I wrote a post on the likelihood of a Trump induced recession on Friday and then disappeared for the day into a series of long meetings and discussions on research work from which I did not really emerge until early evening. In the meantime more than twenty comments had arrived suggesting that the conventional narrative of failure that I had portrayed were just wrong in an MMT environment.
There are a number of lessons for me in this. One is not to blog in haste. The other is to remember that I have elders on this blog, not all of whom will immediately follow my train of thought. Let me explain, before developing the real issue of consequence.
I actually based two posts on one FT article on Friday morning whilst rushing to work. One was pure MMT (modern monetary theory). The other (to which I am referring) was not. It was meant to explain why the Trump deficit can deliver a crisis because of conventional thinking on deficits, employment, interest rates, inflation and much else. I got the tone of that one wrong. I worked through the logical consequences of this forecast and the likely reactions to it for my own purposes without spelling out the caveats and explaining my purpose adequately. I sometimes forget that their is greater purpose to this blog than me working out ‘what next?' for my own benefit. That was a mistake: please accept my apologies.
But some of the comments that were made on that piece were interesting and I want to take issue with them. I am not addressing those on whether the US has full employment or not: just as in the UK, I accept that official data does in no way reflect the true state of capacity in the US labour market. Instead I am concerned about those who suggested I should be indifferent to deficits because MMT says they do not matter. That, in my view, is a seriously incorrect view of the world. In fact, it's dangerous and lazy thinking. In my opinion it's the type of deficit that matters.
This is an extension of my thinking on tax. There I have suggested that there are six reasons to tax:
1. Reclaiming the money the government has spent into the economy.
2. Ratifying the value of money.
3. Reorganising the economy.
4. Redistribution of income and wealth.
5. Repricing goods and services.
6. Raising representation in a democracy.
The essence of this argument - which is explored in The Joy of Tax - is that given that tax exists to cancel and simultaneously give value to government money created through public spending (purposes 1 and 2) then it is vital that it becomes an extension of government social and economic policy (purposes 3 to 6) in the process of doing so.
Let's be clear that MMT can suggest that purposes 1 and 2 are enough. At a pure economic level that might be true. But in my opinion what matters is political economy, not just economic theory. As a result one of my issues with MMT has always been that it has generally said 'we need tax to cancel money creation' but has not emphasised sufficiently the fact that there are better and worse taxes that might achieve that goal.
Regressive taxes do not achieve the goals I set for tax.
Nor are ones that promote useless or harmful social activity.
And which fail to correct market failure.
Or which undermine the relationship between individuals and the state.
And I would explicitly extend this logic to the matter of deficits. Deficits created by austerity - or the failure to spend when doing so would generate a fiscal multiplier effect - are not good.
Nor are deficits created by tax cuts the redistribute wealth to the already wealthy beneficial.
And, come to that, nor are deficits created by military spending intended to destabilise the world.
These are what Trump is planning to deliver, in the main. These concerns cannot be dismissed because he says he might do a bit of infrastructure spending as well, some of which is a Mexican wall. To pretend that any such spend makes the rest of his plans acceptable is to suspend political judgement and I do not think that has any part in modern monetary theory. Otherwise we're back to the logic that digging holes and filling them in again is useful economic activity and worth doing. It isn't.
MMT does, I very firmly believe, require that we continue to exercise sound political judgements. There are good and bad reasons for running deficits. To accept all deficits as being worthwhile when the economy needs a stimulus is simply wrong. The Trump deficit will meet almost no social criteria for usefulness. Indeed, the fact that the stimulus will be saved and so there will be a deficit is in itself some proof of that because it shows that the gains will go to those who have no reason for their wealth to be increased.
Might a make a gentle plea to those who think all deficits might be good to think again? That's simply not true. The world is much more complicated than that.
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I understand what you are saying Richard. And following it to its logical conclusion, just as there are good and bad taxes and good and bad deficits so there must be good and bad successful economies. Just imagine a successful economy where even though everyone has a terrific standard of living there is terrible inequality and low taxes for all, including the rich, where the state has little involvement in the economy. The thought of such an economy must bring a shudder to your pyschy.
For those who say your research has no merit, Richard, I say that yours is the most meretricious research I have read!
Simon
I note what you say
But then I note your IP address has also been used for trolling here
So I also suggest that you do not mean a word you say
And that’s why it’s now on the blocked list
Richard
“so there must be good and bad successful economies.”
Unsuccessful sentence.
I’m struggling to think of which country has had terrific standards of living for all despite terrible inequality, low taxes and low state involvement in the economy. Oh yeah, because it doesn’t exist.
Well I’m genuinely glad that you have clarified that and I am glad to say that I generally agree this time as I am sure most others will.
I would also note that a military build-up is basically the fascist solution to unemployment as Michael Kalecki famously explained in 1942. https://delong.typepad.com/kalecki43.pdf Unfortunately, over several decades, the military has also become the US’ usual first recourse for using up excess industrial capacity.
There is nonetheless one point that piques my curiousity. Where you say that “I accept that official data does in no way reflect the true state of capacity in the US labour market”. That’s fair enough but the official data is already quite clear with official unemployment (U3) at 4.1% and Bureau of Labor Statistics (BLS) broadest measure of unemployment (U6) at 8.1%
That’s clearly inconsistent with the FT’s claims about the US nearing “full employment” and their claims about rising inflation were clearly wrong too as the BLS best measure had inflation at 2.3% in Jan. 2017 falling to 1.8% in December 2017.
My point is that something else is going on here. Something separate to the deficit discussion – being that there is a beat-up or false narrative being generated about a real economy boom that doesn’t presently exist in the US. I am curious as to where that is coming from and why.
Refs:
https://data.bls.gov/timeseries/LNS14000000 , https://www.bls.gov/lau/stalt.htm ,
https://data.bls.gov/timeseries/CUUR0000SA0L1E?output_view=pct_12mths
This false narrative has been going on for ages
David Blanchflower has been challenging the myth of employment data for a long time
No, my point is very much present tense. Stories like the one you quoted in the FT, telling us that things are all of a sudden “booming” last month in Trumpland. These stories seem to be some sort of follow up to the “normalisation” schtick, and, going by the real statistics they are blatantly, shamelessly or thoughtlessly crap.
So what taxes do you think could be used to take inflation out of the economy, if we run it on MMT principles?
I suggest you read The Joy of Tax
my concern is that there is an irreconcilable conflict between a desire to tax the rich and a desire to use taxes to control inflation. I’ve read the Joy of Tax and you didn’t seem to answer this point.
I have no desire to ‘tax the rich’
I have a desire shared with the OEcD, IMF, World bank and others to address the massive economic problems created by inequality that undermine the well-being of all people
Do you have a problem with addressing the issues inequality creates?
‘Instead I am concerned about those who suggested I should be indifferent to deficits because MMT says they do not matter.’
Anybody saying that has not studied MMT which makes very clear that whether a deficit is needed (or a surplus or a balanced fiscal stance) depends on sectoral factors, in particular the savings desire of the private sector. MMT makes absolutely clear that deficits are not ‘good’ or ‘bad’in themselves. I think that needs to be clarified, Richard, as your post simply says ‘That, in my view, is a seriously incorrect view of the world’ which looks ambiguous as whether you are ascribing the incorrect view to those that say ‘deficits don’t matter’ or to MMT itself. It’s clear you are saying the former from what follows but it sounds a bit unclear at that point.
I think it’s because we have had deficits for most of the time over the last hundred years ( c.85%??) that people think that deficits are always good. of course, the word ‘deficit’ doesn’t tell you, in itself whether it is ‘progressive’ or contractionary but many use that word as if it is automatically progressive.
MMT sees some of the foundational definitions of the purpose of Tax as expounded in the Beardsley Ruml article you blogged on some years ago which covers most of your points, I think. It would not say that purposes 1 and 2 are ‘enough.’ They are necessary because they are inherent to taxation but not sufficient for tax policy. We need to remember that MMT is a tool to analyse the functioning of the monetary system, not a policy proposal of a political party-you could be MMT conversant and be a Libertarian although most MMT economists are on the Left and most propose a full-employment policy with a Job Guarantee as a price floor for employment.
Richard, when you say ‘As a result one of my issues with MMT has always been that it has generally said ‘we need tax to cancel money creation’ but has not emphasised sufficiently the fact that there are better and worse taxes that might achieve that goal’; I think you are confusing MMT’s role as an analytical tool with seeing it as an issuer of policy proposals. MMT tells us how the a monetary system functions which obliges politics to be transparent; it’s not a policy generating instrument though most MMT economists do have policy proposals.
As Randall Wray puts it: ‘ Once we understand what taxes are “for”, we can start to think about what kinds of taxes make sense.’ That’s were policy comes in.
I have long felt that the last point has been left as a residual by MMT and should be central
And I have done my reading, I think
Sorry, Richard, I wasn’t at all implying YOU haven’t done your reading ( I’ve just re-read my first sentence and realised how you might have read that) but those that say ‘deficits don’t matter’ claiming that’s what MMT is about -which is really agreeing with what you said!
Apologies for ambiguity.
No problem!
I started the problem
You’ve hit the nail on the head. This is a useful reframing of the debate.
So, some deficits are morally justified.
And some are not because they are not socially useful at all.
Sounds good to me.
Thanx.
Indeed-the word ‘deficit’ doesn’t tell you how it is being spent.
@Richard,
Would you have made the same analysis at the start of Reagan’s presidency? It’s probably too early to say for sure, but Trumponomics doesn’t seem much different from Reaganomics. I wouldn’t agree with Reagan’s understanding of economic theory but, in a way, and as it turned out, it can be considered that he gave a Keynesian stimulus to a flagging economy by cutting taxes.
On the point of digging and filling in holes, no-one can agree with spending real resources on doing that. But sometimes, if these resources are otherwise going to waste anyway, and as Keynes himself put it, it can be better than nothing when the multiplier effect is taken into consideration.
I think Trump and Reagan are fundamentally different
I don’t like either but Reagan for all his other faults listened and then acted
Trump acts, as is apparent here
Peter,
For quite some time now some of the more conventional progressive, Keynesian economists have been telling us that tax-cuts are less effective as a form of stimulus. At its core, the typical argument is as follows:
“Less than half the personal tax cuts, or rebates, are likely to be spent in the first two years. The rest will be used to pay down debt, build savings or buy imports – none of which help boost the U.S. economy. Therefore, the cumulative impact of tax rebates will be much lower than that of public spending.”
http://www.epi.org/publication/public_investment_far_better_than_tax_cuts/
Then there is the more obvious point about most of the Republicans tax cuts being wasted on the rich who have a very low propensity to consume and basically represent a lot of money being returned to very few consumers that have no immediate needs.
The main argument in favour of tax cuts for the poor and middle class is that, when appropriate (in a crisis), they are quicker to take effect than infrastructure spending.
While I am sure that this school of advice is not perfect I have yet to find any reason to doubt it in any significant way.
I pretty much agree with you
@Peter Martin
From the horse’s mouth, so to speak: “I helped create the GOP tax myth. Trump is wrong: Tax cuts don’t equal growth.” – https://www.washingtonpost.com/news/posteverything/wp/2017/09/28/i-helped-create-the-gop-tax-myth-trump-is-wrong-tax-cuts-dont-equal-growth/?utm_term=.84b65cd1a1f7
@ Marko @John D,
I pretty much agree. Except I’d say it depends on what type of tax cuts. A cut in a consumption tax like VAT or an increase in the personal allowance, can, for example work well too.
The big advantage of spending more is that it can be better targeted. This is in a geographical sense too. In the U.K. London and the South East probably don’t need much of a stimulus at present.
Agree with both of those
I second that agreement – on both counts – particularly so re. consumption tax because it is regressive. The observation re. geographical areas is quite right as well but that takes us into the realm of Optimal Currency Area discussions and I won’t go there because it is too far off-track.
Deficit spending is perhaps difficult to fully understand as a concept, due to what seems a contradiction in terms.
We spend into the economy and tax out seems to work better for me, Interest rates and taxation are the only available means to regulate the economy, and as has been said, it depends what you tax whether it achieves the desired aims or not, interest rates are a blunt instrument that does more harm than good, as the money only boosts bank profits. The Tories I believe use debt as both a regulator and stimulant, which has all sorts of outcomes which benefit no one in the long run.
I see the need to tax the super rich quite heavily as they are now a law unto themselves, and appear to use their wealth disproportionately to gain even more wealth against the interests of the many. It has really no other purpose than to confine their unsociable activities.