Monetary Realism

Understanding The Modern Monetary System…

The Payroll Tax Hike and Higher Gasoline Prices

Mark Thoma catches Tim Duy who catches an analyst saying:

“”The increase in the payroll tax has undoubtedly dampened consumers’ spirits and it may take a while for confidence to rebound and consumers to recover from their initial paycheck shock,” Lynn Franco, director of economic indicators at The Conference Board, said in a statement.”

One of the more interesting anecdotes I picked up last week was from a businessman who said that after his firm issued the first paychecks of the year, virtually every employee came to the payroll office and asked why their paychecks were lower, evidently unaware that the payroll tax cut had expired.”

The level of consumer spending went to post-crisis records in November and December, and remained strong into January. This is great news, but I fear the hike in gasoline prices plus smaller paychecks will mean we have a recession in the works.

Gasoline prices are ticking up again after falling for months. Gas has gained about $.22 per gallon in just a few weeks. This is a very dramatic increase.

Remarkably, every year for the last 2 years, we’ve had a significant increase in gasoline prices begin sometime in Q1. In 2011, gas prices jumped $.50 per gallon in just a few weeks in early February. Then, in 2012, gasoline started its massive upwards move in February.

I fear we might be seeing a repeat of this seasonal cycle, and this could push us into recession.






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20 Responses

  1. nitu says

    You wrote a really great article. Have you seen this site. He’s good at trading stocks.

  2. vimothy says

    Hey Ramanan (if about),

    Did you see Pallet’s recent paper?

    • Ramanan says

      One negative aspect of the paper is the discussion around the Phillips curve. During the 70s, there was high and rising inflation when employment was high.
      Discussions around the Phillips curve can be quite misleading. There are various things about this but although Palley seems to wrongly think about these issues, the Neochartalists also oversimplify.

      • Matias Vernengo says
        • JKH says

          Following a millisecond of intense thinking about the subject, and perhaps slightly less research into it, I semi-conclude the following:

          In its theoretical conception, the Phillips curve is supposed to be a relationship in instantaneous time, no? If you drew a phillips curve over discrete time, perhaps partly anchored on empirical observations of actual relationship pairs in the past, or on those predicted from the path of assumed scenarios in the future, you’d actually posit a phillips surface, no? The point being that the phillips curve in its theoretical conception can shift over time. Similar to supply and demand curves, or ISLM, or any of that stuff? Anyway, that’s my total contribution to phillips curve discussions over all time. Wither goest my contribution – dustbin or other?

      • vimothy says

        Yeah, I think I read that post of yours at the time, actually. It’s a good point, with which I quite agree.

        As for Palley, I’m sure he probably said a bunch of stuff that I disagree with, but what I liked is that he tried to take MMT seriously as an economic theory. That’s something which is hard to do, because MMTers aren’t very forthcoming about their theoretical model. I mean, it’s all just “operations”, after all.

        • Cullen Roche says

          Palley doesn’t really get to the core problem in MMT, which is the inclusion of banks in their “money monopolist” model and the centrality of reserves to their model (which is essentially a different form of the way all neoclassicals design their models around the public sector money supply and not the private sector money supply). MMT essentially circumvents the reality of private money issuance by banks by consolidating the Fed and Treasury to create the illusion that banks are mere users of the govt’s IOUs as opposed to being the entities who “rule the monetary roost”. The reality is that the money supply has been outsourced to private banks and the govt has CHOSEN to make itself a user of this private bank money. MMT mangles the reserve settlement process and the purpose of the Fed (which is to serve the private banks first and the govt second) to create the illusion that the govt is a self funding entity. MMT is only applicable if the banks are crushed and the govt self finances without feeding the private sector banking beast. There is no money monopoly, no self financing and no money purely for public purpose when you have a private sector industry that distributes all the money in the process of private profit. The two are not consistent with one another and MMT requires substantial financial system overhaul to be applicable. There’s a reason MMT rails against private banking every single day and then blatantly contradicts itself by stating that banks are users of the govt’s IOU’s in the process of serving public purpose. MMT has to hate private banking because private banking is the thing keeping the MMT world from being accurate.

          Palley does a better job than many others at cracking the MMT nut, but he’s still not there. My critique is more thorough and gets to the heart of the problems in greater detail.

        • Fed Up says

          “The reality is that the money supply has been outsourced to private banks and the govt has CHOSEN to make itself a user of this private bank money.”

          #1 I highly recommend using a different term than money. There are too many definitions for money.

          #2 What are the economic assumptions behind this?

        • Ramanan says

          The tendency to oversimplify is painful.

          See this comment :

          It argues that have imports ever gone to 1000xGDP etc so my argument is wrong.

          Which is silly. For according to the commenter’s logic all debts and deficits are sustainable because we do not see 1000x GDP private sector deficits!

          It is a bit difficult to argue with the MMTers on basic logic sometimes.

    • Ramanan says


      Oh yeah just had a quick look. Looks very good.

      Note however that Palley has his own issues such as money financed versus bond financed.

      Other than that it looks like a nice. For example, there is an alarming amount of taking credit for the work and not giving credit to original authors and Palley is right to take issue from the start.

      One example: Bill Mitchell’s website has no acknowledgement of either Godley’s work or Moore’s work or for that matter Cambridge Post Keynesians. Quite alarming.

      Although MMTers struggle a lot, the “correct” part of it is all in Post Keynesian Economics. There is nothing original which comes out of MMT. The remaining part – where they have separate claims are grossly inaccurate and childish. For example, in my opinion there is no need to claim that a nation with a “sovereign currency” doesn’t run out of money. It is as misleading as its opposite.

      Take for instance Australia. Its banking system is heavily funded by the rest of the world and is vulnerable due to the nation’s current account deficits. *This is noted by all the rating agencies*. A fiscal expansion is counterproductive because it increases the banks’ external funding due to more deterioration of the CAD. If something happens to the banks, the government may be forced to take the banks’ debt in both domestic and foreign currency in its books. The nation is thus no longer using a “sovereign currency”. This is not a hypothetical example. It happened during the 2008 crisis. Fortunately, the conditions in the US funding markets eased and lenders were again re-willing to finance Australian banks and the RBA was able to pay its USD debt back to the Federal Reserve.

      MMTers confuse sovereignty – as used by Kaldor with their own definitions of “sovereign currency”.

      Somewhat related: I saw you commenting on the NEP 5-part series on debt sustainability. Do check my take on one particular point about debt sustainability:

      • beowulf says

        ” A fiscal expansion is counterproductive because it increases the banks’ external funding due to more deterioration of the CAD.”

        Here in the States, EVERYBODY ignores the current accounts deficit. Everybody, that is, except the American public.
        “Poll: Americans expect economic pain to continue
        …The survey found that Americans blame factors other than the recession for their economic plight. Seven in 10 said the high jobless rate is partly the result of foreign competition and “cheap labor” abroad.’

        Drives me crazy because closing our $500B CAD (whether by tariffs or Warren Buffett’s import certificate cap & trade market) is a fairly straightforward way to boost AD, stimulate employment AND reduce the budget deficit.

        • Ramanan says

          Good points Beowulf and Tom. According to Joan Robinson free trade is promoted by nations when it is in their favour and abandoned when it is not. She also mentions however that the attachment becomes so strong that it continues even in weak times. So very interesting dynamics there.

        • Tom Hickey says

          And the reason this is not going to happen is because it would elicit a counter by emerging countries, especially China, whose markets US firms are counting on to lead the way over the next many decades of this century. US business figures that opening up the world is in its favor on several counts, first, access to emerging markets and and secondly, fungile labor controlling domestic labor costs and reducing the bargaining power of local labor. Neoliberalism will remain US policy until American business concludes that free markets, free trade, and free capital flows are no longer in its interests.

        • beowulf says

          “And the reason this is not going to happen is because it would elicit a counter by emerging countries…”
          Well its important to make the distinction, as the chair of the President’s jobs council did not, that what’s good for GE is not always what’s good for America.

          China has absolutely no leverage over the US since they run a huge trade surplus with us now. Say they reduced or even blocked all US imports, we in turn would reduce and block all Chinese imports in response. What happens to our respective current accounts balance? Ours improves and theirs worsen…. no matter what China does! We’re already in a trade war, we just haven’t bothered shooting back yet. Its aggravating just to think about really, and in truth Donald Trump may the only political figure who understands how badly two decades of CADs has hurt our economy.
          On the other side of the ledger, China could retaliate by eminent domaining all of GE’s Chinese factories (paying GE the lowball book value price they list on their Chinese tax returns). Ehh, knock themselves out for all I care, the US economy would still come out ahead with balanced trade. Anyway, its because politicians are incapable of seeing that sometimes the people who fund their campaigns (and advise their Administrations) have interests in conflict with the Nation’s is why we’ve run a trade deficit year after year for decades.

        • Tom Hickey says

          While I agree with that, beowulf, what I am saying is that the “free markets,” “free trade,” and “free capital flow” mantra of neoliberalism is the dominant force politically in the US because US financial and business interests have made it so. That mantra will remain in effect until it no longer favors the elite, or there is so much populist pressure against it that politicians are forced to listen to voters rather than donors.

          And this pertains not only to the CAD but also to just about everything else having to do with economic policy and legislation that affects finance and commerce.

          Every society has a dominant culture and that culture has a dominant myth, which we now call a narrative. The used to be carried by religion. Economics is the new religion, and the economic theology of the “Free World” is neoliberalism. Acting against it, or even suggesting acting against it, is a “sin.”

  3. zanon says

    illegal aliens repatriate USD to their home country because that is where their family is. they drive down american wages while they are in america however.

    if they become legal aliens, then their may still send money to their families in mexico, or they bring their family over to the US as well. They will spend more in US then, but will also drain more in welfare etc as they will be poor and welfare programs target poor.

    • beowulf says

      Darned if we do, danged if we don’t.

  4. Cesar says

    Interesting point regarding the illegal aliens Beowulf…. but isn’t there a possibility that legitimising such immigrants will significantly up their propensity to spend and to invest within the USA and decrease their current propensity to repatriate USD out of the country?

  5. beowulf says

    Cowpoke, that’s interesting. Have there been reports that annual salary increases lost 2% points during the time the payroll tax holiday was in effect?
    If that’s so, it’d be the white collar version of the Speenhamland effect, welfare economics term for the (lowering) effect a govt wage subsidy has on private employer wages (since the govt insures that take home pay stays the same).

    In fact, that’s my one concern about an ebay hiring hall, the risk of it being gamed by employers to cut back on wages they’d have otherwise been willing to pay.
    Of course, just because the enactment of a payroll tax cut (possibly) led to smaller salary increases doesn’t mean the loss of the payroll tax cut will lead to a bounce back to higher “ordinary” increases. Labor has so little bargaining power in this economy, there’s nothing really stopping most employers from keeping any salary increases in their pocket. Adding millions of illegal aliens (and hundreds of thousands of work visas) to the legal work force probably won’t help.

  6. Cowpoke says

    Remember, Performance Reviews are this Quarter.
    I am waiting to see how many companies actually start giving more that the .05%-1.5% now that the payroll tax break is gone.
    If companies return to the 1.5-3% range then it would be a great case study for govt involvement vs company with regards to peoples take home.
    Should be interesting.