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Getting Us Out of This Fix In 90 Days

letsgetitdone's picture

In a heartfelt piece lamenting the jobs crisis and Washington's Hooverite response to it, Bob Herbert of the New York Times said:

There is no plan that I can see to get us out of this fix. Drastic cuts in government spending would only compound the crisis. State and local governments, for example, are shedding workers as we speak.

Actually, there is a simple plan that would get us out of this and its author says it would do it in 90 days. The author is Warren Mosler an International Consulting Economist who is running for the US Senate in Connecticut under the Independent Party Banner, and who is one of the leading figures in the approach to economic analysis that has come to be called Modern Monetary Theory (MMT).

The Mosler Economic Restoration Plan has three core proposals:
-- Declare an Immediate ‘Payroll Tax Holiday’ — The U.S. Treasury will no longer deduct FICA, Medicare and other Federal payroll tax deductions from your paychecks, resulting in an immediate increase in take-home pay of roughly $650 per month for a couple with a combined income of $100,000 per year. That’s big money, and the extra cash will help you pay your mortgage and car payments, which helps the banks the right way, from the bottom up, and not through the top down bailouts of the recent past.
-- Give U.S. States Revenue Share Money Based on Population — Provide each State government with an immediate, unrestricted $500 per capita of revenue to spend where they decide they need it most. This will amount to approximately $1.75 billion for Connecticut to help fill the holes created by the recession.
-- Fund an $8/Hour National Service Job for Anyone Willing and Able to Work — This will provide transitional employment for the unemployed, preparing them to find new private-sector employment as businesses look to add millions of new jobs to meet the demand coming from a rise in spending due to the increased take-home pay from my first proposal.

Warren thinks this program will work in 90 days. I'm not so sure about that, because I don't know how fast the Government will be able to move in getting people onto the program and into jobs. It seems like a bureaucracy without computers and much smaller in size in the 1930s under FDR moved a lot faster than ours does today. But if he's right, and Congress could pass it by the end of July, it would certainly clarify the current clouded picture for incumbents in the coming Congressional elections, and probably could get us out of the recession in 12 months or may be a little less. (My own Wild Ass Guess)

I've discussed Warren's program in a bit more detail here, and suggest some modifications to the FJG program, including cost of living wage adjustments by county. But with or without these modifications, I think this simple three-part program is the plan that can get us out this fix that Bob Herbert is looking for. Who knows? Maybe he'll take a look.

(Cross-posted at Fiscal Sustainability and All Life Is Problem Solving)

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Submitted by Elliott Lake on

to be collected in this? That's boneheaded on the face of it, if you are. I'm self-employed, so haven't paid payroll taxes for years, but a person wants to keep contributing to Medicare and SS, you know. The last thing we want to do is give a nice big gash in the throat to the things keeping us from starving to death in our old age.

letsgetitdone's picture
Submitted by letsgetitdone on

The proposal is for tax a holiday. The Government will credit everybody's SS and Medicare accounts for as long as the holiday lasts. When the economy comes back, the FICA taxes will too, unless Congress wises up and decides that regressive taxes like SS and Medicare ought to be replaced by progressive taxes to help create greater economic equality.

beowulf's picture
Submitted by beowulf on

If you do, forward him the 7DIF book (paste the Tom Dasche/Larry Summers anecdote in the email, that will catch his eye ) and suggest he interview Warren.

As for possible changes to the plan... cost of living adjustments are a political landmine. The Blue Dog Democrats whose votes you'd need in Congress will get their nose out of joint that their lower cost of living states will get lower wages than workers in other state. Absurd I know, but we're dealing here with some fairly horrible human beings. Better to set it at single national rate and allow states to top it off with a higher amount if they wish.

Something else worth thinking about is something David Colander wrote:
"The lesson most economists learned from World War II was that Keynesian aggregate demand policy worked. The fact that the expansion of aggregate demand had been accompanied by major controls over wages and price … was lost on the majority of the profession."

Of course, Colander and the Functional Finance pioneer Abba Lerner came up with an intriguing solution to the inflation risk (which was later improved by Noble Prize winning economist William Vickrey):
"It is here that my free-market solution to inflation, later reworked, further developed and, renamed the market anti-inflation plan (MAP) by Abba Lerner and me, came in. Vickrey saw MAP as the institutional change needed to guarantee that a true full employment – roughly 2 to 3 percent unemployment – could be reached in a way that was institutionally compatible with a non-inflationary economy. And it could do so in a way that was fully consistent with existing institutions."

I should add this article that explains how Vickrey applied his auction theory work (cap and trade, off-peak discounts, congestion pricing were Vickrey ideas) to enabling a full employment economy without inflation.

letsgetitdone's picture
Submitted by letsgetitdone on

I've enjoyed your MMT-related comments for some time now. I'm afraid I'm a little wooden-headed about these things. I think you propose what you think is the right policy, i.e. one with cost-of-living adjustments, and then fight like hell for it, compromising only at the last minute if you absolutely have to and always extracting concessions from the other side that hurt them as much as your concessions hurt you. I wouldn't give the blue dogs an inch until the end, and if they voted against the bill I'd take away their Chairpersonships and choice committee assignments, and threaten that beforehand.

Also, I'd begin by using the "nuclear option" to cut down on their power, even before I attempted any more legislation.

But all this is just me.

CMike's picture
Submitted by CMike on

For instance, Eggertsson says a payroll tax holiday would be deflationary and slow growth (36 page pdf):

1 Introduction

...What is the effect of tax cuts and government spending under the economic circumstances that characterized the crisis of 2008? A key assumption is that the model is subject to shocks so that the short-term nominal interest rate is zero. This means that, in the absence of policy interventions, the economy experiences excess deflation and an output contraction. The analysis thus builds on a large recent literature on policy at the zero bound on the short-term nominal interest rates, which is briefly surveyed at the end of the introduction.

The results are perhaps somewhat surprising in the light of recent public discussion. Cutting taxes on labor or capital is contractionary under the special circumstances the U.S. is experiencing today. Meanwhile, the effect of temporarily increasing government spending is large, much larger than under normal circumstances. Similarly, some other forms of tax cuts, such as a reduction in sales taxes and investment tax credits, as suggested for example by Feldstein (2002) in the context of Japan’s "Great Recession," are extremely effective...

5 Why labor tax cuts are contractionary...

[Technical discussion]

I say a payroll tax holiday would wreck Social Security by making it vulnerable to claims it is a welfare program and trying to re-institute the tax after a holiday would undermine support for the program by workers.

a little night musing's picture
Submitted by a little night ... on

(however reluctantly)

I say a payroll tax holiday would wreck Social Security by making it vulnerable to claims it is a welfare program and trying to re-institute the tax after a holiday would undermine support for the program by workers.

Yes, I get that the FICA tax is regressive, and also that there is no necessary connection between FICA in and the "balance" in the social security / medicare sheet, but until these facts are commonly accepted, the political effect of a tax holiday is more likely to be what CMike indicates. Or, more precisely, the enemies of social programs can easily slant it to their purposes, since the common understanding of these matters is the "household budget" model and the simmering hostility to "entitlements".

We've got to prepare the ground before we can go out on potentially politically risky limbs like this. IMO.

My goodness, too many people don't even know what a progressive tax system is, let alone why it's a good idea.

letsgetitdone's picture
Submitted by letsgetitdone on

Hi a little night,

We've got to prepare the ground before we can go out on potentially politically risky limbs like this. IMO.

I agree. However:

1) Getting the program passed implies getting people to accept that there's no solvency risk associated with it because Government can create money without inflation in an economy like this, and

2) It's a proposal for a tax holiday, not for elimination of SS and Medicare taxes

So, I don't think it's nearly as risky as just attempting to eliminate separate SS and Medicare taxes

beowulf's picture
Submitted by beowulf on

I came across the fourth rule of "functional finance", which Abba Lerner added to his original three in a book he and Colander wrote in 1980.

1. The government shall maintain a reasonable level of demand at all times. If there is too little spending and, thus, excessive unemployment, the government shall reduce taxes or increase its own spending. If there is too much spending, the government shall prevent inflation by reducing its own expenditures or by increasing taxes.
2. By borrowing money when it wishes to raise the rate of interest and by lending money or repaying debt when it wishes to lower the rate of interest, the government shall maintain that rate of interest that induces the optimum amount of investment.
3. If either of the first two rules conflicts with the principles of ‘sound finance’ or of balancing the budget, or of limiting the national debt, so much the worse for these principles. The government press shall print any money that may be needed to carry out rules 1 and 2…

To these three original rules, Lerner and Colander added:

4. The government must establish policies which stabilize the price level and coordinate both the money supply rule and the aggregate total spending rule with this stable price level at the unemployment level it prefers.

Colander writes, “To integrate the necessity of dealing with the institutional problem of sellers’ inflation by changing institutions rather than accepting whatever unemployment was required to stop inflation, Lerner and I arrived at [this] modification of the rules of functional finance… With this fourth rule the rules of functional finance can once again be relevant to modern economic problems”.
“Functional Finance, New Classical Economics and Great Great Grandsons”

letsgetitdone's picture
Submitted by letsgetitdone on

Thanks Beowulf, it's great to have this.

Once upon a time, many, many years ago, in the early 1960s, I had the pleasure of hearing Abba Lerner speak. I was a graduate student at Michigan State University in political science in those days, and Abba was billed as a Keynesian for his talk. As I recall the talk was in the late Spring and it was fairly warm. Abba showed up in shorts, with a deep tan and a hair cut kind of like David Ben-Gurion's. He looked every inch the Israeli Kibbutznik, which in those days, had a very favorable connotation to it.And he was very charismatic and unusually clear in his exposition. he left a lasting personal impression on me, but I don't remember much of what he said.

I think this was because it was hard for me to see the significance of his thought beyond Keynes in those days. The country was still on the gold standard, at least in theory, and the significance of functional finance for fiat money systems was not clear to anyone,

What I do remember, however is Abba's emphasis on the use of Government spending to achieve full employment and the duty of Government to make that happen, and also his confidence that functional finance if followed by the Government could achieve and maintain full employment.

beowulf's picture
Submitted by beowulf on

You've really taken the leading oar on publicizing MMT, and I appreciate your efforts. As for adding "locality pay" adjustments to a JG bill, well since you insist, I believe it could be done by executive order or the bill could have a clause stating that the jobs program is subject to FEPCA (see "locality pay").

CMike, never look a gift house in the mouth. Let's take Eggertsson's New Keynesian (apparently economists use the word New where the layman would use the word Not) theorizing at face value. If tax cuts are deflationary and spending hikes are inflationary, then the more we cut taxes, the more we can boost federal spending at the same time without fear of inflation.

You raise a good point about re-instituting the payroll tax, what I'd suggest is tying the tax holiday to the U3 unemployment rate and adjust it quarterly or monthly as the economy improves. Say, U3 rate x 10 with that percentage subtracted from baseline payroll tax due. So 10% unemployment, no payroll taxes due from either employer or employee. 7.5% unemployment, 25% of baseline payroll taxes due, 5.2% unemployment, 48% of baseline due and so on. Now consider this, we could double the payroll tax-- start by uncapping above SS levels and expanding the new Medicare unearned income tax-- to fund Medicare for All and it wouldn't cost taxpayers a penny more than the current payroll tax until unemployment dropped below 5%.