Opinions on shape of proper stimulus differ. Both sides have a point.
As he watches policy makers cry “fire fire” in Noah’s flood, Paul Krugman becomes almost shrill. He has a simple (rigorous) model which suggests more stimulus would be ideal and that, when in a liquidity trap, government spending should be set to give unemployment equal to the non accelerating rate of unemployment. In this model, he assumes Ricardian equivalence. That’s the problem.
In the model, there is no problem with running up a large public debt. The timing of taxes doesn’t matter at all. In the real world, we are concerned about the public debt. In normal times, Krugman is very concerned because, he believes, people mistake bonds for net wealth and this distorts consumption/saving decisions. In a liquidity trap there would be an additional advantage of public spending (giving a multiplier greater than 1). However, the debt will still be with us when we exit the liquidity trap.
This does not have to be true. It is possible to pay for the stimulus by cutting public spending when the economy exits the liquidity trap. This does not reduce the stimulating effect (if consumers are rational and forward looking it increases the effect as lower government spending in the future implies more private consumption now). It is also possible to pay for it by raising taxes in the future. However, both cutting spending and raising taxes is difficult. Below, I will just pretend that I find this argument that further stimulus is only OK if it doesn’t add to the deficit convincing, even though I don’t.
So the problem is how to cause increased aggregate demand without increasing the budget deficit.
I think the solution is a temporary increase in the progressivity of the tax code. A temporary tax cut for the poor will cause a large increase in their spending as many of the poor are liquidity constrained. A temporary tax increase for the rich will cause a small decrease in their spending as few of the rich are liquidity constrained.
Explicitly temporary tax cuts do not all become permanent. There is no movement to extend the temporary tax cuts in the stimulus bill, even though Obama promised permanent tax cuts which were to be identical except five fourths as big. It might be hard to let a temporary tax increase for the rich expire. So my approach might reduce the deficit in the long run.
I think it is likely that none of the people who claim they oppose further stimulus because it will add to the debt* will support my proposal. I do mean my subjective mode for the number is exactly zero. Few people will hear of my proposal. Few of them oppose further stimulus. Most people who oppose further stimulus and call themselves deficit hawks are hypocrites. Sincere deficit hawks might find my argument unconvincing.
Maybe there is one sincere deficit hawk who will read this and be convinced, but I doubt it.
* typo corrected.
“I think the solution is a temporary increase in the progressivity of the tax code. A temporary tax cut for the poor will cause a large increase in their spending as many of the poor are liquidity constrained. A temporary tax increase for the rich will cause a small decrease in their spending as few of the rich are liquidity constrained. “
Some will object because they feel those who make high incomes will postpone receiving income for the length of time that the tax hikes are in. But how much income can be deferred above and beyond what is deferred now (i.e., is there an extra incentive to defer when the marginal rate rises by 4%?), and how much would that change spending habits and hence aggregate demand?
FWIW, like my posts on conditions leading to exiting recessions and the length of expansions, this is yet another good reason for a tax hike at this time. Its funny how I keep reading nobody believes in tax hikes in times like this…
The poor are already paying virtually no income taxes by definition of being poor. That leaves state and local taxes. The states are running a 600 billion deficit. That means to give the poor more to spend would mean a direct subsidy to the poor or the states. To the state large enough to offset the 600 billion plus extra. The plus extra is required because the poor (and dare I say middle class) are already near or in negative “liquidity”.
I showed a while back that personal income to 99% of the population has been below personal consumption since 1996 and the gap was increasing. It coinsided with the share to the top 1% crossing the 15% level and continued to get greater. This is the opposite of when income for 99% went above personal consumption in 1945. The share to the top 1% crossed below 15% and continued to get smaller.
There is only one solution to increasing demand: increase income earned to 99% of the population. Now, we are either going to start promoting labor law (including going after those who hire the illegals), unions, etc or we are going to tax the top large enough to make it worth their while to pay the help themself or let the government redistribute it via spending on things the create wealth. Things like free college ed, single payer healthcare, etc.
But, what we can not do is cut taxes enough to make up for 1.4 trillion dollars per year that used to be in the hands of the 99% which is now in the hands of the top 1%.
The other issue as I showed a while ago is that the top 1% has taken money out of the economy as income faster than the GDP has been rising since 1980. That is their income has doubled before the GDP doubled. There is no way cutting taxes to those who’s income has not doubled in 22 years (bottom 99%) will stop the top from taking money out faster than we can produce it. Unless of course we are just going to print it fast enought to make up the difference between how fast the top takes it and how slow the GDP grows.
All these tax cut approachs are nothing more than trying not to piss off the top by pretenting the top can keep what they have while the bottom waits for the economy to grow for them to catch up. That was called trickle down. It don’t work because it can’t work.
not a deficit hawk (me), but a bit of a deficit crow.
so far only me and kimel think we can raise taxes in a recession. what we can’t do is cut taxes on the people who have no money. and of course we can’t cut the payroll tax because that is not a tax.
we can however, let the government find useful work for people and pay them. either by raising taxes on the people who have money now, or by raising taxes on the people who will have money later when the economy grows.
what we can’t do is cut taxes now “to grow the economy,” and then cut them later “to keep the economy growing.”
and yes, a minimum wage law that would (gradually) require the people with money to pay a living wage to the folks who work for them, or the folks who work for the people they buy their stuff from, would be… ah, salutary.
what you can’t do is keep making rules that help the people who have more get more yet. at some point the poor don’t have enough…. to buy from the middle class… and the rich have more than they can “invest,” so they turn to gambling.
somebody needs to be starting to think about whether “growth” is the answer to everything.
maybe the recession is the “market’s” way of telling us we have enough.
it could be distributed a bit better, both as to the people who have it, and the worth of the things they have. contrary to the dominant religion, free markets are not “efficient” at providing people what they need. they are efficient at providing people with immediate gratification. something a wiser generation knew was the path to hell.
i am not proposing a socialist, let alone communist, model. i am happy enough to let markets do what they do best: facilitate the exchange of goods and services in the marketPLACE. but we don’t need to spend 24 – 7 in the marketplace. we could find better things to do with human life while we have it. and this can, i think, be achieved simply by something called “culture,” if it is allowed to grow without needing to justify itself every hour in terms of money.
the fact is that we have reached a point where we can afford to “work” less. instead we have gone insane and “stimulated” ourselves to work more and more, buying things we don’t need and don’t even really want. not least a military capable of winning two wars at once against an enemy that no longer exists. nor to mention the need for a more “dominant” car than our neighbor’s.
I have made the point divorcedone makes about the rich either seeing that the poor get more of the pie from the economy or paying more taxes so the government can give more of the pie to the poor in the context of “free trade”. All of the economic models show that trade benefits both countries. The problem I see is that the benefit of our current approach to globalization has gone almost exclusively to capital at the expense of labor. I know, I know there are people employed in export businesses and the poor benefit by being able to buy those nifty running shoes at Wal-Mart at a reduced price because they were made in sweatshops in Indonesia or Guatemala or wherever, but on balance labor has taken it in the shorts due to “free trade”. Therefore I think it is reasonable to say to the wealthy that either they pay more in taxes or we are going to erect trade barriers.
I do think there is a problem at the federal level because the poor do not pay income taxes although I have argued that we could eliminate the employers share of social security on the first $20k of wages while lifting the cap on the employers share. While the social security contributions paid by employers are in essence wages, I think most people would still see it as an insurance/savings program and not redistribution if the employees continued to pay as they do at present and the effect of the change would be to encourage employment at the bottom of the scale while damping down some of the income increase at the top.
Coberly you convinced me a week or so ago that it was the cut in spending, nit the increase in taxes which caused FDR problems in 1937-38 so I will join with you in Mike in arguing that a tax increase in a recession can be a good thing.
A temporary tax cut for the poor will cause a large increase in their spending as many of the poor are liquidity constrained. A temporary tax increase for the rich will cause a small decrease in their spending as few of the rich are liquidity constrained.
I propose calling this the “Waldmann See-Saw”.
Yes, as you guessed, the tax cuts I had in mind would be refundable tax credits, that is, giving the poor and lower middle class money.
It is true that the rich might just shift income forward to dodge the temporary tax increase. I don’t know how much of that can be done. An even better stimulus would be to give money to the non rich now and keep the medium term deficit the same by introducing a future tax on extremely high consumption.
To avoid that tax, the rich would spend their money now.
I gave myself the arbitrary rule that the tax increase had to be implemented now just to make things harder. Also I read on the web somewhere about the idea of stimulating by threatening to tax high consumption. I forget where I read it, so I can’t cite, so I can’t quote without citing which I consider OK in reply to comments but not ok in posts.
“What do you mean “we” White man. ” — Tonto
“What do you mean “we” American.” — Robert
Europeans are taking out productivity growth by taking longer and longer vacations. Hours worked per year per worker stopped shrinking in the USA in the 70s. Over here, they just keep shrinking.
Europeans, indeed Italians, are amazed both by my laziness and my complete lack of any interest in income or consumption. So you are preaching to the choir.
I very much like the idea of making the employers contribution to social security progressive in wages. It isn’t a totally totally new idea — it was proposed by MacDonald and Solow in 1980 called “Tax based incomes policy.”
However, income taxes paid by the poor can be cut with a refundable tax credit, which makes their income tax liability go from negative to more negative. One might call that a spending increase not a tax cut, but it can be done. It was done in the Stimulus bill and called a tax cut.
As of 2007, there are about 138 million taxpayers in the United States.The Treasury Department in 2006 reported, based on Internal Revenue Service (IRS) data, the share of federal income taxes paid by taxpayers of various income levels.
The data shows the progressive tax structure of the U.S. federal income tax system on individuals that reduces the tax incidence of people with smaller incomes, as they shift the incidence disproportionately to those with higher incomes – the top 0.1% of taxpayers by income pay 17.4% of federal income taxes (earning 9.1% of the income), the top 1% with gross income of $328,049 or more pay 36.9% (earning 19%), the top 5% with gross income of $137,056 or more pay 57.1% (earning 33.4%), and the bottom 50% with gross income of $30,122 or less pay 3.3% (earning 13.4%). If the federal taxation rate is compared with the wealth distribution rate, the net wealth (not only income but also including real estate, cars, house, stocks, etc) distribution of the United States does almost coincide with the share of income tax – the top 1% pay 36.9% of federal tax (wealth 32.7%), the top 5% pay 57.1% (wealth 57.2%), top 10% pay 68% (wealth 69.8%), and the bottom 50% pay 3.3% (wealth 2.8%).
Other taxes in the United States with a less progressive structure or a regressive structure, and legal tax avoidance loopholes change the overall tax burden distribution. For example, the payroll tax system (FICA), a 12.4% Social Security tax on wages up to $106,800 (for 2009) and a 2.9% Medicare tax (a 15.3% total tax that is often split between employee and employer) is called a regressive tax on income with no standard deduction or personal exemptions but in effect is forced savings which return to the payer in the form of retirement benefits and health care. The Center on Budget and Policy Priorities states that three-fourths of U.S. taxpayers pay more in payroll taxes than they do in income taxes.
The National Bureau of Economic Research has concluded that the combined federal, state, and local government average marginal tax rate for most workers to be about 40% of income
How do you cut taxes on the lower 50% when they aren’t paying any? It should be the other way around. Raise taxes on the lower 50% and cut taxes on the upper 50%. But….we can’t talk taxes unless we talk spending, and if we can’t control the spending then there is no debate.
“However, the debt will still be with us when we exit the liquidity trap.
“This does not have to be true. It is possible to pay for the stimulus by cutting public spending when the economy exits the liquidity trap.”
It is also possible to pay for the stimulus by creating money without increasing the debt. As it is, the gov’t provides money to the economy by issuing bonds. That means that we pay interest. It also means that we scare the electorate.
I just don’t understand the complexity passed along in articles such as Robert’s (not only his though) re: deficit spending versus a balanced budget.
Consider a Balanced Budget a balance beam. One side is spending and the other is revenue. To balance the beam both ends must match. Lowered spending and increased revenue (both taxes and improving the economy) are the only ways to get anywhere near a balance point.
Lowering taxes without its equal cut in spending gets us no where! Raising taxes while continuing to increase spending gets us no where. Cutting taxes and cutting spending MAY get us to a balanced position with a solidly growing economy (the mid Bush years.) Raising taxes and controlling spending (the Clinton/Repub Congress approach) during a growing economy works, and if the economy stays positive ling enoug can get to a balanced position.
All other options, especially those who only affect one side, are useless. Yes, that includes trickleldown!
Taking dollars out of the public’s hands via tax increases, and assuming there is some payoff due to a mystical multiplier is also just plain useless. If you are beleiver that public sector spending is more efficient than private sector spending please explain the difference(s).
I have an idea that is obviously too simple for economists to think of, but I’ll post it anyway.
Economists should let old people retire. In order to make that possible, economists should let us have the social security we paid for.
Unemployment would disappear because young people would have jobs. Old people will spend all their money on consumption. There is some chance that our GDP number will go to some figure (most likely down) that the economy may like to have.
Ok. I said it. Everyone can laugh now.
I’ve always been impressed by the Hoover Dam, and I don’t understand why economists always slam him for being a do-nothing guy. But I actually believe government could do some worthwhile things, or at least be the manager/funding entity for a private sector workforce, but the track record has been rather spotty.
” It is possible to pay for the stimulus by cutting public spending when the economy exits the liquidity trap.”
And what would you say to people like me (other than some choice Anglo Saxonisms) who point out that this is rather easier said than done?
Or, more formally, those who have no problem with the analysis that increasing spending while not increasing taxes, in recessions, is just fine and dandy. Straight Keynes in fact, fiscal stimulus.
But when it comes to cutting spending or increasing taxes in the booms, the necessary counter cyclical fiscal contraction, well, you know, from observation, that’s just not how politics works, is it?
Those of us like me who point out that politicians have no problems, indeed are delighted, with the part of the theory that says that they get to throw out the sweetie bags sometimes, but have something of a problem with being the people who confiscate them in the good. And that, therefore, politically run Keynesianism won’t and cannot work: because politicians are not willing to do what the theory requires to work.
As you noted, the lower 50% are certainly paying taxes, just not federal income taxes. In any case, it is easy to cut the taxes of people who are paying zero or less. It is called a refundable tax credit. One was part of the stimulus bill. Zero is not an especially important number.
You write “should be the other way around. Raise taxes on the lower 50% and cut taxes on the upper 50%.” Why ? You do not claim that your proposed policy would have any good effects. You give no reason. You just declare.
I explained why my proposal would stimulate demand without adding to the deficit. You explained nothing.
Then, after talking taxes for your whole comment “But….we can’t talk taxes unless we talk spending, and if we can’t control the spending then there is no debate.” Odd, you have been debating at length before saying that there is no debate. Since my proposal is revenue neutral it seems to be to be orthogonal to the debate about the deficit and therefore about spending.
OK if we stimulate by creating money and not bonds, then we will have a huge excess supply of money when we get out of the liquidity trap. Either we convert the money to bonds then or we accept inflation. The interest currently paid on money is similar to the interest paid on short term bonds.
What the Fed is paying interest on money ?!?! yes indeed. Not on your money, but on banks’ excess reserves. Why ? Uhm it’s complicated. Why not stop ? Don’t tell me tell Ben Bernanke.
I didn’t write anything about public sector spending and wrote very little about the deficit. I was discussing how to increase aggregate demand without adding to the deficit. The demand in question would be private spending.
This idea has been brought up before. I can’t remember who exactly, but a fairly reputable economist layed a full senerio of it happending and how the numbers might work out.
It looked good on paper, but I have no idea if it really would work!
I suspect modeling it will show an increasing structural deficit, and the concept fails.
Robert, i was responding to your closing comments and other writers in general. You closed with: “Sincere deficit hawks might find my argument unconvincing.
Maybe there is one sincere deficit hawk who will read this and be convinced, but I doubt it.”
As you can see from my comment, I don’t believe a one sided (tax cuts) is enough to significantly alter the path of the recession. Moving dollars from the private sector to the public will not significantly change much.
If the deficit is an issue we need to hit both sides of the equation and there is NO EFFORT on the reduced spending side. I think we are on the verge of a tipping point on the deficit and it’s not going to be pretty.
Mayor Bloomberg has a brilliant plan to not raise taxes, except indirectly and only for some middle-class city employees. “Bloomberg Moves to Block Teachers’ Raises.”
He wouldn’t want those Bush tax cuts to sunset, but sunsetting the pay increases of all those wealthy teachers is a brilliant idea. They would only have wasted the money by spending it on mortgages, food, and entertainment anyway. Better that the obscenely wealthy be allowed to continue to enjoy the lowest taxes since Eisenhower was president. Don’t forget boys and girls. A layoff of government employees, or any other method of lowering their incomes, is no different than a tax increase to those individuals. The government keeps more of their money. it just takes a different avenue to reach the same goal. So why not increase the taxes of anyone that can afford to reduce their discretionary income?
“It is called a refundable tax credit”
Didn’t Bush try this and everybody claimed it was pointless because people used to pay down debt, or put it into savings? I actually agree with giving some of the moeny back to people who have payed in, but giving people money that have not paid in….Absolutley not! As the great oral MasterBater Joe Biden said, “Everybody must have skin in the game.”
“You write “should be the other way around. Raise taxes on the lower 50% and cut taxes on the upper 50%.” Why ? You do not claim that your proposed policy would have any good effects. You give no reason. You just declare”
Small buisness is the bread basket, any additional pain in times like these are going to increase unemployment. If we want to increase demand we should be figuring how to get the wealthy to spend their money, instead of relying on the poor running to the casino to hit it big using our money. The wealthy can buy big ticket items, and use more services with less economic pain.
“Since my proposal is revenue neutral it seems to be to be orthogonal to the debate about the deficit and therefore about spending.”
We do not get into economic trouble by not taxing enough, we get into economic trouble by spending to much. What exactly is the point of raiseing taxes at any level if their is no clear plan to cut spending.
thanks. i can’t take credit for convincing you about FDR. i am no scholar. but i remember the comment which made that point and it wasn’t mine. however i do think FDR raised taxes during a recession, and i’ll take that as some kind of confirmation of my point which is, alas, made from “first principles.”
makes me glad i’m not so smart. all this gerrymandering of the tax code looks like insanity. if you want to “fix” the payroll tax, i’d say give the empoyers a 6.2% of payroll tax cut in return for an immediate 6.2% raise in wages. and, of course, a 6.2% increase in the payroll tax on workers.
can’t see that would change anything but the shouting. if we could then get as much television time explaining to people why they were paying for social security as the bad guys get telling them why they shouldn’t, i think we’d win the argument.
i’m waiting to cut the spending for the vast military and the dubious wars. be perfectly happy to see the “poor” pay even more payroll tax… say about a tenth of a percent more this year, and then in again in about 2026, when it is needed to provide for their old age.
i’m not sure but i think it could be managed with a more subtle policy than declared tax raises / spending cuts. unemployment insurance would cut itself automatically as employment rises. taxes should rise as employment rises without a raise in the rate. i think this did work more or less well for a time, before we got the “deficits don’t matter” tax cuts.
We did create lots of money already. It’s just sitting as excess reserves, tho I have been wondering if the banks are day trading with it and put it back at night. New money multiplier needed? Don’t ask Ben, it will just confuse him.
I like the Chinese way better than Ben paying banks interest. They just raise reserve requirements. It doesn’t cost anything.
I’m counting on the guys and gals at AB to make it so.
I also think that rich old fossils over the age of 80 should be locked up in a nursing home without access to mail, email, telephones, or visits from anyone in politics. Especially if they want to cut social security.
problem with this is that the poor rent, so if you hand out money to all the poor it will end up in the landlord’s pocket eventually.
there is wisdom here.
the problem that everyone is missing is that land values and rents are simply too high and that is why most of us are poor and some of us are rich. Reducing incomes across the board will eventually just lower land values and rents.
If the 30hr workweek worked for George Jetson it can work for us.
There are 2 ways to increase BigG demand. Tax the wealthy or borrow from the wealthy bond purchasers.
Cutting spending doesn’t work because it does nothing to repair the drop in revenue due to high unemployment.
Fix unemployment first. The deficit will take care of itself.
i agree with you. but take the thought a little further. fix unemployment exactly how?
i suspect … part of the lizard people conspiracy theory … that the lizard people have recognized that we are running out of resources, and the workers either can’t or don’t want to work for more plastic toys. so they are gradually shifting to an economy in which the rich consume most of the resources, and most of that to protect themselves from the poor. the poor will either get jobs as servants or soldiers in the rich’s private armies, or they will scrabble over the marginal lands and waste heaps left by the prior civilization (ours). high employment is not in their plans.
Seems like the whole reason people want progressivity in the tax code is because they want to get at high earners’ wealth and not just their income. How about this solution?
1. Eliminate the federal income tax entirely
2. Fund the federal government’s spending with new printed money, to the extent that spending exceeds other revenues and any desired deficit (in order to serve the bond market).
3. Accept significantly higher inflation in both prices and wages as normal, serving as a tax on wealth to pay for the costs of our government. Inflation could still be managed, but the target rate would be higher.
I see a lot of benefits to this plan, without a lot of downsides.
1. Eliminates deadweight cost of trying to comply with the tax code
2. Eliminates temptation for federal politicians to manipulate people’s behavior through the tax code
3. Eliminates all obfuscation regarding what is a “tax cut” vs. what is “spending”, allowing for more honest debate.
4. Maintains progressivity by taxing wealth through inflation. Those without wealth would not feel pain from inflation, while those with wealth would.
I think there are a lot of interests vested in the status quo, so this would never happen. But we would have a much freer and more honest society if it did.
an idea not entirely without merit.
but “the whole reason” people want progressivity in the tax code is not to get at the wealth of the rich.
it’s simply that the rich have more money they won’t miss. a not-progressive tax code simply won’t raise enough money at a rate that won’t keep the poor from eating. not to mention buying.
a progressive tax code needs to tax the poor just to keep them in the game, but it would be easier and just as honest to simply tax only corporations. they can, as they like to tell us when it suits them, simply shift the cost of taxes on to their customers. i see no problem at all with that… it would simply price goods and services at their true cost (including externals).
but then you immediately see what the whole tax “problem” is: its a matter of psychology. the ape in us cannot stand it when a bigger ape (gummint) takes away “our” banana. don’t mind so much when he takes away the other guy’s.
of course, the real rich know how to make money on the float.
Cut Entitlement spending the same as Military Spending and I’m on board!
Robert Waldman: “OK if we stimulate by creating money and not bonds, then we will have a huge excess supply of money when we get out of the liquidity trap.”
One question I have is the word “excess”. It seems like we currently have virtually no money except debt. So does excess mean any amount above zero?
Also, why would we have less money if we created it with debt? For that to happen we would have to pay off the debt, right? We haven’t done that for 174 years.
Well it appears to have worked in Australia! Australian unemployment peaked at around 6% and is now back down to 5.1%, and overall employment has grown. The Federal budget is projected to be back in surplus in around three years.
Australia‘s fiscal package over the period 2008 to 2010 amounted to 4.6 percent of its 2008 GDP. Among OECD countries, only the United States and Korea initiated larger fiscal stimulus packages.
About two-fifths of Australia‘s stimulus package consisted of reduced taxes and increased transfers to households – all temporary – and progressive.
This money was largely delivered in two tranches: on 14 October 2008, the government announced a package that it termed the ‘Economic Security Strategy‘. The two largest household payments in this package were paid in December 2008, and focused on pensioners (single age and disability pensioners received $1400; pensioner couples $2100), Carer Allowance recipients ($1000) and families eligible for Family Tax Benefit A (FTB-A eligibility depends on family income and the number of children, and ceases at around $100,000 for a one-child family, or at about $125,000 for a three-child family). Together, these payments totaled around $8.8 billion.
The 2009 package (termed the ‘Nation Building and Jobs Plan‘) was announced on 3 February 2009 The package included a range of measures, but the three key household payments – totaling around $12 billion – Tax Bonus for Working Australians: A payment based on taxable income in the 2007-08 tax year. The payment was $900 for individuals with taxable incomes of $80,000 or less, $600 for individuals with taxable incomes of $80,001-$90,000, and $250 for taxpayers with incomes of $90,000-$100,000.
In Australia, tax is assessed on an individual basis, so it was possible for both adults in a family to receive the payment. This payment was estimated to cover 8.7 million taxpayers (about three-quarters of all taxpayers).
Back to School Bonus: $950 per child for low-income and middle-income families receiving Family Tax Benefit A who have school-aged children (ages 4-18). This payment was estimated to cover 2.8 million children.
Single-Income Family Bonus: $900 per family to those families entitled to Family Tax Benefit B (around 1½ million families). FTB-B eligible families are single parents or couples where the primary earner has an income of less than about $150,000, and the secondary earner has an income below about $20,000 (both thresholds vary according to the number of children).