Automating Fiscal Policy

Izabella Kiminska has a great post up about automating fiscal policy:

 “Compensate the unemployed with credit/debt/government spending and use automated fiscal stabilisers to tweak inflationary and deflationary side-effects.

Or, alternatively, employ them — for the sake of humanity — in big mega projects that stimulate our creativity, scientific and academic knowledge, and culture.

Fiscal policy needs to become as fluid and dynamic as monetary policy.

People also have to understand that taxes are just another sterilisation mechanism. They are particularly important when government has to take over from the private sector to stimulate demand. Higher or lower taxes are needed to keep the correct amount of money circulating through the system.

The government can do this because it — unlike private capitalists — is not exposed to the effects of diminishing returns.”

Well, that’s part of it, but there are lots of other questions to be answered as well. “How much?” is a good question, because then you start a thinkin’…

I have one answer – the Strong Economy rule. The strong economy rule links unemployment, population growth, and inflation and gives a total amount of fiscal policy to be implemented. The original target for this fiscal policy is the level of payroll taxes here in the U.S., and the level of payroll taxes is adjusted quarterly.

Beowulf also has a proposal which links the level of unemployment and a percentage “holiday” of payroll taxes.

These are both good proposals which would lead to a stronger economy, and have the important ability to automate fiscal policy.

But the question “how much” leads to other ideas. Scott Sumner points out monetary policy “acts last”, and during most times, the ability to boost or limit credit creation has an impact on the economy. Additionally, government spending isn’t all we want in the world – at least I do not. The private sector should get some of the  decision process too.

There are deep accounting linkages between the Treasury and the Central Bank, and each of these entities has a part to play in society. The Strong Economy rule gives us a total amount of deficit spending which should be pushed into or pulled from the economy. The next question is “How much” of this stimulus should be from the public sector, and how much should be from the private sector?

Morgan Warstler would say 100% private, but then you end up with the problem of the balance sheet recession. I’ve started to outline more on the issues of private credit creation, but it’s staring us right in the face. MMT would say 100% public, but this seems equally foolish.

I’ve started to create a rule which targets NGDP, the total amount of stimulus, and the ratio of public to private money creation. It just seems like a rule like this would be very useful to the nerds over at the Central Bank.

 

 

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Cowpoke
3 years 2 months ago

Interesting,
“Or, alternatively, employ them — for the sake of humanity — in big mega projects that stimulate our creativity, scientific and academic knowledge, and culture.”

I can see it now, Big Beautifully designed Bridges to nowhere all over the place.

Wait, it’s already been tried before:
http://www.bbc.co.uk/news/magazine-19049254

Guest
Art
3 years 2 months ago
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Cowpoke
3 years 2 months ago

What role did the Govt have in AC/VS DC Electricity?

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Cowpoke
3 years 2 months ago

Agree.. And that was funny. 🙂

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Art
3 years 2 months ago

“MMT would say 100% public”

Michael…seriously?

P.S. Izzy is a smart cookie, thanks for linking this.

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Jose Guilherme
3 years 2 months ago

I think MMT would (should) be agnostic between additional public expenditure and tax cuts.

And tax cuts would mean increased spending by the private sector – households and firms.

Guest
JK
3 years 2 months ago

Jose,

Tax cuts do not necessarily lead to an increase in spending, at least not neccesarily a significant increase. If the private sector is undergoing massive deleveraging, much of that money will go to paying down debt and not consumer spending. So… should MMT actually be agnostic between the two?

I would think both are appropriate. Tax cuts absoutely provide direct relief to people. That is important. But government spending serves other important purposes, a la ‘the common good’ e.g. education, infrastructure, etc.

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