Auerback/Wray: Liberals need not fear Obama’s tax deal: Why a payroll tax holiday actually helps support tomorrow’s retirees

Yves here. As much as Auerback’s and Wray’s argument does describe the reality of government fiscal operations accurately, I see their political reading as wildly optimistic. Given that disproven ideas like “trickle down economics” still hold considerable sway, I think the concerns about how a payroll tax holiday will serve as a wedge to cut Social Security benefit are valid.

By Marshall Auerback, a portfolio strategist and hedge fund manager, and L. Randall Wray, Professor of Economics at the University of Missouri-Kansas City. Cross posted from New Economic Perspectives.

The commentary in the aftermath of President Obama’s announced tax deal with the GOP has been both predictable and, for the most part, misconceived. Leaving aside the issues of income inequality (which we discussed in a previous post), the more predominant critique (especially from the “deficit dove Left”) focuses on the proposed temporary payroll tax cut and the adverse implications that such a cut implies for budget deficits and for Social Security’s longer term “solvency”. Payroll tax cuts are seen by many as part of a bigger plot by Republicans to destroy Social Security’s finances or permanently fund it with general revenues rather than allowing the payroll tax to be re-imposed at the end of the tax “holiday”. One staffer in Congress expressed the concern that funding Social Security with general revenues was part of a bigger plan to destroy it by converting Social Security into a welfare program, rather than an earned benefit.

A related concern deals with the overall solvency issue and is best expressed by Robert Kuttner, who has argued: “The deficit commission appointed by the President has called for an increase in the retirement age, as well as other cuts in benefits over time. And the deal that Obama made with the Republicans just gave deficit hawks new ammunition by increasing the projected deficit by nearly $900 billion over a decade. Social Security will be in the cross-hairs.”

Kuttner’s views reflect a fairly typical concern of deficit doves, who worry relentlessly about the public debt to GDP ratio because they assume that the “credibility” of the government debt will be compromised as we lose the “confidence” of the markets. Even President Obama has argued that deficits today leave our grandchildren with a heavy burden, which is why he is already proposing budget freezes for the federal employees next year. Other deficit doves are somewhat more tolerant of near-term budget shortfalls than our President, but they still worry about long term pain. That pain is said to be compounded by the imminent retirement of baby-boomers, which will threaten the “solvency” of Social Security. Thus, it is all the more necessary to get the budget “under control” as quickly as possible and payroll tax cuts which, according to this view, “fund” Social Security, cannot and should not be cut, even though these kinds of tax cuts would constitute a highly effective form of fiscal stimulus and mitigate the aggregate demand shortfall which is the core of the problem in the first place.

Yet again, we see the dangers of accepting the neo-liberal paradigm, which holds that government spending is limited by tax collections or bond sales. It represents a form of fiscal chastity in which (much like St. Augustine), we acknowledge the need to become “fiscally chaste, but not yet”. To which the Right has a legitimate rejoinder: if deficits are bad long term, then why not start to deal with them in the short term, to mitigate the longer term damage?

The truth of the matter is that payroll taxes do not fund the program. Social Security was constructed this way to buttress its political legitimacy against widespread charges of “socialism” in the 1930s, but the reality is that the federal government has been (since the inception of the program and well before) the sole issuer of our currency, and the dollar, which is nothing more than the government’s IOU, is always accepted in payment as such. Government actually spends by crediting bank deposits (and simultaneously crediting the reserves of those banks). For more on this see here.

The “government as household” analogy, which persistently interposes itself on the deficit dove or hawk paradigm, is fundamentally flawed because no household (or firm) is able to spend by crediting bank deposits and reserves, or by issuing currency. Households and firms can spend by going into debt, but the debt must be serviced with the debt of another—usually a bank debt. Sovereign government only makes payments—including interest payments on its debt—by issuing its own IOU. This is why it is ludicrous to speak of Social Security as some sort of “Ponzi scheme”, because unlike private debtors the sovereign government can always make payments and service debt by crediting bank accounts.

The Social Security program has run large budget surpluses since the early 1980s; Treasury then matches those surpluses with an equivalent amount of treasury debt—and then credits interest to the Social Security Trust Fund account. In the future, the program will turn the bonds back to the treasury when Social Security revenues are less than its benefit payments. Social Security’s treasury holdings in reality amount to no more than an internal record keeping—a sort of reminder that someday the treasury will cover Social Security’s shortfall. It will do that the same way it pays retirement benefits now—by crediting the bank accounts of recipients.

Even by Federal Reserve Chairman Ben Bernanke’s own admission, neither taxes nor bonds should impose any technical constraints to spending. Yet many of the same figures who acknowledge this reality, such as Bernanke, still insist on discussing issues such as the budget deficit (or, more specifically, Social Security “shortfalls”) within the constructs of a financing constraint. They seem to recognize that the Treasury/Federal Reserve finances spending or purchases by electronically injecting reserves into the system and that there is no limit to its ability to do so. On the other hand, most (including Bernanke) still argue that somehow taxes are necessary to fill the government’s coffers, and that any shortfall in revenue collections would cause the government to deplete private savings through borrowing (domestically or abroad) to finance the expenditures of something like Social Security. In so doing, Bernanke misstates (perhaps purposely) the reality of how a government actually spends and feeds the myth that our taxes fund our federal government’s spending programs.

In response to this fear, ironically, the reality is that government spending cuts proposed to “ensure” Social Security’s “solvency” in the future, work in exactly the opposite way to what the mainstream neo-liberals claim. Today’s budget cuts actually generate higher unemployment, poorer educational facilities, increased malnutrition, etc. They will impose real burdens on our children, who will be less educated, less skilled, less experienced, and have lower income as a whole as a result of the fiscal austerity and will have less real income later, which of course is no means to solve a solvency issue if that is in fact the real issue. In any case, government cannot financially provision in advance for future benefit payments. Indeed, attempts to do so via the encouragement of deficit cuts today will simply exacerbate the “dependency” problem implied by ageing demographics.

In that regard, it is worthwhile reading Don Peck’s story in a recent Atlantic Magazine: “How a New Jobless Era will Transform America” as well as Edward Luce’s recent account of the crisis of middle class America in the Financial Times. Both recount what are undoubtedly the real intergenerational issues which affect demand, future economic growth and employment. The retired and retiring baby boomers want their high nominal fixed incomes plus purchasing power preservation (if not deflation) now and until the day they die.

The youth want jobs and the prospects of a life worth living. The fiscal rectitude wing is literally strangling the baby in the crib today by denying a sensible fiscal response for the current generation’s plight, while hyperventilating that fiscal deficits will do the strangulation of the next generation tomorrow. All of which exacerbates a problem of economies facing intense global headwinds from private sector deleveraging.

Maximizing employment and output in each period is a necessary condition for maximizing long-term growth. The emphasis in the fiscal hawk intergenerational debate is on the adverse demographics and they suggest that we have to lift labor force participation by older workers—for example by postponing retirement. Perhaps, but this is contrary to current government policies which reduces job opportunities for older male workers by refusing to deal with the rising unemployment. To us, it makes far more sense to eliminate unemployment of the pre-retirement crowd—to produce the goods and services our retirees need. If it turns out that is not enough—that it does not produce enough goods and services for the retired as well as the pre-retired—then at that point it will be useful to encourage older people to remain in the labor force.

What is required is an aggressive fiscal policy today to establish effective demand (as well as facilitating ongoing private sector financial deleveraging). Constraints should be viewed from an inflationary perspective, rather than through the “solvency” paradigm. If total spending in the economy including the rising pension and health care spending exceeds the real capacity of the economy to meet this demand by supplying output then inflation becomes the issue, not national insolvency.

By the same token, the purpose of the payroll tax is NOT to “fund” a “pay as you go” scheme, but to prevent wage earners from consuming all the output, so something is left for those who do not work. But at less than full employment, we do not need to do that since all we need to do is put more people to work to produce Winnebagos (etc) for the elderly. If we should ever get to full employment, then we will need a tax. But all the evidence is that the US fiscal stance is set far too tight–anytime we get nearer to full employment, tax revenue literally explodes, growing above 15% per year.

And that is why we do not fear a payroll tax holiday—we need to further loosen the fiscal stance. And once Americans get used to that holiday we certainly do hope that they will insist on making it permanent. Goodbye and good riddance to the payroll tax—a poorly designed tax by any measure. Why discourage hiring and employment by imposing a “tax wedge” (as supply-siders call it), increasing the cost of hiring a worker and reducing take-home pay? Further, the tax is regressive—lower rates for those at the top. For the vast majority of Americans, the payroll tax takes far more income than the federal income tax. And why should only wage earners “share the burden” of supporting retirees? Remember, the purpose of the tax is to reduce consumption by income earners, to leave more goods and services for retirees. If that is the case, why exempt the rentier class (that lives on interest, rent, and profits) from this burden? Especially as the wage share has fallen substantially (and is projected to continue to fall for decades—which accounts for much of the future Social Security “shortfall” that intergenerational warriors are so concerned about). If we need to reduce consumption of income earners to leave more for retirees, then we should tax all forms of income.

A Social Security retirement benefit is not welfare; retirees have earned their benefits. Not by paying taxes but rather by working, contributing to the production of the goods and services needed by past and present generations of retirees. Those retiring today and tomorrow should be proud of the contributions they made. And those contributions take the form of the accumulated annual produce of American workers. Many of their contributions are still in evidence and are still being enjoyed: our housing, our schools, our bridges, our educated population, our arts and literature, our justice system (Ouch! It is mostly on holiday right now, although it used to be the envy of much of the world.) and our financial system (Double ouch!—unfortunately, a monument to excess and fraud.). You get the picture.

The fact that retirees paid payroll taxes is the least of their contribution. Note that we do agree that taxes are one of the two unpleasant inevitabilities (death, unfortunately, is the other)—but the purpose is not to raise revenue to fund a government program. From inception, taxes create a demand for our sovereign currency. Working hard for money gives money its value; retirees have worked hard over their careers, giving value to the money that we award them in their retirement. They pass the burden of work on to the next generation of workers, who keep money strong—and provide the goods and services the retired generation needs. Social Security is really a social compact among generations. This is something the intergenerational warriors wish to deny.

So let us have a permanent payroll tax holiday, but meanwhile we need to strengthen our social compact—not by legislating future benefit cuts (which reduce the willingness of today’s workers to join the compact) but rather by legislating more generous retirements

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58 comments

  1. paper mac

    After having been exposed to Thomas Ferguson’s investment theory of party competition via this site, this kind of analysis seems kind of bizarrely apersonal. The tax deal occurred within the context of a government employed by a bloc of major investors within the FIRE sector and the MIC. It doesn’t make a lot of sense to me to say that the tax deal shouldn’t be viewed as odious when some components of it were non-pernicious or even salutary (given further MMT-prescribed easing of fiscal policy), when the broader policy constellation is being driven by an extractive parasite investor class which has absolutely no intention of doing anything that would improve the lot of the working class over their own short-term self interest.

    1. Fed Up

      “What is required is an aggressive fiscal policy today to establish effective demand (as well as facilitating ongoing private sector financial deleveraging). Constraints should be viewed from an inflationary perspective, rather than through the “solvency” paradigm.”

      Considering the way the system is set up (it will be debt), this is incorrect. You are not picking up the difference between being interest rate constrained and currency constrained along with what seems to be an aggregate demand shock from your perspective. If it is debt, you need to worry about more than price inflation.

      Since it will be debt, the Social Security question remains. It is the problem with debt in general. That would be spend now and work later (retire later) IF the work is available later while the rich maintain their excess savings in assets that remain overpriced.

      1. flatTax cutCandidatus


        debt, the Social Security question remains. It is the problem with debt in general. That would be spend now and work later (retire later) IF the work is available later while the rich maintain their excess savings

        ~~Fed Up~

        Precisely!

        You have loosened The Latch Of The Pandora Lock. We shall now bank-role The Doctors Serving Duffers with a magically simple bond float. Wealthy Investors with “Excess Savings” bulging their respective pockets will buy a specific amount of Duffer Doctor Bonds for a specific amount of semiannual interest. The interest will be funded by Dr. Jekyll’s Shekels representing the co-payments for doctor services paid out by co-paying patients. All Medicare co-payments for services paid out by patients for “Now Say Ah! Examination” will go straight into the Kitty for Clipped Bond Coupon. Got it? Your granddad pays $9 co-payment to Dr. Atatürk for his Gargoyle Growth Extraction Procedure. Dr. A puts the 9 into the kitty which is later emptied out for interest payments. “At a boy, Atatürk!”

        Mai voila! There is no payroll-tax within the mix. Without payroll tax, the economy revs up to a high fever that is unresponsive to aspirin as the money velocity takes off like a Boeing 797 with all four afterburners a’blazing. Larger economy fuels larger tax-base to fund medical school’s coffee pots.

        Got it?

        Get it
        !

  2. albrt

    Thanks for the foreword, Yves.

    The theoretical (or even empirical) constraints on federal government spending are irrelevant right now because the political constraints are binding at such a low level of stimulus spending that other constraints are not even in view. In this situation giving up political capital matters much more than giving up actual government revenues.

    Obama’s attack on social security will do tremendous damage among the working class currently over 50. Of course, the group has collectively voted over and over again to get screwed, and it is mildly entertaining that they are finally going to get what they wanted at the hands of a politician they did not collectively support.

    1. DownSouth

      Yep. Those “political constraints” can be a bitch, no?

      Marshall Auerback and Randall Wray said:

      The truth of the matter is that payroll taxes do not fund the program. Social Security was constructed this way to buttress its political legitimacy against widespread charges of “socialism” in the 1930s, but the reality is that the federal government has been (since the inception of the program and well before) the sole issuer of our currency, and the dollar, which is nothing more than the government’s IOU, is always accepted in payment as such.

      So what’s changed since the 1930s? Very little, I think.

      That’s why I very much appreciate the perspective that political practitioners like Matt Stoller bring to this blog. Stoller, as a congressional aide, must deal with people as they are, not as liberal economic credo prescribes. “We are illogical and therefore unjust beings from the first, and can know this”, Frederick Nietzsche wrote in Menschliches, Allzumenschliches I, “that is one of the greatest and most insoluble disharmonies of existence” (emphasis Nietzsche’s).

      What are human beings like, according to liberal economic theory? I made an internet search of visual images and came up with these:

      Zombie I

      Zombie II

      But the image I felt best captures the essence of human beings, according to liberal economic theory, is this one:

      A Human Being, According to Liberal Economic Theory

  3. Paul Tioxon

    There is a certain charm to reading the posts on this site. It comes from people with ideals, that I share. They set up sound argumentation for their positions. Unfortunately, like Bernie Saunder’s romp on TV, no one is watching in the Senate chambers and there is not much of an audience elsewhere. This is a political power struggle between those who want the pile of money in SSA, those that want to destroy the government program as much as possible and those who want to build on the legacy of the New Deal. As Democrats, there is no need to lecture on how much ammunition this will or will not give the republicans. They do not need any more motivation, any more ammo, or any new argument that can be turned against those who seek to rationally defend the rightness of the retirement insurance program run on a compulsory basis by the Federal Government for everyone who works and pays into it.

    The PA US Senator elect, Pat Toomey has a book that has been out for years, in it he outlines the need to save or reform, or privatize SSA. He wants it dead. As a congressman during the Bush administration, he voted in the failed bid to do the program in. They will make up arguments, data sets, history and yes, even create wedge issues. We just have to deal with that because Obama is a pragmatist and not a right wing ideologue who wants to smash the Federal Government into a million pieces along with the Federal Reserve, Unions, the ACLU and tofu manufacturing in North America. Aside from his excursions into not getting people on the other side of the aisle to do what he wants when we want it, he will deal with current social discontinuity which requires him to get things done in unorthodox ways. Will cutting the payroll taxes open up a breach that will allow the savage hordes of the right wing to coming storming in like locusts? No, they do that anyway. Will this needlessly add to the work of defending social security, yes, it will. That’s why life is hard, and we die before we get to the promised land, but we do get to see it from the mountain top.

    I have a question to ask: does it make sense and can it be argued to keep the lower rate of the tax and in a year or two, get rid of the cap and extend it all the way up to the $3BB paydays of the hedge fund managers? Can we argue to reform and save and put on a sound footing, that all income, including capital gains must pay into the trust fund and the cap is taken away and replaced with a lower rate for all concerned? Real tax reform means all income pays and all pay a lower rate. Of course, we don’t pay the billionaires more than 3x the lowest benefits.

    Would it further make sense to allow those of us who do not trust Wall St or anyone else with our money, to pay extra into the trust fund with optional savings, not unlike the payroll deduction savings bond program that I remember. This would provide for enhanced annuity payments when we do retire.

    We do need to fight to reform and save and put on a sound footing the SSA, we need to act on different terms than the kiss of death republican proposals. By coming up with completely different and financially sound proposals, not the annihilation of SSA masquerading as good government from the new idea people of the US Chamber of Commerce.

    1. Fractal

      Far more persuasive than the main post, which is unreadable.

      One quibble: you say “Unfortunately, like Bernie Saunder’s romp on TV, no one is watching in the Senate chambers and there is not much of an audience elsewhere.” Not being a Twitter user myself, I cannot find the links to confirm what was widely reported last Friday, but Sanders’s speech was an instant Twitter hit. He was the top “trending” person or Tweeter or transmitter, however they rate that, whatever “trending” means. But we are assured it is a big deal in terms of attention.

      As for the “audience elsewhere” for Bernie Sanders’s speech, I was surprised to find so few clips on YouTube. The one or two clips that are out there have tiny hit rates.

      One columnist implied that demand to watch Sanders’s speech was so intense that viewers crashed the Senate servers, and that the White House was so anxious to push Sanders out of the headlines that Obama dragged Clinton in front of the cameras that afternoon:

      http://www.denverpost.com/news/ci_16837106

      1. Paul Tioxon

        Fractal, I am not a twitter guy. Or a facebook guy. My kids are but I am on the same page with Christina Hendricks when she says no man should be on facebook. But I digress.. Here is somemore ammo for understanding SSA.

        http://sociology.ucsc.edu/whorulesamerica/power/social_security.html

        Research has uncovered the basis of SSA comes from the private sector. For example:

        “A pamphlet written for the American Management Association in 1928 by a personal employee of Rockefeller, Jr., best exemplifies the pre-depression thinking about company pensions within corporate moderate organizations in the policy-planning network. According to this detailed analysis, which contains discussions of the moral, economic, and technical issues involved in industrial pensions, a pension is part of a good personnel program. Especially in the case of corporations that have been around for many years, a pension is “a means, at once humane and approved by public opinion, of purging its active payroll of men who, by reason of age or disability, have become liabilities rather than assets” (Cowdrick 1928, p. 10). Pensions also provide the “opportunity to promote their younger subordinates” (p. 11). The pamphlet concluded with the prediction that industrial pensions will be “increasingly valuable to employers” (Cowdrick 1928, p. 21).”

        The rational, common sense and of course, beneficial aspects to the corporation are clearly outlined. The article traces the promotion of a public retirement program that fills the bill as outlined above. But more importantly, by moving responsibility off of the books of the private sector and onto the Federal Government, is a coup for competitiveness. When Clinton tried to move health care onto the Federal governments shoulders, Lee Iaccoca pointed out the structural problem of health care as a private sector responsibility. All of his global competitors manufactured more cheaply, even if all other costs are even, because American producers carry the health care costs that no other industrialized country puts on their private sector. The USA remains the only G20 country where more than 50% of the money that goes into health care come not from the public through taxation but is built into the cost of every item produced. Every service offered, everything.

        The early industrialists realized the value in health care, unemployment benefits, and pensions in creating a stable, strong and loyal workforce. They only managed to move some of these costs off of their books. The idiots who fought health care reform like a tong war, every inch of the way, have kept America as uncompetitive as possible. And sicker than comparative industrialized nations. Now, they also are fighting to make us poorer and politically unstable as Russia.

  4. dave

    “Not by paying taxes but rather by working, contributing to the production of the goods and services needed by past and present generations of retirees. Those retiring today and tomorrow should be proud of the contributions they made. And those contributions take the form of the accumulated annual produce of American workers.”

    —————————–

    I call bullshit on this statement, and I will walk you through it step by step.

    —————————–

    Taxes reduce income of current workers in order to reduce their consumption of real resources, thus making room for those real resources to be used by others. The portion of payroll taxes used to fund current benefits simply amounts to a transfer of consumption from current workers to current retirees.

    The trust fund represents something different. We know that future demographic shifts will mean much larger levels of real resources will need to be available to provide promised (implied) levels of real consumption to future retirees. The only way to provide those real resources is to dramatically increase future productivity so a smaller pool of future workers can provide them. In order to do that resources freed up by reduced consumption for the tax must be used for productive investment that will raise future production.

    Now, that productive investment could take many forms. We could let people simply keep the tax, save for their own retirement, and then the investments this generation made for its retirement would be private market determined and non guaranteed. Majority opinion rejects this option, because some wouldn’t save and some wouldn’t invest well, and the idea of people being destitute in old age is repulsive. Majority opinion also rejects using the surplus to invest in private markets, instead opting for 100% government bonds (which just means government spending). There are pros and cons to this decision, but they aren’t really relevant to the thrust of this post.

    So we’ve essentially created a big Defined Benefit pension for society. That DB plans assets are treasury bonds, which merely represent government spending (they could issue cash to the SS surplus fund, it doesn’t matter, its internal accounting). Like all DB plans, whether or not you can actually meet your obligations depends on how your assets perform. Our asset is government bonds, which represent spending done by the government in the present time. If that spending was on productive assets for the nation (infrastructure, education, what have you) then there will be enough real resource to pay those benefits. If that government spending was on non-productive uses (war, giveaways to bankers, etc) then there will not be enough real resources to provide the future consumption implied by the bonds without taxes or inflation. Inflation is just another way of saying default and it causes all sorts of economic problems. Onerous taxes on the younger generation by the old is like an inter-generational Versailles treaty.

    So after all that it comes down to something simple. If the government used the resources set aside by those extra taxes productively then real resources will be available for future retirees. If not, then they won’t. So if we examine the claim above has the current generation contributed to the productivity of future generations enough to justify taking their promised share of future real resources without placing great burden on those future workers. To know that we have to evaluate how the government utilized the real resources provided to it. Let’s examine how the baby boomer generation did on that regard.

    1) They used a ton of their resources on war and “defense”.
    2) They build an out of control financial system that does not promote the formation of productive capital and extracts huge rents.
    3) They failed to keep infrastructure updated, and did nothing about energy concerns
    4) They erected unjust alliances between several industries and government whose only purpose seems to be the extraction of rents.
    5) Even in areas that should theoretically be a slam dunk to increase productivity, like education, they ending up spending a lot of money and got terrible results.

    So exactly what has the baby boomer generation done, through their elected representatives spending, to justify seeking a portion of future production that they did little to create? In my view nothing, and as such they have no moral claim on excess future production implied by the trust fund. I won’t cripple the future working generation by transferring onerous levels of real resources to provide for the retirement consumption of baby boomers.

    Yes, I’d like to go after the main perpetrators first. Tax the bankers and the fraudsters before raising some old guys benefits. But the thing about Ponzi schemes is the money is all gone even if you catch the culprit and wring what assets might be left out of him. Madoff’s victims still have to deal with the fact their investments were lost, and so will the baby boomer generation when they realize they spent it all on bombs and bonuses. If this generation doesn’t fix its mistakes pronto and make some real progress they will simply have to face the fact that future generation don’t have enough resources to provide for them.

    And yes, I wish the younger generation was a little more involved in stopping the baby boomers negligence. But they always had the demographic power to call the shots, and all the politicians of the era came from them. The last time young people really tried to change the status quo they got Obama, who is about as shining a symbol that you can’t fight the system.

    1. DownSouth

      dave,

      I like your analysis even less than Auerback’s and Wray’s.

      While Auerback’s and Wray’s analysis is heavy on materialism and light on morality, yours is completely devoid of morality. Granted, a society does have physical resources, as you accurately assess. But this is only half the picture. In addition to material capital there is also moral capital, which I’ve about come to believe is even more important than “real” capital, as you put it.

      Ernst Fehr and his colleagues at the University of Zurich are on the vanguard in investigating moral capital, or “ultrasociality” as they have dubbed it. Ultrasociality refers to the glue that holds a society together—-those things that enhance internal cohesiveness and cooperation. In many ways, there’s nothing novel here. Military planners have long known of the value of “unit cohesion.”

      To illustrate just how disconnected from reality your bowdlerized conception of human existence is, I recommend this essay, which was included in a book published by Fehr et al, Moral Sentiments and Material Interests. In this regard Figure 1. Survival and Net Food Production: Human Foragers and Chimpanzees is most instructive. From the age of 0 to about 21 years old humans existing in primitive societies (the environment in which humans evolved over the last 10 million years) are net drags on the group. That is they eat more food than they produce. The same is true for those between 63 and 72 years old. And, as the authors conclude, “the human life course could not have evolved without long-term imbalances in food transfer within and among families.”

      But human food sharing does not stop there. “In addition to within-family food transfers, food sharing sometimes extends beyond the nuclear family in many societies,” the authors observe. “If families had to ‘balance the budget’ at every period, they would either have had to lower their fertility or force their older children to fend for themselves. This would most likely increase childhood and adolescent mortality and lower rates of skills acquisition. Adolescent males could not afford to hunt, because their returns are so low during the learning period.”

      But human existence requires something more than sharing. In addition to sharing there is also something called “moralistic punishment” of free-riders. Free-riders are those who do not share or do not produce up to their potential. As Fehr et al demonstrate, without moralistic punishment ultrasociality comes apart at the seams. You tell us: “Yes, I’d like to go after the main perpetrators first. Tax the bankers and the fraudsters before raising some old guys benefits. But the thing about Ponzi schemes is the money is all gone even if you catch the culprit and wring what assets might be left out of him.” But you completely miss the very reason that punishment exists. Punishment is not exacted for material ends, but for moral ends. Punishment is costly. The material cost of punishment almost always exceeds the material return.

      1. Doug Terpstra

        Thanks for a substantive rebuttal to Dave’s thinly-disguised defense of plutocrats. Dave wants to punish working-class boomer for the malinvestment and crimes of elites with absurdly disposable qualifiers — the wealth is gone already; going after the pirates won’t achieve anything, so why bother. Let them keep their yachts and seventh homes while we foreclose on the proles. What good did putting Madoff in prison do, after all? Instead, let’s look forward to cutting the benefits of poor rank-and-file boomer retirees. Let’s punish those loathesome, defenseless scapegoats.

        Like any good Neocon, Dave fights the class war for plutocrats through an unjust intergenerational war, much like Bush’s Operation Iraqi Liberation (OIL). It’s an effective divide and conquer strategy—but so tiresome and despicable.

        1. dave

          “the wealth is gone already; going after the pirates won’t achieve anything, so why bother”

          I hardly say this at all. Indeed, go after the pirates. Take whatever they have. But at the end of the day if the real resources of this nation truly have been squandered by the nations elite on ostentatious consumption there will not be enough to provide for future retirement payments for the baby boomers. So you can pick them clean, but if its not enough its not enough. Like the bondholders of a bankrupt company get their obligations converted to equity and sometimes don’t recoup their capital, the bondholders of a bankrupt nation (retirees) get converted to equity and get whatever that bankrupt nation can provide. If its not as much as they thought, that’s tough. Its what is left.

          Best to not let them steal in the first place rather then wait 30 years and then wonder what happened.

          1. Doug Terpstra

            Thanks, dave. Perhaps I misunderstood. Agreed, as long as we first “take whatever they have” — jets, yachts, car collections, art, jewelry, skyscrapers, homes beyond principal residences, land-holdings (incl. islands), off-shore accounts, inheritances, etc., AND put fraudsters in prison AND put the generals out of the killing business—before touching the safety net for the victims, then sure let’s look at fair solutions going forward, including progressive taxation. But I think you may be underestimating how much the pirates have really ‘Madoff’ with.

            Agreed also—better to prevent looting beforehand, but punishment after the fact, putting the perps in prison (no guillotines), is part of that deterrent—regulation with very sharp teeth. Cost-of-business fines or even clawbacks clearly don’t cut it.

      2. Toby

        Good stuff DownSouth.

        Isn’t an additional and even more obvious proof of the deep role cooperative urges play in ‘human nature’ language itself? That we have ‘created’ languages of such rich complexity speaks clearly of our profound need to cooperate, and also our ability to do so. The very idea that each individual could compete to come up with the most efficient and effective communication tool is patently absurd.

        Furthermore, isn’t the extent of our competitive urges — and they are there — determined by our sense of who ‘The Other’ is, and how threatened we feel by ‘The Other?’ Written language and subsequent communication technologies have expanded humanity’s potential sense of “Us” to include the whole of life — let alone family, tribe, nation, race etc — an all-inclusive embrace termed “biophilia’ by a scientist whose name I forget.

        Recent research, including the paper you cite, shows increasingly that our cultural descriptions of ourselves as isolated, ‘rational’ competitors, concerned first and foremost with profit for self, are fallacious. Consequently, the system we have ‘constructed’ to reflect this fallacy, as well as the myths we have woven to support it, need to be changed, and about as deeply as is humanly possible I’d wager.

        Whatever humanity creates as a genuine alternative to the scarcity/competition-based models we know and love/hate, must be based on principles of cooperation, belonging, carrying capacity, resources, community, etc., otherwise we will simply continue to ensure our own destruction in defense of the system which is killing us.

  5. skippy

    Why would any generation…negotiate with the present power structure. They have shown their hand / intent over the last 25 odd years. And after they crash the world markets we get Bernie and Stanford plus some c/d grade shysters…really?

    Btw how is the island stan these days ummmm? Keeping some goodies on ice for the next election? That would be right, pull out a few ex friends for a parade, at the voting time. Stuff em I say, would rather loose every thing…just to see them dance.

    Skippy…shame on all of us_but_their burden is massive in comparison.

  6. Michael Fiorillo

    Dave,

    You make some valid points, but your argument is undermined by one glaring weakness: it’s not about intergenerational warfare, but class warfare. The immense wasting of resources devoted to the national security state pre-dates the baby boomers accession to power, and to blame them for spending trillions of dollars on weapons that don’t work for enemies that don’t exist is a dangerous straw man argument.

    As for Mr. Auerback’s idea that we can blithely fund retirement so that people can tool around in Winnebagos, that demonstrates an outdated view of what affluence should truly mean, and is certain to run aground on the shoals of the second law of thermodynamics and competition for resources. Improved living standards need to be re-conceptualized to mean greater access to high-functioning public goods such as quality health care, education, transportation, parks and cultural resources, rather than energy-intensive private consumption.

    1. Toby

      Well said Michael Fiorillo!

      My reading of where humanity stands is this; we are tasked with redefining wealth along systems theory lines, i.e. as an emergent property that arises almost organically from the health of ecosystems, community, society, etc. To have our notion of wealth tied too tightly to ‘bling and glamour’ (or money) is to focus our collective and cultural energies — not to mention fossil fuels — on conspicuous consumption at the expense of that which makes it possible in the first place; resources and environment.

      And despite the ‘success’ of this model in producing consumer goods more cheaply and in ever increasing amounts (thus far), I would say humanity is actually getting poorer and poorer where it really matters. In fact, we are impoverished and desperate for real value; honesty, transparency, trust, justice, good universal education, and so on.

    2. dave

      Paragraph 1: In the present time period its about class warfare. The baby boomers from the non-elite class should fight back against the elites to make sure their trust fund monies are spent on productive purposes for future generations, rather then be stolen. However, should they fail in this purpose I don’t think it is moral to impose unjust burdens on the next generation as a result of that failure.

      Paragraph 2: As to the second sure I agree in many ways, but it sure as hell isn’t what this generation is doing.

  7. Spruce

    That’s a nice theory. Too bad it falls down on important limitation: the finiteness of physical resources.

    Namely, the whole argument depends on this premise being true: “But at less than full employment, we do not need to do that since all we need to do is put more people to work to produce Winnebagos (etc) for the elderly. If we should ever get to full employment, then we will need a tax.” However, that is not possible in the real world where raw materials and energy output is limited. We CANNOT just put more people to work to produce Winnebagos etc. since we cannot increase the production of the raw materials and energy to feed that production.

    In fact, the limitation of resources (especially energy) is much more of a factor in limiting the output than the limits of employment. This is also very reason why payroll tax is not as stupid as the article claims. And for the same reason printing dollars is not a workable solution to fund the needs of the government. The debasement of the currency would result in a corresponding increase in the price of raw materials and energy, in effect being a “shadow tax” on everyone.

    1. Jim Haygood

      Thanks, Spruce, for drilling down to the core of the MMT fallacy. Currency is just a veil of illusion over the real economy.

      Believing that newly created fiat currency can sustainably add value to the real economy is spectacularly deluded.

      1. F. Beard

        Believing that newly created fiat currency can sustainably add value to the real economy is spectacularly deluded. Jim Haygood

        Actually it could prevent the destruction of wealth if it was applied to the victims of the bankers, the entire US population, rather than to the villains.

        A government backed counterfeiting cartel has certain moral and economic consequences.

  8. Bruce Krasting

    The author says:

    Even by Federal Reserve Chairman Ben Bernanke’s own admission, neither taxes nor bonds should impose any technical constraints to spending.

    Ben said that? When did he do that?

    Just a question, if bonds and taxes don’t impose any constraint what does? Nothing?

    So we should be Greece and have a crisis? Those that think there is no risk to unchecked spending and deficits are going to get hit in the head with a 2X4. Of course they matter.

    The Fed is not going to cure high unemployment with cheap money. Congress is not going to cure the problem with bigger deficits. You guys are pushing old strings and assuming they will work. They won’t. Not this time. The market will not let you. Continue down this road and you will have wrecked the debt market. It is happening today in case you have not noticed.

    There are limits. We have already passed them. Come up with a new plan. Deficits and QE won’t get it done.

    1. Marshall Auerback

      Bruce,
      In “Japanese Monetary Policy: A Case of Self-Induced Paralysis?” (R. Mikitani
      and A. Posen (eds.), Japan’s Financial Crisis and its Parallels to U.S. experience, Institute for
      International Economics: Washington, D.C., 2000, 149–166.

      In this paper, Bernanke made the claim that, in deflationary circumstances, monetary policy is effective largely because of its ‘fiscal components’. To achieve its policy objectives the monetary authority must collaborate closely with the fiscal authority in order to finance however large fiscal stimulus is necessary. He argued that the government’s ability to fund these large fiscal components is in no way financially constrained in the cases of Japan or the United States.

      This position is intriguing for several reasons. It endows fiscal policy with a new form of effectiveness, long denied by the mainstream; it undermines the oft-assumed omnipotence of monetary policy; and it proposes that there are no financial constraints to government spending. At the same time, in an apparent 180
      degree reversal of this position, Bernanke has recently joined the chorus of deficit hawks, arguing that the size of the government deficit has become unsustainable and must promptly be reversed to reduce the onerous tax burden on future generations.

      In effect, the Fed Chairman has made two seemingly contradictory statements: 1) that the crucial ‘fiscal components’ of monetary policy for fighting deflations can be financed without limit, and 2) that the resulting government deficits can become ‘too large’ and must be reversed to preserve fiscal sustainability.

      1. Doug Terpstra

        Thanks, Marshall. “…the Fed Chairman has made two seemingly contradictory statements: 1) that the crucial ‘fiscal components’ of monetary policy for fighting deflations can be financed without limit, and 2) that the resulting government deficits can become ‘too large’ and must be reversed to preserve fiscal sustainability.”

        Let me translate: “I can fund my crony members of the Wall Street casino and their wars indefinitely, but to continue the Ponzi cartel, at some point we’ll have to loot Main Street again.”

        We’ve come to expect incomprehensible doublespeak from the Fed, but Bernanke is not yet so accomplished in obfuscation as the fundamentally flawed Greenspan. Sounding “100% sure”, Benny also said recently:

        “We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.” —BB 7/1/2005

        “Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.” —BB 2/15/2006

      2. dave

        Its not complicated to understand. If the fiscal spending utilizes real resources in a productive way it will stimulate growth. If it utilizes real resources in an unproductive way then it won’t. Simple. Fiscal spending should be supported based on the nature of the spending being proposed.

        Now, sometimes fiscal spending proponents try to cheat. There are two ways in which they cheat.

        1) They claim that “idle resources” have an opportunity cost of zero if used by the government and thus no matter how wasteful the spending it has a positive effect. I disagree with this assumption, I believe that government spending, even in a time of slack, has complex effects on our economy and potential costs are greater then zero. For instance, we could close aggregate demand shortfalls by starting a war, but it would impose huge costs on society even if you only used the portion of resources deemed to be “under utilized”. Sure, the ROI requirements of government spending decrease in periods of slack, but they don’t go negative.

        2)They use it as a cover for increasing government spending as a % of GDP and using fiscal policy to steer real resource allocation. If there truly is a nominal demand shortfall it could be filled by reducing taxes (which destroy money) or simply writing everyone in the country a check. Then the people would get to determine how to spend it rather then the government. All sorts of Keynesian nonsense about multipliers must be constructed to justify why something like having a payroll tax holiday would be inferior to government spending. Really, its just a cover for wanting to increase government as a % of GDP and using an aggregate demand shortfall as justification. Then crisis programs eventually become permanent programs.

        1. Peter D

          Dave, what about projects that nobody but the government can do? No amount of tax cuts will allow long term infrastructure investments, investments in research where a lot of paths will lead to dead ends etc.
          Right now, for example, New Jersey refuses to build a tunnel to Manhattan that would have saved millions of hours wasted by NJTransit commuters. NJ does not have the money and neither does anybody else – except for the US government.

          1. dave

            Yes, high ROI investments in public goods should be made by the government. I grew up in NJ and NYC and I support the tunnel. How much clearer can I be? Good spending will grow the economy. Wasteful spending will not.

            Hardcore Keynesian and MMTers would have us believe that any spending, no matter how retarded, is good for the economy. Krugmen thinks burying money in coal mines and having people dig it up is a good use of excess labor. I disagree. I don’t think the value of “idle” resources is zero. And I don’t necessarily believe any kind of spending has positive value regardless of its nature. I don’t think its all just AD and the nature of spending doesn’t matter.

          2. Peter D

            dave, you are clear, however, I think you and other critics of MMT need to be careful not to ascribe to MMTers things that they do not say. All the MMTers I follow know very well that real resources are *the* constraint. I agree that they allocate too much space to the details of reserve accounting and such instead of mentioning it in passing. I guess many people do believe there is an operational constraint on govt spending which is why they try to debunk it, but for audiences such as the one on this blog, this is superfluous.

  9. Fractal

    Yves, thank you so much for your preface. The main post is a surprising waste of time. It is stuffed full of so many straw men and outright falsehoods that you would have to pay me to spend the hours necessary to find the links disproving all of its presumptions and fallacies. Then the authors insert one or two rational paragraphs. It is as if the co-authors were wrestling with each other over the text and could not find an editor to make sense of their contradictory arguments.

    Just for one tiny example, the record is replete with elected Republicans in Congress stating for attribution or in publications that they do intend to drain Social Security of FICA contributions as part of a long-term plan to privatize or kill Social Security. Check out newly-elected Sen. Pat Toomey’s insane book (co-written with Larry Kudlow):

    http://www.amazon.com/Road-Prosperity-Economy-Revive-American/dp/0470394390/ref=sr_1_1?ie=UTF8&s=books&qid=1292329720&sr=1-1

    Check out Rep. Paul Ryan’s “roadmap” which turns the usual plan to drain Social Security upside down by claiming that some “surplus” to be generated by 2069 through vague means will enable reduction of the FICA payroll tax:

    http://www.roadmap.republicans.budget.house.gov/ (see esp. discussion of retirement security and Appendix 1)

    Diverting payroll tax revenues from Social Security was the key element of Shrub’s campaign to privatize Social Security:

    http://www.ncpssm.org/news/archive/vp_inflated_solvency_gap/

    Thus it is complete bullshit for Auerbach & Wray to write that FICA taxcuts “are seen by many” as instrumental in privatizing Social Security when in fact the elected Republican authors of the privatization plans use FICA taxcuts for precisely that purpose. Auerbach & Wray snidely insinuate privatization opponents are some kind of conspiracy theorists because they see “a bigger plot by Republicans to destroy Social Security’s finances or permanently fund it with general revenues rather than allowing the payroll tax to be re-imposed.” But that is precisely what elected Republican privatization advocates say they want to do. Apparently Auerback & Wray could only find “One staffer in Congress” who believed that FICA taxcuts posed such a threat. They are just insulting our intelligence.

    And the raging non-sequitur in this sentence makes the rest of its graf incoherent:

    “Social Security was constructed this way to buttress its political legitimacy against widespread charges of “socialism” in the 1930s, but the reality is that the federal government has been (since the inception of the program and well before) the sole issuer of our currency, and the dollar, which is nothing more than the government’s IOU, is always accepted in payment as such.”

      1. F. Beard

        See everyone in Utopia. Cedric Regula

        Utopia may not be possible but redress for past thievery via the counterfeiting cartel and fundamental reform wrt money creation is.

  10. Frank

    from the Auerback and Wray post: “But at less than full employment, we do not need to do that since all we need to do is put more people to work to produce Winnebagos (etc) for the elderly.”

    This is delusional thinking. What about peak oil? Even the Internationl Energy Agency (which for a long time was reluctant to admit the reality of peak oil) now indicates that it probably began in 2006 and that global oil production will eventually “plateau” at around 68 million barrels per day.

    Many energy analysts consider this projection to be hopelessly optimistic.

    But according to Auerback and Wray we should just ignore resource depletion, and instead train young people to build Winnebagos! of all things, so seniors can happily spend their retirement motoring around the USA and using up the world’s remaining oil reserves at an average rate of 5 or 6 miles per gallon?

  11. Jim the Skeptic

    From the Post: “The truth of the matter is that payroll taxes do not fund the program. Social Security was constructed this way to buttress its political legitimacy against widespread charges of “socialism” in the 1930s, but the reality is that the federal government has been (since the inception of the program and well before) the sole issuer of our currency, and the dollar, which is nothing more than the government’s IOU, is always accepted in payment as such. Government actually spends by crediting bank deposits (and simultaneously crediting the reserves of those banks). “

    They have destroyed their credibility on this subject with this BIG LIE. Their logic reads somewhat like that used by the scum who try to evade paying taxes. They all depend on some convoluted logic and they all lose in court.

    From: http://www.ssa.gov/history/briefhistory3.html
    “After Social Security numbers were assigned, the first Federal Insurance Contributions Act (FICA) taxes were collected, beginning in January 1937. Special Trust Funds were created for these dedicated revenues. Benefits were then paid from the money in the Social Security Trust Funds.

    From: http://www.ssa.gov/oact/progdata/fundFAQ.html
    “By law, income to the trust funds must be invested, on a daily basis, in securities guaranteed as to both principal and interest by the Federal government. All securities held by the trust funds are “special issues” of the United States Treasury. Such securities are available only to the trust funds.
    In the past, the trust funds have held marketable Treasury securities, which are available to the general public. Unlike marketable securities, special issues can be redeemed at any time at face value. Marketable securities are subject to the forces of the open market and may suffer a loss, or enjoy a gain, if sold before maturity. Investment in special issues gives the trust funds the same flexibility as holding cash.”

    All of my working life I have held jobs where FICA was withheld from my wages. Now they want me to believe that the government took the money under false pretenses, gave the Social Security Trust Fund an invalid IOU, lied to the public about it, and then spent the funds.

    Any foreigner purchasing US Treasuries should be aware of this cavalier attitude toward US government obligations. We will not treat you any better than we treat ourselves! AND YOU CAN NOT VOTE!

  12. Jim Haygood

    ‘The truth of the matter is that payroll taxes do not fund [Social Security].’

    Setting aside all the loony-tunes MMT theory, there’s a legal reason for this.

    A serious prospect existed when Social Security was created in 1935 that the Supreme Court would find no constitutional basis for the government to run an insurance program.

    Therefore, legally speaking, Social Security consists of two entirely separate functions: (1) a FICA payroll tax; and (2) a disability, survivors and retirement welfare program. Contrary to the lies spread by Frank Roosevelt at its inception (‘you will have an account at Social Security’), there is no necessary connection between the tax and the benefits. Congress is free to modify (or even cancel) the tax or the benefits at any time.

    This rather nasty legal subterfuge means that Social Security is not an insurance scheme (although it deceptively uses the term) since there is no necessary connection between ‘contributions’ and benefits — merely an ordinary payroll tax and an ordinary welfare program, either of which is severable from the other.

    If Social Security were subject to ERISA funding requirements, the question would arise, ‘Where are we going to find $7.677 trillion to cover its negative net worth?’ But of course, in its habitually seedy fashion, Congress exempts itself from its own prudential laws. Politicized entities such as Fannie and Freddie already crashed, to the tune of hundreds of billions. Social Security is no different; just bigger and more thoroughly looted.

    1. Fractal

      You say “there is no necessary connection between the tax and the benefits.”

      However, there IS a “direct connection” between EARNINGS and the amount paid in FICA TAX on earnings (this is a tautology; as earnings rise, the amount collected by the 6.2% tax rises). There is also a “direct connection” between EARNINGS and the AMOUNT OF BENEFITS: the dollar amount of monthly (annual) Social Security retirement benefits (Title II) is based directly on average annual lifetime earnings. Monthly retirement benefits increase as total lifetime earnings increase. Since there are direct connections between earnings & FICA tax, and between earnings & monthly benefits, THERE IS A CLEAR “NECESSARY CONNECTION” between the FICA taxes paid in and the monthly benefits paid out.

      Nobody is claiming that every worker “earns” all of his or her Social Security benefit, because that total benefit depends on actuarial factors. Anyone claiming supporters of Social Security believe the benefits are equal to the taxes paid in is using a straw man. But there is without doubt a “necessary connection” between FICA taxes paid in and monthly benefits paid out.

    2. Jim the Skeptic

      Jim Haygood said: “Congress is free to modify (or even cancel) the tax or the benefits at any time.”

      And the Congress could decide to default on all US Treasuries. So What?

      Mexico could invade tomorrow, conquer the lower 48 states, and renounce any obligation owed by the formed US government? So What?

      The US could be obliterated from the face of the earth by a meteor and all it’s debt obligations would go with it. So What?

        1. Cedric Regula

          snark on

          But the government CAN eliminate the tax, and the government tooth fairy WILL show up for your retirement!

          snark off

  13. F. Beard

    The truth of the matter is that the government backed banking system transfers wealth to the rich from everyone else. If the Right wants to stop transfer payments in the other direction then the banking and money system should be on the table too.

    Fair is fair. When the Right stops looting via the government backed banking and money system then the need for socialism should “wither away”.

  14. Al Obama

    The 2% cut in the payroll tax is in reality a 16.5% cut in revenue because it’s only on the employee side not the
    employer’s contribution.

    This is most definitely the beginning of the end of Social
    Security because it’s very unlikely this tax cut will be
    allowed to expire in two years.

    A very clever and sneaky way of bringing about the demise
    of Social Security without having to debate it or announce
    an actual cut in benefits but at some point in the near
    future benefits will have to be cut because of the lost
    revenue.

    It is the proverbial “camel’s nose under the tent”.

  15. Peter D

    All the trashers of the post: you missed the point and now congratulate yourself on knocking off straw men. What Auerback and Wray (and other MMTers, see Mosler, Bill Mitchell etc) are saying is that real resources is the only constraint. Then dave goes on saying exactly that and pats yourself on the back that he somehow debunked the post.
    But what you all fail to see that the conversation in the society is not about what is worthy to do to ensure we have enough resources in the future but instead it is about “how are we gonna pay for this” and “how are we gonna pay for that” and “oh, we’re going broke”.
    So, the questions asked are the wrong ones and this is why it is important to explain to the people that the real constraints are not about money and this is what Auerback/Wray are trying to do (I grant that this post of theirs is not the most eloquent and succinct.)

  16. Hugh

    MMTers are their own worst enemies. They are too cute by half. They get carried away by their own cleverness and lose their audience in the process. That’s unfortunate because they often do have good ideas.

    They have never squared the circle of declaring that taxation is what gives government control of its currency by forcing us to use it in discharging our tax liabilities and at the same time that taxing doesn’t matter: it’s all about crediting accounts. Now these can be reconciled by backing off the absolute nature in which they are stated, but MMTers seldom do, or only when they are called on it. By stating these two postulates baldly, they lose many who see the contradiction.

    Similarly, crediting accounts has two constraints. The first is the absolute resource constraint. The second which you might see as flowing from this is inflation. But you really don’t get that impression from a statement like this: Bernanke seems “to recognize that the Treasury/Federal Reserve finances spending or purchases by electronically injecting reserves into the system and that there is no limit to its ability to do so.”

    Now it’s true if you infer from high unemployment and capacity underutilization that resources are available, then yes indeed, you can credit accounts without causing inflation. It’s sort of definitional.

    That’s for the economics side of it. The political side is simply divorced from reality. Many of us are concerned about kleptocracy, class warfare, and enormous wealth inequality. In this framework, it is pretty easy to see how a payroll tax cut could be used politically to justify a cut in benefits or other government services later. That MMTers say look, this doesn’t have to be so, ignores virtually everything about our current corporatist dominated political process.

    MMT’s assertion that a payroll tax cut will increase aggregate demand is also mistaken. It might or it could simply be eaten up by commodity price inflation and end up in the pockets of the rich (via corporate profits) with no real increase in aggregate demand. MMTers seem so fixated on the coolness of their theory that they don’t even seem to entertain the possibility how easily the payroll tax rollback can be diverted.

    1. F. Beard

      Many of us are concerned about kleptocracy, class warfare, and enormous wealth inequality. In this framework, it is pretty easy to see how a payroll tax cut could be used politically to justify a cut in benefits or other government services later. That MMTers say look, this doesn’t have to be so, ignores virtually everything about our current corporatist dominated political process. Hugh

      The beauty of MMT is that it allows for redress of past injustices. And the key is whose accounts get credited, the villains or the victims. Also, if combined with a 100% reserve requirement to put banks out of the counterfeiting business, it could be done safely wrt the risk of inflationary spiral.

      1. Doug Terpstra

        Yes, it’s really all about whose ox is gored, and Hugh is right, the post “ignores virtually everything about our current corporatist dominated political process.” With Obama’s military-financial kleptocracy in absolute control, fuzzy-math MMT only guarantees war as primary fiscal stimulus, the evil employer of last resort—and before long a new bubble in the price of cat food.

        1. F. Beard

          …only guarantees war as primary fiscal stimulus, the evil employer of last resort Doug Terpstra

          Except nukes and biological warfare can reach out and “touch” the PTB too. Perhaps it’s time for the PTB to question their own survival instincts?

    2. Peter D

      Now, this comment is spot on. I do think the MMTer get carried away a bit with all the balance sheet minutia. The focus on real resources does appear but it is given a back seat because the front seat is given to the exposition of the current fallacies. But all this does not invalidate MMT itself.

    3. attempter

      They have never squared the circle of declaring that taxation is what gives government control of its currency by forcing us to use it in discharging our tax liabilities and at the same time that taxing doesn’t matter: it’s all about crediting accounts.

      That’s not the contradiction you think it is. It’s just two different perspectives on taxation.

      Taxation doesn’t matter as far as the ability of the government to spend; but it does matter for getting people to accept the currency in the first place. (Which is often used as a weapon of tyranny against people who might otherwise eschew the cash economy. That’s probably one intention of the health racket mandate, as the informal economy and therefore increasing non-participation in the rent economy will loom larger as a threat to the system. Ironically, the “black market” is likely to represent an alternative to the real criminal economy.)

      1. Peter Drubetskoy

        Well, attempter, this is not exactly what MMT is saying. It does say that one function of taxation is to establish the currency, but then they say that the other is a means of regulating the private sectors spending/saving. So, while you don’t “need” taxes to spend, you might still “need” taxes to control inflation. So, MMT taketh with one hand and giveth with another.

        1. F. Beard

          So, while you don’t “need” taxes to spend, you might still “need” taxes to control inflation. Peter Drubetskoy

          Key questions are who gets the spending first and on whom the taxes are levied. Also, a money, even without taxation, has a utility value based on convenience, traditional use of it and known scarcity. A properly managed money supply, even without taxation, could maintain its value even without legal tender laws if its issue was carefully controlled.

          1. Peter D

            F. Beard, I agree that in principle it is possible to manage money supply (or, more precisely, the monetary base, I guess) without taxation, but seems to me this assumes a very finely attuned machine which is probably not a realistic assumption. So, maybe I am missing something, but MMTers seem to admit that in the current system we might need to raise taxes in the future when demand outstrips supply. And this is a weakness of sorts of MMT, since it works on paper, but ignores the fact that people especially in the US, are taxophobic and will not necessarily support the however-benign government taxing them to regulate the money supply. I like MMT and hope it makes way into the mainstream but I am afraid it might have the fatal flaw of other theories that work on paper but ignore the realities of human nature.

  17. F. Beard

    <i.I agree that in principle it is possible to manage money supply (or, more precisely, the monetary base, I guess) without taxation, but seems to me this assumes a very finely attuned machine which is probably not a realistic assumption. Peter D

    I reckon that it is government backed fractional reserve banking that is complicating the problem; it introduces temporary money (credit) into the system. Money should never decrease in volume so temporary money should be illegal or at least strictly controlled via market forces.

    1. Peter D

      Would love to see some elaboration of this point. Can you point me to some sources? Are you saying that the banks should be allowed to lend only up to a multiple of their reserves and not rely on the Fed to loan them the funds later?
      Still, cannot there be an overshoot in money supply coming only from the government spending that would need to be reined in by taxes?

      1. F. Beard

        Can you point me to some sources? Peter D

        Here my bookcase wrt money in no particular order:

        Web of Debt by Ellen Brown
        The Mystery of Banking by Murray N Rothbard
        The Lost Science of Money by Stephen Zarlinga
        Dissolving Dollars by Alex Marchand
        The Truth in Money Book by Theodore R. Thoren
        Money, Bank Credit and Economic Cycles by Jesus Huerta de Soto

        Are you saying that the banks should be allowed to lend only up to a multiple of their reserves and not rely on the Fed to loan them the funds later? Peter D

        I’m saying the banks should only loan money entrusted to them for that purpose with matching maturities on CD’s and loans or if not then covered by bank capital. Banks would no longer be able to create what is effectively government money. As for new government money, I would abolish or privatize the Fed and let the US Treasury issue it debt and interest free.

        Still, cannot there be an overshoot in money supply coming only from the government spending that would need to be reined in by taxes? Peter D

        That’s one way or government spending could be throttled till the economy caught up with it.

        My complete views on money include separate government and private money supplies. Fractional reserves would be allowed in private money supplies with full disclosure of the risks to depositors and absolutely no government bailouts for anyone.

        1. F. Beard

          Oh, I neglected to say the most important book I read wrt money is the Bible, both Old and New Testaments.

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