when ordinary people don’t have pricing power (aka, there isn’t a labor shortage and lots of competition offering the products and services they need.) Thus, this:
And that tax cut you got me? Thanks, a lot. Didn’t even cover the jumps in the price of gas and my monthly minimum payments and my insurance premiums and my grocery bills. Didn’t offset the amount I lost in reduced hours and no more overtime and did I mention I haven’t gotten a real raise in ten years?”
Stated this would happen back when everyone was spewing about the biggest middle class tax cut. What Americans need isn’t tax cuts, it’s a working economy, which tax cuts will not lead to. Period.
Formerly T-Bear
Can’t wait until your MMT work is written. It might shed illumination on demand side economics that is missing from any supply side proposition (NOT a theoretically complete political or economic ideology). In demand side economics, taxes become equivalent to enforced spending, transferring spending from individuals’ income to aggregate or governmental spending as a means to stimulate production (supply side). This tax also reduces the quantity of income capable of being saved, this according to MMT are funds that unless reinvested in economic production, are removed from (and only extracting rent from) the economic process, equivalent to “mattress money” of misers. When the range of incomes available increases to vast amounts incapable of being spent or creating edifices also generating unspendable income (holding trusts, estates, etc.), taxation is the only way that those funds can be (freed) spent, it takes the state power to tax to accomplish this. Where the power to tax becomes counterproductive occurs when income tax is applied to incomes too small to satisfy the daily needs of the recipient and provide sufficient savings to meet future requirements (retirement, emergency, educational, other savings). This level taxes act to reduce aggregate demand. What is economically overlooked is whatever is necessary to make supply side economics work, there must be a counter or mirrored activity in demand side of the equation. When either are missing or out of balance, economic disaster will sooner or later overcome the economic process. When wages have stagnated for three or four decades when production has vastly increased is indicative of an unbalance between supply and demand that has lead to the current state of economic collapse.
Ian Welsh
I’m working on another project right now, so it may be a while. But yes, MMT is essentially supply side, and there are reasons why liberals tend to be demand-siders.
I think structural issues are much much bigger than MMT seems to, as well. That said, I don’t know enough about MMT yet to really go at it, but when I read the high level stuff on the blogs, I notice big important chunks missing. Still, the whole “we can print money if we’re a country with fiat currency” insight is pretty important, and seems to have been forgotten by too many people, as we are seeing both in the US with deficit hysteria and in Europe with a badly designed currency union (this is one of the few places where Stirling and I have a long run disagreement, I’ve never been a fan of the Euro.)
Mandos
Is the supply-side/demand-side dichotomy really a good one?
beowulf
Still, the whole “we can print money if we’re a country with fiat currency” insight is pretty important
Henry C.K. Liu wrote an excellent explanation of MMT without once using the acronym. :o)
Government levies taxes not to finance its operations, but to give value to its fiat money as sovereign credit instruments. If it chooses to, government can finance its operation entirely through user fees, as some fiscal conservatives suggest. Government needs never be indebted to the public. It creates a government debt component to provide a benchmark interest rate to anchor the private debt market, not because it needs money. Technically, a sovereign government needs never borrow. It can issue tax credit in the form of fiat money to meet all its liabilities. And only a sovereign government can issue fiat money as sovereign credit.
If fiat money is not sovereign debt, then the entire conceptual structure of finance capitalism is subject to reordering, just as physics was subject to reordering when man’s worldview changed with the realization that the earth is not stationary nor is it the center of the universe. The need for capital formation to finance socially-useful development will be exposed as a cruel hoax, as sovereign credit can finance all socially-useful development without problem. Private savings are not necessary to finance public socio-economic development, since private savings are not required for the supply of sovereign credit.
http://www.henryckliu.com/page215.html
Cujo359
I have mixed feelings about the euro, even in the limited context that I use to think about these things. On the one hand, it simplifies trade between European countries a bit. On the other, we now clearly can see that it makes it impossible for a country that’s running a deficit to say “Don’t worry. We’re good for it.” Sometimes that can be a good thing, but at least some of the PIIGs are in trouble for reasons having little to do with their own mistakes.
As for taxes, I think that all you need to do is ask yourself what you’re going to do with a couple of hundred dollars extra to realize that it won’t have that much effect on the economy, even when multiplied by millions. Smart investments in tech, research, infrastructure, and so on would have far more effect down the road.
Hillsfar
Ian, it’s sad but true. The Republicans are those school jock bullies with the hot girlfriend, and they have stuffed he Democrat nerds into the locker and stomped on their horn-rimmed glasses. I don’t think that’s going to change.
That said, what do you think of Chris Martenson’s Crash Course on the coming challenges facing us in the next 10 years? For example, massive debt, and Peak Oil.
http://www.youtube.com/watch?v=cwNgNyiXPLk
That said, what do you think of John Michael Greer and his Archdruid Report about America becoming a 3rd world country?
http://thearchdruidreport.blogspot.com/2010/02/becoming-third-world-country.html
Curmudgeon
Greer is definitely on to something by calling the US a third world country. However, from my perspective, the US is already a third world country and has been for some time. Of course, the US is very wealthy in aggregate, but being third world is more of a feature of political economy rather than a level of GDP per capita.
What makes the third world the third world–and the US a member of the same group–is that third world countries are operated by tightly closed oligarchies that use state power to benefit rentiers rather than the general public.
A state that operates for the benefit of its richest citizens at the expense of everyone else is simply not developed regardless whether has the GDP/head of Afghanistan or America.
Curmudgeon
It’s also interesting that the US scores scarily high on many quantitative metrics used to identify/predict failed states. American human welfare numbers (e.g. Gini, homicide rate, infant mortality, food insecurity, etc) have more in common with those found in the impoverished world rather than among the rest of the G7.
The US position is morally worse than that of–for example, Afghanistan–however, as the Americans (unlike the Afghans) could improve domestic human welfare but chooses not to.
Ian Welsh
The main difference between Greer’s views and mine is that he thinks it will be a long slow gentle decline. I don’t think it’ll work that way. (He came here once and suggested that people here /want/ a catastrophe.
Peak cheap oil is definitely hitting in the next 10 years, if it hasn’t already. There’s a reason I was screaming to spend the stimulus money on a complete refit of the US economy.
Debt… depends how folks want to handle it. Inflation and devaluation are the likely outcomes (printing money in large amounts. Bear in mind the Fed buying treasuries= printing money and the US already did that.) The question is if the entire world cracks up, and if they do, who winds up ahead. And that means the questions are China’s fragility, whether the Europeans have sense on how to reform the Euro, and what happens in the US.
There are a few possible scenarios, one has China staying together and the world reorienting towards it, another has everyone going down, an end to globalization in the current model with tariffs going up and nations with resources insisting on either using them at home and doing the value add at home, or making bilateral deals for other resources with countries, while general tariffs go up. Both scenarios include the high possibility of some really nasty wars, the first one including a China/US great power confrontation, the second some very ugly resource wars.
marku
Ian, I would love to see you flesh out these ideas in a post, when you have the time of course.
Cujo359
Regardless of the pace of the change, I suspect that when we’re eclipsed by China, it will only become evident to most of us after some sudden event. The groundwork for it was laid some time ago, so in a way it’s already happened slowly.
Celsius 233
Ian Welsh;
The main difference between Greer’s views and mine is that he thinks it will be a long slow gentle decline. I don’t think it’ll work that way. (He came here once and suggested that people here /want/ a catastrophe.
I think some do want a catastrophe, because it’s seen as a way to shake up the sleepy heads and create a situation where there is a chance to do it differently (as in no system left to repair).
The old system isn’t broken; it doesn’t work.
It’s new or die for most of us.
Celsius 233
Resource wars are a given and already happening in the Middle East; Israel has grabbed a bunch of water already. Many people have died for that water.
Resources without water are useless; the water wars have already begun and it’s all going to hell from here.
lambert strether
I don’t think we can predict collapse vs. decline. If our elites panic and turn on each other, collapse, I would say.
Regardless of the larger scenario, the real answer is to build up local resiliency as fast as humanly possible. That means paying rent to as few rent-seekers as possible, among other things.
Ten Bears
I often delight in the watching, in the participation as history unfolds… as opposed to the reading of it in some dusty old tome. But a Gulf Coast resident summed it up far more succinctly yesterday – watching in real time as a catastrophe unfolds in slow motion. Wars will be fought, blood spilt.
Local resiliency indeed, Lambert, the if necessary induced devolution of the nation/state to ‘bio-regional’ communities centered upon cultural, economic and environmental commons. And sadly, we’re all gonna’ have to get a little more thick-skinned about the dead and dying – as the world hastens to a somewhat cyclical change billions will die, and the only thing we can do is as Old Abe told my ancestors not so very long ago… endeavor to persevere.