guardian article features a picture of a male graduate wandering the streets with a placard saying “Job wanted. History graduate. University of Kent. Interview me.”





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Stiglitz doesn’t get Modern Monetary Theory.

Joseph Stiglitz wrote an uninspiring guide to reducing the deficit at the end of last year. Here is guide to the main ideas in the paper.



He gives seven main ideas, starting on page 1.





Brainwave No 1.



The first idea is to go for “Public investments that increase tax revenues by more than enough to pay back the principle plus interest reduce long-run deficits.”



One flaw in that idea is that worthwhile public investments (and private investments) should be being made ANYWAY – regardless of whether we are in a recession or not.



The second problem is that if the investment “increases tax revenues by more than enough to pay back the principle plus interest…” then the investment will withdraw cash from the private sector. In a balance sheet recession that’s plain daft. Or in MMT parlance, the last thing that needs to be done in a recession is to reduce private sector net financial assets.



Thirdly, public sector investments often require specialised labour, e.g. highway or bridge construction. A dramatic increase in public sector investment in a recession could be plain impossible or difficult for lack of the relevant skilled labour. But even if it is possible, to dramatically expand one sector of the economy, only to contract it again come the recovery simply distorts the labour market: hardly desirable. The distortion has to be unwound come the recovery.



Stiglitz then enlarges on this public sector investment idea under item A in his page 2. Here he claims that public sector investments during a recession a good idea because interest rates are currently low.



Well hang on. WHY are interest rates low? It’s because the government / central bank machine has DELIBERATELY lowered them! And those low interest rates have been lowered by printing money and buying government debt.



So Stiglitz is saying government should borrow the stuff (i.e. money) which government itself has produced. Well now, why go to all the trouble of dishing out money to the private sector only to borrow it back again????



It would be much simpler just to print money and spend it (in a recession), which is what MMT advocates!!!



His next reason under item A for public investment is that given high unemployment, the multiplier from such investment will be high. True. But the same goes for any sort of spending, so this is not specifically a point in favour of investment!



MMT beats Stiglitz yet again: MMTers tend to favour payroll tax reductions in a recession. Having expanded the economy via such payroll tax reductions, a portion of the expanded economy will doubtless end up in the form of extra public sector investment. But that’s by the by.





Brainwave No 2.



Stiglitz’s second brainwave is that “It is better to tax bad things (like pollution) than good things (like work).” Revelation of the century! There was me wondering why we tax alcohol. Now I know.





Brainwave No 3.





His 3rd idea is that “Economic sustainability requires environmental sustainability. The polluter pay principle—making polluters pay for the costs they impose on others—is good both for efficiency and for equity.”



Quite right, but what’s that got to do with deficits or recessions? Absolutely nothing. Again, the above principle applies recession or no recession.





Brainwave No 4.



This is that “Eliminating corporate welfare is good both for efficiency and for equity.” True, but for the umpteenth time, this has nothing specifically to do with recessions or deficits.





Brainwave No 5



This is “Given the increases in inequality and poverty and given the inequitable nature of the 2001 and 2003 tax cuts, the incidence of any tax increases should be progressive, and there should be no increases in the tax burden on the poorest Americans.”



At last: an idea with a small amount of logic! The inequality point is irrelevant in that optimising the level of inequality is a valid aim recession or no recession. But the idea does have a small amount of logic in that the poor have a higher propensity to spend income increases than the rich. Thus transfers of money from rich to poor would be stimulatory. But as far as I can see Stiglitz has not grasped the latter “stimulatory” point: at least I can’t find it in his paper.





Getting technical.



But even the above stimulatory effect of transferring money from rich to poor is a feeble saving grace for this paper. Reason is that it is a classic example of the “bang per buck” argument – the idea that there is some merit in getting as much employment as possible from each dollar spent.



The latter apparent merit is not actually a merit at all because the process of government creating dollars and spending them is virtually costless in real terms. The only important question is: what are the REAL effects of the different options available? The number of dollars that need to be created and spent to effect each option is irrelevant.



As Abba Lerner put it (p.39) "government fiscal policy, its spending and taxing, its borrowing and repayments of loans, its issue of new money and its withdrawal of money, shall all undertaken with an eye only to the results of these actions….” (the italicisation of the word “results” is in the original).



Stiglitz’s paper thus consists of a series of random ideas, most of which are no good. But when it comes to the one idea that is half valid, the author does not seem to realise why it is half valid.



I’ve had enough. I’m can’t be bothered reading beyond Brainwave No 5.







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Anti fractional reserve banners on streets of Newcastle.

We set up in the shadow (literally and metaphorically) of Grey’s monument.



Grey was a leading light of the Great Reform Act of 1832 which cleaned up some of the corrupt practices in parliament. He’ll be turning in his grave . The inscription on the monument reads:



This column was erected in 1838 to commemorate the services rendered to his country by Charles Earl Grey,K.G. who during an active political career of nearly half a century was the constant advocate of peace and the fearless and consistent champion of civil and religious liberty. He first directed his efforts to the amendment of the representation of the people in 1792, and was the minister by whose advice, and under whose guidance the great measure of parliamentary reform was, after an arduous and protracted struggle safely and triumphantly achieved in the year 1832.







Plenty of interest in the banners. The daughter of a professor who has done a podcast for Positive Money spotted us and gave us some moral support. And a fellow who helped start a credit union in London stopped for a chat.

Full versus fractional reserve arguments on the streets of Durham, UK.

I set up a couple of anti fractional reserve banners on a street in Durham yesterday. We handed out some leaflets from Positive Money and the Money Reform Party. Both the latter are opposed to fractional reserve. There was plenty of interest.



Even though the university term does not start for a few weeks yet, three or four students who were doing economics came up to us and asked questions.



Expect full versus fractional reserve riots on the streets of North East England in the coming weeks. There were no riots here over the last two weeks. We Geordies don’t go in for your common or garden type of riot: looting and all that. But we get very worked up about more intellectual stuff.







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