- Callahan gets it right.
- Jonathan responds to my claim that raising taxes is an austerity policy. He has a good graph of idle resources that relates to my idea that unemployment is not the same thing as a labor surplus. Except, if I were to put a dollar figure on it, I think I'd shade the transpose of the triangle he shades (factors of production to the left of equilibrium are being used - they're not idle - and what's lost is the productive capacity extending all the way up to the full employment demand curve). This is the crux of the point:
"However, within the context of depressed aggregate demand, this is no longer the case. The entire problem is that nominal expenditure has fallen, which is caused by either a failure in financial intermediation (unused savings) or an increase in the demand for money (basically also unused savings). If we abstract from real goods for a minute, the entire issue originates from the fact that there is a portion of aggregate income which is left unused. If there is no intention of using this income, then taxing it and redistributing it does not seem contractionary. In fact, it is expansionary, since it puts to use idle income."
I may be misunderstanding the argument, but I don't think this is right. It's not that some income is unused. It's that the income is unearned. Nominal spending (i.e. - nominal income) declines. You can look at the decline, call it "unused" and figure it can be taxed away relatively costlessly. The income isn't there and that's the problem.
Now, a better way of saying this might be to talk specifically about income that is held liquid - i.e. income that IS EARNED but then isn't subsequently spent (not income to the right of the equilibrium point that is never earned). You're basically raising the cost of staying liquid. This might have merit. That's the idea of a negative IOR, after all - and Gesell's evaporating currency. I'm not sure how to do this, though, without reducing spending further.
Now, the traditional way of saying all this is that if you tax a dollar from a consumer with an MPC that is less than one and spend it by a government that has an MPC of one, you're still coming out with a modest stimulus. This is true, and it's more or less what Jonathan is getting at. However, I don't think that makes it a non-austere policy. That argument basically boils down too "when you finance spending with taxes you're only elimintinating 80% of the stimulative effect - not 100%, so it's still stimulative". In my book, any policy that gets rid of 80% of a given stimulative effect is an austerity policy. You are reducing aggregate demand relative to the counterfactual. That's austerity.
Wednesday, February 22, 2012
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Daniel,
ReplyDeleteIncome just doesn't come into being. A worker's income is paid from savings, and so that a worker doesn't earn an income does indeed mean that some income is left unspent (the income that is represented by an increase in savings, but not an increase in expenditure).
You aren't really taxing consumption, you would be taxing savings -- which is the idea behind raising taxes on the wealthy, and not on the poor.
The real essence of my argument, though, is what we're really after is the use of resources. Whether you tax someone or finance spending through deficits, the purpose is to take up idle resources. Even deficit spending works the same way. In deficit spending you are borrowing from the private sector -- the private sector still loses control over that dollar, so it still restricts private spending. But, the point is that you are taking from a pool of unused savings.
re: "Income just doesn't come into being. A worker's income is paid from savings, and so that a worker doesn't earn an income does indeed mean that some income is left unspent (the income that is represented by an increase in savings, but not an increase in expenditure)"
ReplyDeleteSure it just comes into being. And I'm not sure why it comes out of savings (although you presumably could pay someone out of savings). Income comes out of other income. I get paid by the AU economics department out of revenue to the school. The whole problem with excess savings is precisely that it doesn't go towards another person's income.
re: "You aren't really taxing consumption, you would be taxing savings -- which is the idea behind raising taxes on the wealthy, and not on the poor."
Well, in the example at hand - Hoover's tax increase - you're taxing both consumption and savings because you're taxing income. The point about wealthy/poor gets to my point on MPC and the stimulative effect of tax-financed spending. I think we agree on this. I would just say that taxing is still austerity relative to the counterfactual of not taxing. Certainly one could imagine more and less austere taxes. Taxes on the rich are less austere than taxes on the poor. Taxes on savings are less austere than taxes on income. But any tax increase is still going to be an example of fiscal austerity.
re: "Whether you tax someone or finance spending through deficits, the purpose is to take up idle resources"
Is the money you send into the government idle otherwise? Mine certainly isn't (at least not a lot of it... I do have a certain level of preference for liquidity).
re: "In deficit spending you are borrowing from the private sector -- the private sector still loses control over that dollar, so it still restricts private spending. But, the point is that you are taking from a pool of unused savings."
This is true under normal circumstances. But we have special reason to think that in the credit markets we are not taking resources away from the private sector right now. What argument can you make for that when it comes to taxing?
If we're talking about a tax on demand deposits above a certain minimum level, I'd agree with you. This is what I was trying to get across when I mentioned Gesell and negative IOR. But that's a pretty funky tax policy.
Daniel writes,
ReplyDeleteSure it just comes into being. And I'm not sure why it comes out of savings (although you presumably could pay someone out of savings). Income comes out of other income. I get paid by the AU economics department out of revenue to the school. The whole problem with excess savings is precisely that it doesn't go towards another person's income.
You just repeated my argument! The AU Economics Department pays you out of saved income/revenue. If it consumed that income/revenue, then they wouldn't have the funds to pay for your schooling/salary. All wages are paid out of savings (savings, afterall, being saved income).
And yes, the problem with excess savings is that it's not being spent, and therefore not going to anybody else's income. This is also exactly what I said in my post and in my response.
Is the money you send into the government idle otherwise? Mine certainly isn't (at least not a lot of it... I do have a certain level of preference for liquidity).
Right, but this type of lack of control of what money is being used by the government exists with any kind of financing. Instead of consuming, someone can choose to save money in a treasury bond, which is then used by the government to spend. In this scenario, a market agent has decreased expenditure more than he otherwise would, and the government is using that money for its own expenditure -- the problem that government can't really know which resources are idle and which are not is a broad one, and it doesn't apply only to taxation (and with taxation you can choose who and what to tax, specifically).
This is true under normal circumstances. But we have special reason to think that in the credit markets we are not taking resources away from the private sector right now. What argument can you make for that when it comes to taxing?
You've honestly re-stated my argument, and not noticed the implications of what you're writing. If you tax money that someone is putting in their savings, during a period in time where savings are not being transferred to entrepreneurs (and spent), then you are effectively taxing "idle money." This is one of the points behind taxing the rich and capital gains taxes -- some of that is meant to be saved (left unconsumed) and re-invested. During a period of time where investment has fallen and so there might not be re-invested, it's not contractionary to tax that income and spend it through government. This is not "funky" tax policy -- this is tax policy as it exists today. And if you want to say that some taxes are contractionary (like taxes on consumption), then that's fine -- but don't lay out a blanket system that all taxes are contractionary.
I guess I don't understand what you mean by "savings". I think of "savings" as income that is not expended. I.e., by definition you can't spend money you are saving in a given period, but presumably you could spend out of your stock of savings in a future period. But we generally think of firms as paying workers from revenue (abstracting from any short term credit to meet payroll). This doesn't seem to me like paying someone out of savings, but if we agree that's great.
Deletere: "If you tax money that someone is putting in their savings, during a period in time where savings are not being transferred to entrepreneurs (and spent), then you are effectively taxing "idle money.""
Right - I've said this. I haven't missed anything, Jonathan. But that's a mighty big "if". We don't tax demand deposit balances in this country, and I doubt we ever will.
re: "This is one of the points behind taxing the rich and capital gains taxes -- some of that is meant to be saved (left unconsumed) and re-invested."
Right - I made the point that this is the argument behind taxing higher mpc workers, did I not? Again - I don't think I'm missing anything here. I'm simply saying that I would call that "less austere than taxing poor people". It's still more austere than not taxing the rich, though.
re: "This is not "funky" tax policy -- this is tax policy as it exists today."
No. We tax incomes today. Unless you can target a tax exclusively at idle funds, it is going to be more austere than the alternative of not taxing. Rich people may have an mpc of 0.05. A 10% tax rate is still going to be more austere than not taxing them. If you have other reasons to tax them (concerns about income inequality, concerns about the debt burden, etc.) then you can rest assured that you're not making that big of a dent in aggregate demand. But it's still an austerity position relative to the position of not taxing them.
re: "but don't lay out a blanket system that all taxes are contractionary."
Until a tax is brought to my attention that would not reduce AD relative to the counter-factual of no tax (or until someone points out a flaw in my logic), I will continue to assert that tax increases are an example of fiscal austerity.
A tax on demand deposits would do the trick. Can you think of any country on earth that does this? I can't.
Even then, I'm not entirely sure that will do the trick. If my demand deposits got taxed I'd either move that money into a higher yielding account (this is what they want to happen), or keep a bunch of cash in my safe (this is what they don't want to happen but since I have to pay bills and rent every month this is probably where the majority of it will go). So even that tax probably wouldn't achieve it's aim. People don't just have a pile of money earning a quarter of a percent of interest or whatever it is. Once you get more than what you need for month-to-month activities you start putting it somewhere else.
The only definition of savings is unconsumed income. The distinction is not between savings and spending. Spending on investment comes out of savings -- indeed, you have to save in order to invest. The wages of workers are paid out of savings, not out of some constant flow of revenue from their product (see Reisman's book Capitalism).
ReplyDeleteThe income tax is not the only form of tax, and it is not the only form of tax that exists today. Nor is an absolute and unrestricted increase in the income tax what has been discussed politically so far -- for the most part, we've discussed an increase in the income tax of the wealthy. All these tax policies are conscious of the fact that the poor contribute to our pool of savings much less than the wealthy.
The are the type of taxes which would/do not reduce AD, because they tax money that is left unspent (there has already been a fall in AD) -- this is what you are missing.
Finally, you can say that people can avoid taxes, but this is not the same thing as saying that taxes are a form of austerity.