Automatically Giving Piles of Money to the Middle Class

We are trying to change the debate a bit over here at MR through a variety of methods, and so I was very happy to see Matt Yglesias rip off ideas from yet another MR comments thread – giving piles of money to the middle class is a good idea right now:

“But doing this by trying to engineer a stock market boom is insane. We should do something much simpler: print up a bunch of money and send it to American households.

The best thing about helicopter money is that it’s largely agnostic as to what lies at the root of our problems. As long as you think there’s some level of excess capacity in the economy, putting cash in the hands of households will help. Most obviously, if people had more money they’d buy more stuff. That means more jobs making, transporting, and selling the stuff. But not everyone would spend all of their helicopter money. Lots of families would use it to help pay off debts already accumulated, which would help speed the process by which we climb out of the debt hole of the boom years. Prosperous families without debts would just save a large share of their money. Increasing the size of the savings pool should drive borrowing costs down for firms that want to expand, while pushing up the value of stocks and other financial assets.”

It could be just coincidence, but Matt Y seems to follow what happens over here at MR pretty closely. If we have a good thread, you’ll see something on it just a few days later. I am glad to see Chris Hayes follow this idea as well.

We need to give the middle class piles of money. However, there is a huge problem with just giving piles of money to the middle class – it’s a political non-starter. ftm, stone, and Philip Deihl pointed this out and they are correct.

Here is Mr. Deihl:

“Giving piles of cash to the middle class” is a losing message. Even many, probably most, middle class voters would reject it as irresponsible or a cynical election ploy. Ask George McGovern how it worked for him. (Years later McGovern himself said his proposal to give $1000 to every American was a mistake. It wasn’t the GOP that killed the proposal as a vote-buying scheme; it was Humphrey.) Sure, the McGovern campaign was 40 years ago, but it says something that no Democratic candidate for the presidency since 1972 has made such a just-give-em-cash proposal. It’s always been middle class tax cuts or grants and loans for college tuition, and the like, not cash handouts.”

This is entirely correct. It’s a losing message. It’s a proposal which will be crucified (heh) in trial of public opinion. Yet, giving piles of money to the middle class is one of our best options for stimulating the economy at this particular moment. In general, it’s a great way to get the economy moving at any time!

I find it entirely offensive that this good solution is so politically un-possible. It shows the debate is being framed around the wrong ideas. If a good and worthwhile proposal which would increase our standard of living is not politically possible, there is a major problem with the discourse.

It’s good to see people talking about this helicopter drop – because talking about something repeatedly is a way to make people more likely to support an idea. But even a helicopter drop isn’t really enough. Helicopter drops structured like this are too one off – much like the stimulus checks Bush mailed out in early 2008 (! They freakin’ knew! The recession wasn’t called until much later that year – can you imagine the outrage if Obama did something like this?) – a very useful stimulus which went almost entirely down the memory hole.

These checks worked despite going against widely accepted economic theory, and going against what crazy people think about fiscal policy.

beowulf then proposed a technocratic way of delivering those piles of cash, entirely automatically, through a series of proposals:

  1. Tie the level of the full employment (payroll) tax to the level of unemployment. Higher unemployment = lower taxes.
  2. Close the trade deficit with Buffet’s import certificates so we don’t end up funding the entire planet’s demand problem.
  3. Move fiscal authority to the fed – Make them responsible for both monetary and fiscal policy so they can fill their legal mandate of full employment and stable prices.
  4. Have the Fed use the Trillion Dollar when necessary.

Carlos has a specific plan in mind. But his larger point is that unless you make this process almost entirely automatic, there is no way it will happen repeatedly when needed most needed. Even if you disagree with his specific proposal, it’s really hard to disagree with the automatic nature of his idea. If we have to negotiate a fiscal stance every year for the next 100 years, the fiscal stance will never get close to what we need to have a truly prosperous society.

We did this with monetary policy – where we’ve given the automatic nature to a group of “wise men” who decide what is needed for the economy at any given moment, and then implement this decision across the economy. No matter what you think of the fed, this process is largely automatic. We don’t need to negotiate, bargin, decide, or otherwise do anything – there is already a process in place to implement monetary policy across the wider economy. There is nothing like this at all for fiscal policy, no method or process, which automatically adjusts the amount of fiscal policy with any sort of pre-determined thought. Our automatic stabilizers are tiny compared to the size of our economy, and are so ill directed.

As Philip pointed out, if we need to campaign giving piles of money to the middle class, the idea will lose even among the middle class. Even though it is probably a good idea right now, and a decent idea even during normal downturns, this is a losing idea. So we need to find a way to bake it into the structure of the economy.

 

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134 Comments on "Automatically Giving Piles of Money to the Middle Class"

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Guest
4 years 4 months ago

Kenneth Boulding did a lot of work on the economics of grants that speaks to this. See, for example, The Economy of Love and Fear.

“On the whole, economists, as well as other social scientists, have concentrated heavily on the concept of exchange in describing social relationships and the organization of society, and they have regard the one-way transfer, or “grant,” as exceptional and apart from the general framework of economic and social theory…. Today [1973], for instance, according to various possible definitions, we could say that from 20 to almost 50 percent of the American economy is organized by grants rather than by exchange.” ( p. 1-2).

“The grants concept may also be significant in the area of public finance and the provision of public goods. Public finance… has never had a really satisfactory theoretical base — I suspect because it has been studies by economists trained primarily in in the theory of exchange who have tried to force public finance into that mold on the assumption that if taxes are paid, for instance, the taxpayer must receive for them. The grants concept liberates public finance from it enslavement to the concept of exchange and enables us to perceive the whole system as a system of one-way transfers rather than as a system of exchange.”

Guest
joe bongiovanni
4 years 4 months ago

That’s very Soddy-like.
And, as such, very like Kucinich.

Guest
4 years 4 months ago

Reference to second quotation is p. 5-6.

Guest
wh10
4 years 4 months ago

The problem with automating fiscal policy is that it goes directly against our constitution, which gives power of the purse to Congress. So there’s some big legal issues that need to be worked out.

Guest
joe bongiovanni
4 years 4 months ago

They should be worked out by rethinking how money SHOULD get into the economy:debt-based bank loans, helicopters, or government investment?
Sure , join the monetary powers within the Fed, AFTER making the Fed a public central bank.
I hope the discussion can get enlarged at least to what Lincoln did when the economy needed money.
Then maybe we can understand why the realists are stuck in endogenous money. Which ain’t really fair.

Admin
4 years 4 months ago
I did give a thought or two to the legal basis. Congress has total discretion in how it spends. It can appropriate a sum certain for how much an agency can spend or it can set a formula that the agency must spend by. Sometimes there are limitations set in the authorization bill and typically the need for annual appropriations creates a spending firebreak. But there are some laws that transcend this. The most extreme case is the most open-ended clause in all the US Code (and its quite constitutional). “there is authorized to be appropriated, and there are appropriated, out of any money in the Treasury not otherwise appropriated, such sums as may be necessary for the purpose of carrying out section 1072 (c)(7) of this title. ” That’s from the student loan statute and its pretty remarkable. It has a permanent authorization (first line), a permanent appropriation (second) and an unlimited draw on the Treasury (three) for fulfilling an established spending formula (four). Now that’s a little extreme but spending formula laws are better known as entitlement programs. Congress still has power of the purse because it writes the formula, the Executive Branch has no discretion when and if it spends. Likewise Congress could enact floating tax rates tied inversely to unemployment or GDP growth rates, again the Executive Branch would just be tasked to carry out Congress’s will. The Fed has the power to set user fees to cover the direct and indirect cost of providing user services. The trick here is an indirect cost of any financial transaction is to incrementally increase the velocity of money. That’s a cost the Fed can recover by imposing a fee on, well, any financial transaction. As for Medicare, its an entitlement program, dropping the age from 65 to birth… Read more »
Guest
Philip Diehl
4 years 4 months ago
Yes, I think the entitlement route is the way to structure a counter cyclical fiscal policy since Congress cannot delegate its taxing and spending authority to the Fed or a group of wisepeople. Assuming the President doesn’t veto its legislation, Congress has very broad discretion in setting fiscal policy under the Constitution. (Caveat emptor: I’m not an expert on federal budgetary processes though I’m very familiar with them.) As far as I know, Congress could pass legislation creating entitlements that would be turned on and off based on certain GDP, unemployment or other thresholds. The political difficulty in pursuing this course, besides the opposition of deficit hawks (is it time, now, to call them vultures?), is reflected in the old DC saw about there being three parties in Congress: Republicans, Democrats, and Appropriators. Appropriators are loath to give up control over the purse strings (likewise, Senate Finance and House W&M with taxes). However, there might be ways to overcome this hurdle, for example, by building an active, powerful constituency in support of the concept. Several ideas come to mind. As we’ve seen in the current recession, state and local governments, which must balance their budgets annually or biennially, cut spending during recessions. What do they cut? Spending on secondary and higher education, especially teachers and non-tenured faculty; police, firemen and other public employees; Medicaid; infrastructure; and public health. Creating “emergency” entitlements designed to prevent these cuts would mobilize powerful, bipartisan support from governors, mayors, state legislators, construction firms, influential higher ed trustees, school teachers, public employees, healthcare providers, etc. that would help enact and preserve a counter cyclical program like this. Other attractive features of this approach are that the benefits would flow largely to middle class and low-income households and there would be little leakage. However, a disadvantage is… Read more »
Guest
ftm
4 years 4 months ago
Philip, I like the optimistic end to your comment. I wish the democrats were even remotely prepared to take advantage of the opening. Of course, I’m in complete agreement that early emergency government spending on infrastructure when the construction sector turns down. Emergency support of local government spending is also a huge deal. Just to emphasize something we discussed before, local government funding problems have really sustained this current great recession because of the combination of their balanced budget requirement and reliance on property tax (asset tax) . Because real estate values cratered, local governments have had to cut services and jobs much more deeply than in a normal recession to balance their budgets. Enhancing automatic stabilizers via a modestly counter-cyclical payroll tax and enhanced unemployment benefits would also be positive . But there is an issue with tax cuts, in a balance sheet recession (asset prices have fallen severely) tax cut recipients may direct their tax cut to debt service or debt repayment rather than spending. While debt repayment improves the individual’s balance sheet, it does nothing for current output and it feeds the credit destruction cycle. The paradox of saving can bite particularly hard even though many people only have negative savings. And last, but probably the most important, implementing some program to balance trade as repeatedly advocated by beowulf. The neo -liberal fascination with “freeish trade” is perhaps the biggest hurdle because you have to fight not only the business sector but also some of the left economic aristocracy http://www.thenation.com/article/173593/why-was-paul-krugman-so-wrong . If these ideas could be bundled as a response to the current and to future national economic emergencies , you might find the fabled left -independent and lower class right constituency that could get something done.
Guest
beowulf
4 years 4 months ago

“And last, but probably the most important, implementing some program to balance trade”
Haven’t had time to read it yet but Joe Gagnon’s new paper looks interesting.
“The Elephant Hiding in the Room: Currency Intervention and Trade Imbalances”
http://www.iie.com/publications/interstitial.cfm?ResearchID=2347

Guest
JKH
4 years 4 months ago

“Because real estate values cratered, local governments have had to cut services and jobs much more deeply than in a normal recession to balance their budgets.”

What’s your intended meaning there?

In Canada for example, (municipal) property tax rates would simply increase to offset any decrease in appraised values (a periodic step function). Other things equal, there’s no change in tax revenue owed. Appraisal is for purposes of equitable tax distribution – not as a determinant of aggregate tax revenue.

I suspect its the failure of property owners to pay taxes owed that is more the issue – not the level of taxes owed.

Guest
ftm
4 years 4 months ago

Initially real estate tax revenue falls due to non-payment on troubled properties but then as the assessment cycle (usually 2-5 years or 50% to 20% of properties reassessed each year) kicks in local politicians are put in the difficult position of either raising the tax rate to compensate for the lower assessments or cutting other services to balance the budget. Also if property values have dropped significantly , some homeowners and more frequently commercial real estate owners challenge assessments out of cycle so that can significantly speed the decline in the tax base. But you can imagine that local politicians are reluctant to raise tax rates even to just maintain revenues when the value of homes has plummeted. It is not a recipe for easy re-election.

Guest
JKH
4 years 4 months ago

That makes sense.

I wonder if there’s any systematic “smoothing adjustment” in the assessment math, to account for “unusual” volatility in values (in the case of a downturn like this one, it would be one-sided volatility for a lengthy period of time … ), or is there no allowance whatsoever for the determination of assessed value based on what is observed or estimated for the market at the time?

Guest
ftm
4 years 4 months ago
I did a little research and I need to amend my previous comment. In New York state, properties are assessed each year. Depending on the type of property different assessment methods are used. For example, in New York City, statistical methods are used to sample selling prices to value 1-3 unit residential buildings and market rents to value 4+ unit residential properties. I suspect in smaller communities they still do appraisals in a multi-year cycle and then base annual assessments on current appraisals of similar properties. Different communities can have different transition rules regarding how assessment changes are phased in. Here is the description for New York City: “We phase in changes to the assessed value of Class 2 properties with more than 10 units and Class 4 properties over a five-year period. This means that we apply 20% of the change each year for five years. In any given year, there are multiple transitions being applied which results in an actual assessed value and a transitional assessed value for your property each year. The law requires that we use whichever number is lower – your actual assessed value or transitional assessed value – to get to your property tax bill. Please note that if you make physical changes to your property, the full value of the improvements are applied – it is not transitioned in.” So upward assessments for large properties are stepped in over 5 years , but downward assessments go into effect immediately. So at least in New York City, the tax base is very sensitive to downward movement in real estate prices. It would make sense that other communities have a similar asymmetry because no one wants to be taxed on a value greater than the current assessment. New York State also has brand new a… Read more »
Guest
JKH
4 years 4 months ago

interesting, thanks
check this out:
http://www.tax.ny.gov/pit/property/learn/asmtvtaxes.htm
the 3rd example is sort of along the lines of what I was getting at
I wonder what the general pattern has been, if such a general pattern is tracked anywhere?

Guest
JKH
4 years 4 months ago

We haven’t had the same real estate experience up here – although we did have some downside volatility around 2009.

But, so far, I know that I tend to pay attention to the tax amount more than the tax rate. If the tax amount is going up slowly and gradually, I’m OK.

In a severe real estate depression as you’ve had, I could see partial satisfaction if the amount actually declines, but perhaps less than the change in house prices, which would mean a ‘hidden’ increase in the rate.

Guest
ftm
4 years 4 months ago

This is the situation which puts local politicians in a bind. I think you can infer from still falling local government employment 5 years after the recession start that many of them chose to not fully increase tax rates to offset declining assessments. http://krugman.blogs.nytimes.com/2012/02/17/reversing-local-austerity/
If we assume tax delinquencies mirror mortgage delinquencies , then they peaked around 2010 but home prices kept declining until 2012 so the declining assessment issue would be taking precedence over delinquency issues.

I doubt there is national data available on assessments to compare to local tax revenues. But my strong instinct is people expect taxes to decline when the value of their property declines even if its value relative to other property is unchanged, so politicians respond with service cuts.

Guest
Philip Diehl
4 years 4 months ago

As one who’s been involved in local, state and national politics for more than forty years, I know most local officials are loath to raise property tax rates because revisions to property valuations lags behind those rate changes. Therefore, rate increases raise property taxes. As you can image, this is especially difficult during recessions.

Of course, this raises a question: if rates and property values remain unchanged, at least before the effect of valuation changes take effect, don’t tax revenues remain the same? No, because some homeowners fall behind in tax payments and properties go into foreclosure. More significantly, local governments do not depend solely on property taxes. Sales taxes are also a significant source of revenue for many local governments, and for the reasons described above, it is very difficult to raise property tax rates (and sales tax rates) to offset losses in sales tax revenue.

That said, local officials will sometimes raise property tax rates despite the political risk but not enough to sustain revenues, so even then they must cut spending.

Guest
JKH
4 years 4 months ago

meant “no allowance whatsoever for departing from”

Guest
beowulf
4 years 4 months ago

“I suspect its the failure of property owners to pay taxes owed that is more the issue – not the level of taxes owed.”
In theory, that’s how local property taxes work in the states but there’s two problems.
1. Some states (notably California) more or less freeze assessments when property is bought, so new owners pay more in taxes than existing owners.
2. Other states have caps on property tax rate, so even if property values drop, the county commission is limited as to how high they can set millage rate, starving local govt of revenue.
Incidentally, most prop tax revenue goes to education. Nixon proposed replacing property tax funding education w/ a national VAT.
http://epx.sagepub.com/content/early/2011/11/28/0895904811425913.abstract

Admin
4 years 4 months ago

It would also put thousands of Fed centric theorists/economists out of work. Can’t have that. 😉

Guest
Rich R
4 years 4 months ago

So then use the tax code….perhaps, enact a temporary, dramatic slashing of income taxes cobimed with a generous earned income tax credit for the working poor. The only problem, of course, is that all the deficit hawks come out of the woodwork….

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