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.

 

 

Comments

  1. “MMT would say 100% public”

    Michael…seriously?

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

    • Jose Guilherme says:

      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.

      • 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.

  2. 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

  3. Dave Holden says:

    The devil as always is in the detail and in that detail are a whole host of prickly politics around the constraints on money creation, cronyism, distribution and feedback loops.

    If the powers that be had understood the mechanism of private sector credit creation and not abused their price distorting power over interest rates and risk ratios the useful fictions around the current monetary system would probably have toddled along for much longer without leading to a balance sheet recession.

    • I dunno. My homebrew economic history of the U.S. says we needed to jack up real estate in the 2000s to avoid the recession we are in now.

      The counterfactual U.S. 2005-2008 economy without a housing bubble is in a recession. By this point, the impact of the financial crisis is over. We just don’t have much more real estate based lending available.

      • Dave Holden says:

        Hi Michael,

        My current view is that there are two contexts, in a great recession and not in a great recession. When your not in a great recession and you use monetary policy to prevent small/moderate recessions you eventually risk ending up in a great recession with ZIRP. In this I guess I subscribe to the
        idea of malinvestment and am somewhat Austrian.

        To me, the second of those contexts, i.e. in a great recession, is a different ball game, here I don’t think you can allow the kind of liquidationist recession that I think some Austrians would like to see. I think it’s not politically sustainable, would destroy too much value and hurt too many people. It’s at this juncture I’m much more open to MMT/MR thinking, but here have I two problems, one, grand schemes scare the crap out of me, and two, the thought that politicians realised they are not tax constrained scare the crap out of me. I think of those two the former scares me more. As such it’s my current view that the best way out of this mess requires two things, a huge political push to write down bad debts and clean up the banking system combined with *moderate* but *sustained* fiscal stimulus with a view to facilitating private sector deleveraging.

        • “but here have I two problems, one, grand schemes scare the crap out of me, and two, the thought that politicians realised they are not tax constrained scare the crap out of me. I think of those two the former scares me more”

          What grand scheme? “MMT,” “MMR,” and similar frameworks simply describe the operational realities that, e.g., Reagan tax tax cuts took advantage of.

          I agree on #2 though. To an extremely limited extent I agree with Samuelson’s facade of old time religion. But in the end, I trust the U.S. political system and electorate to get things right for the most part, and I don’t think we’d end up with 20%+ deficits to GDP and rampant inflation, despite what our inner Austrians might tell us. To quote FDR, the only thing we have to fear…

          • Dave Holden says:

            Hi Art,

            By grand schemes I don’t mean MMR/MMT I mean off shoot proposal that would imply a large shift in policy, for example, jobs guarantee. Another one would be Steve Keen’s debt jubilee (Although I realise he’s not an MMTer). Another example would be debt free money as proposed by the positive money guys. I’m actually sympathetic to all of these but I worry about unintended consequences. I guess I’m kind of conservative in that respect.

        • Dave Holden, what do you think of this?

          current account deficit = gov’t deficit plus private deficit plus medium of exchange entity deficit

          Assume CA deficit = 0 & gov’t deficit = 0 so…

          0 = 0 plus private deficit plus medium of exchange entity deficit

          Move private deficit to other side of the equation.

          private surplus = medium of exchange entity deficit

          The medium of exchange entity will have no tangible assets. It will probably need intangible assets.

          • Dave Holden says:

            Hello Fed Up,

            The math is clear but though I’m sure they are very useful, as a layman I find accounting identities quite slippery, so in regards to term definitions, assumptions, implied causal relationships and dynamics I’m sure there are readers here better qualified to comment.

            • Dave Holden, just remember this if someone says if private sector wants to save then there can’t be a zero current account, zero private debt, zero gov’t debt economy. Plus, it is hard to have debt deflation if there is zero private debt and zero gov’t debt.

  4. Always enjoying the posts Michael. Some of the best thinking on the Internet is right here.

    As Dave Holden has stated the devil is always in those details. Their are huge corruption risks that can destroy the entire system through direct spending of the government. Seems that we are moving away from private sector oversight of spending through the regional banking community. And that is what we actually need to expand. SBA loans and grants, research grants of limited size, education grants all need to be expanded with accountability oversight of the private regional banking community. Ironically this is what is actually being destroyed as Wall Street has taken precedence in all “financials reform” legislation.

    • ! Thanks Kelly.

      The devil is in the details. Big programs have big consequences. The implementation is massively important, and it matters who gets the money first.

      The slaughter in regional banking has been the big unreported story of the crisis. The big guys got bailed out, the regionals were taken over and sold to cronies. Really.

      It’s funny because the other leg of my “real estate backed money” piece is about how technology is driving smaller capital projects instead of larger ones. Building a steel mill in 1940 required a huge amount of land and lots of machines, plus infrastructure around it.

      We have the infrastructure already, and the amount of ‘stuff’ required when building new things is far, far less. Capital improvements are smaller.

  5. “The next question is “How much” of this stimulus should be from the public sector, and how much should be from the private sector?”

    Tax credits are public sector stimulus acting through the private sector.
    Ralph Musgrave has been writing about work subsidies for years.
    http://ralphanomics.blogspot.com/2013/01/ed-balls-and-workfare.html

    That’s how Morgan’s ebay hiring hall could work. Create a tax credit (equivalent, say, to minimum wage) for hiring each unemployed person and the bidding process for each employee (per week presumably) would be a Dutch auction of how little of the tax credit an employer will require to hire them. A sharp person with a good work history might need very little or no tax credit to hire, someone just out of rehab might need nearly the whole kicker for someone to bid on them. If no one bids, the person is probably such a wreck they should be on a disability pension anyway.

    Mike, your sensei and mine, Wynne Godley wrote something worth pondering (in Towards a Reconstruction of Macroeconomics).
    It will be argued that there will always be at least one component
    of the operations of a sector over which that sector has no direct control. Each sector is perforce operating under conditions of uncertainty and hence must take decisions on the basis of what it expects will happen, so there must be at least one flexible component in each sector’s list of options which acts as a buffer and over which it has no control in the very short run. There is, in this model, neither a short nor a long term market clearing mechanism which brings (or which fails to bring) supplies into equivalence with demands
    with the important exception that prices do clear the market for equities and bonds.”

    I think an ebay hiring hall would fall into his financial exchange exception of markets that do actually clear.

    • I had a discussion with Morgan which we are going to post in the next few days. He’s far more agreeable in conversation than his writing comes across, and I’ve always enjoyed the eBay idea.

      I might have a post in me about the eBay idea soon. Part of the problem with the idea is the lack of structure on the hiring. But the idea is actually pretty strong in other areas.

  6. “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.”

    By money creation, do you mean more debt? If so, the solution to too much debt is not more private debt and not more gov’t debt. It sounds like you are trying to grow and stabilize an economy with either more private debt or more gov’t debt. What if both of those actually destabilize an economy? What if both of those are medium of account and medium of exchange problems?

    In my opinion, targeting NGDP or targeting price inflation without worrying about debt levels is not going to work.

  7. “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.”

    I think your strong economy rule assumes real AD is unlimited. Yes or no?

    Where is the retirement market?