Seems like the wrong time to be cutting aggregate demand?
Obama Plans to Raise as Much as $120 Billion From Bank Fees
By Hans Nichols
Jan. 12 (Bloomberg) — President Barack Obama plans to impose a fee on banks expected to raise about $120 billion in order to help recoup losses from the Troubled Asset Relief Program, according to an administration official.
The White House hasn’t settled on the final structure of the fee and how to target the big banks that have returned to profitability, said the official, who request anonymity.
The plan is to have revenue from the fee dedicated to deficit reduction and to cover the amount that the Treasury Department estimates it will lose from TARP, which is $120 billion. Details will be contained in the fiscal 2011 budget that Obama will submit to Congress next month, the official said.
Agreed.
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Maybe the wrong thing economically, but this is a political move, too. If the president doesn’t convince the public he is on the side of Main Street instead of Wall Street, he and the Democratic majority is toast. So far, Wall Street is wining and Main Street is outraged about it.
The problem is that the prevailing meme where the political and economic universes of discourse overlap is the myth of fiscal responsibility that translates to government debt is bad and the federal budget should be balanced, even in bad times, and in surplus in good times. Anyone countering that comes across as “irresponsible” owing to ignorance about the relation between currency issuer and currency users.
And as a result we can get a coalition of GOP and Blue Dogs blocking further spending that would increase NAD, or the “party of fiscal responsibility taking power.” But progressive Dems would still be strong enough to block large tax cuts. Looks like this depression is just beginning.
But as I understand they aren’t lending so how is that cutting aggregate demand?
People who can pay back loans don’t want to borrow. That shows up as lower aggregate demand, and less bank lending (on demand side).
Hmm, actually a bank transaction tax makes sense if its put in place as a standby tax (analogous to the President’s authority under 19 US 1862(c) to unilaterally impose oil import fees and other tariffs). The Fed could impose it incrementally in lieu of interest rate hikes when the economy is at risk of overheating (that’s a problem we won’t have to worry about for a while). The Fed already collects transactions fees on Fedwire activity. Likewise, private clearing houses collect fees on their own transactions, so it just a matter of reprogramming software whenever the Fed votes to raise or lower the level of transaction fees directed to the Treasury account.
By giving the Fed a standby bank tax as fiscal tool to reduce the money supply, Congress could declare a payroll tax holiday (or, as I suggested last week, expand Medicare to everyone) without having to vote later to raise taxes when its time to take away the punch bowl. Granted, a bank transaction tax is economically inferior to income or land taxes, but politically its a much easier tax to deal with, Congress won’t share its authority to adjust income tax rates and state governments are adamant that the Feds stay away from property taxation).
Interesting point, Beauwolf.
PKs talk, in generalities, of increasing or draining net private sector savings, but don’t talk about how savings desire could be impacted by exactly how that increase (or drain) is implemented.
I don’t know if PKs would support standard micro (and tax targetting inelastic demand) or the exact opposite.
standby = timing, which is good
Thanks Winterspeak,
And JKH is right, the idea of a standby tax is that Congress pre-approves their imposition and gives discretion as to when or if they’re collected. The most detailed bank transaction tax proposal I’ve found is UW-Madison economist Edgar Feige’s “Automated Payment Transaction” (APT) tax.
Here’s Feige’s 2005 presentation to the Bush Tax Reform panel.
http://www.scribd.com/doc/25299549
He estimated that $1.8 trillion collected in 2002 by the US and the States from income,sales, excise and estate taxes (US FICA and State property taxes weren’t included) could be replaced by a transaction tax of between (depending on volume reduction due to the new cost) .3% to .6%.
And here’s a 2000 journal article where Feige outlines his proposal:
http://www.scribd.com/doc/25299550
In its simplest form, the APT tax consists of a flat tax levied on all transactions. The tax is automatically assessed and collected when transactions are settled through the electronic technology of the banking/payments system.
Gosh, and what Board of Governors oversees the banking/payment system?
:o)
The Fed could ramp up the APT rate economywide as needed or focus it on a particular sector in order to deflate bubbles with a rifle instead of a shotgun. In contrast, remember how the New York Fed addressed the late 20’s stock market bubble.
After New York Fed President Benjamin Strong died in early 1928, his less able successors opted to prick the stock market bubble, raising the discount rate from 3.5 percent in January 1928 to 6 percent in August 1929. This tightening drove private short-term lending rates to 9-10 percent (and occasionally above 20 percent). The high rates killed a budding recovery from the previous mild recession and the economy turned back down in August 1929, leading to a stock market decline in the next month and the well-known crash in October.
http://www.huffingtonpost.com/john-tepper-marlin/economic-recovery—-five_b_151639.html
As WM posted, it’s the wrong time to be cutting aggregate demand, although the tax is to be spread out over a number of years of recovery for the banks. So timing is a consideration.
A standby mechanism seems consistent with the PK MMT proposal in general to use fiscal policy fine tuning instead of conventional monetary policy (especially under the zero rate zero bond version.)
Yeah yeah yeah, I get all that and agree.
My question is, in standard micro theory, the optimum tax is targeted at behavior that will not change much by having the tax imposed on it. So you want small taxes, over a broad base, targeting inelastic demand. This way the Govt can raise the maximum amount of revenue for the least change in economic behavior and dead weight loss.
What I’m wondering is, for the purpose of draining net private savings for inflation control purposes, what kinds of things should the tax target? It’s a micro question in the context of PK macroeconomics
You’ve posed the question very well. The answer is beyond my expertise. PK MMT’ers must have the boiler plate answer for this.
when you’re closer to full employment than we currently are, a job guarantee is the preferred MMT approach to automatically managing AD both on the upside or downside.
As I wrote in the conclusion to a paper from 2005:
“Admittedly, even if one agrees that an ELR policy would have a stabilizing effect on the economy, there are still significant difficulties to be overcome regarding logistical and administrative complexities. In particular, according to the simulations here, an ELR effective at offsetting business cycles and providing price stability does so via a buffer stock of ELR employees that rises and falls countercyclically, though fluctuations in the buffer stock need only comprise—in the U.S. case simulated here—a minority of existing ELR jobs. Also, the ability to employ ELR workers in useful activities that generate productive output further determines the extent of the stabilization effects of the program, at least according to the simulations here. Neither of these would be easy to implement or sustain on administrative, logistical, or political levels. On the other hand, these complexities and difficulties are related to one of the program’s potential strengths vis a vis the other policy rules: namely, if effectively implemented and sustained, the simulations here suggest an ELR program’s stabilization effects could be automatic in the sense that they would not be dependent upon any policymaker’s forecasts, targets, or conceptual understanding of the economy’s functioning—which can clearly have an ideological bent. On the other hand, the effectiveness of an interest rate rule, tax rate rule, or transfer rule would be (or in the case of interest rates, already is) dependent upon the abilities of policymakers to correctly estimate and forecast current versus “potential” or “target” variables, as well as upon their (potentially ideological) perspectives regarding the relationship of policy instruments to ultimate policy objectives. This is so even where a small, somewhat politically-independent decision-making committee can avoid the “decision lags” that plague a larger body such as the U. S. Congress, as already demonstrated by the FOMC.”
Winterspeak,
I think the answer is not straightforward and PKists who have worried about it will know better. From my limited knowledge of the PK lit, I can only point out a few articles such as this gentleman’s papers http://levy.org/vauth.aspx?auth=104
Click on “See all Wynne Godley’s Publications” in that link.
Wynne Godley used to work for Her Majesty’s Treasury as one of the “Six Wise Men” – he uses the phrase “fiscal stance” for the numbers. His models and forecasts for the US economy are stock flow consistent and Godleyan. Keynesliness is next to Godleyness is a phrase I saw recently.
This one is the latest: Zezza and others – http://levy.org/vdoc.aspx?docid=1215
IMO, PKists won’t try to invent a Taylor rule for the tax policy and try to fine tune every now and then.
Winterspeak,
Of course, most taxes only impact monetary policy in one direction– they raise tax revenue. However if the goal of a standby bank tax is to reduce inflation, then I suppose it works by raising tax revenue and/or lowering the velocity of money. Having said that, I’d never appreciated the automatic stabilizer benefits of the job guarantee on both downside and upside until Scott just pointed it out, that’s very interesting.
The nice thing about a standby tax is its political benefit. Even if its never collected, for members of Congress dubious about just letting Treasury “print money” it could be seen as a tool for the Fed to keep Treasury’s check writing from damaging the economy.
“.3% to .6%” is a huge burden on the private sector, especially if the nature of your business involves high turnover and a consequent high level of tranactions. There are so many problems with this proposal that I don’t know where to begin. Designing such a tax into the system still leaves the discretion with the bureaucrat who may have different theories than us about the nature of money. This won’t be an automatic stabilizer because you’ll have people like Obama who think the time to raise taxes is now so that government can pay its bills. In effect, this could become a pro-cyclical tax. And if you leave the decision with the monetary authority, you’ll have a Constitutional challenge.
Zaid, The “.3% to .6%” was the level needed to replace all federal and state income and sales tax ($1.8 trillion in 2002). If the Fed used it as a fiscal tool, they could add or subtract whatever fraction of those numbers as it wished. Though I take your point that there’s no reason to impose any new taxes until at least there’s been a payroll tax holiday declared.
As for whether the decision to impose an APT tax and at what level can be left with the monetary authority, that’s actually an interesting point. Technically its a user fee, so they probably could but you’re right there would be legal challenges.
http://www.nytimes.com/1987/10/13/business/tax-watch-a-user-fee-what-s-that.html?pagewanted=1
APT is scary to implement. Imagine – firms make a markup over costs and consumption taxes and if taxes start fluctuating, Goldman Sachs will get involved in pricing toothpastes, recommend adding a huge premium over prices and the markup will involve fees paid to Goldman Sachs as well!
a tax on the likes of bank deposits is simply passed through as an interest rate increase, as is just about any other bank tax that lowers returns on equity below that needed to sustain capital.
so the fed works to get rates lower while the tsy works to get them higher.
yet another totally confused policy
Warren,
Thanks for your comments. I take your point that anything that raises interest rates now is bad policy because there is so much GDP underutilization. I raised the possibility above of a standby bank transaction tax (using Feige’s ADP proposal as an example) that the Fed could utilize as a fiscal tool to slow down an economy approaching full employment. In that circumstance, would it be better, as Rodger Mitchell has suggested, for the Fed to simply raise interest rates instead of raising taxes (whether on financial transactions or on personal income)?
I guess my unstated policy goal is to move as much mandatory public spending possible “off budget” (e.g. Social Security, an expanded Medicare system, interest on the debt) by direct payments by Treasury’s Fed account in order to reduce federal income and payroll taxes as much as possible while still paying for public necessities.
Hi,
I like making the current 0 rate policy permanent as it’s highly deflationary, which allows us to have lower taxes without ‘inflation.’ (see ‘0 is the natural rate of interest’)
Also, right now the income tax structure automatically works to slow down the economy as it approaches full employment, and usually well before that happens. And I don’t like hiking rates for any purpose, as high interest costs drive up prices because the raise the cost of investment and the cost of holding inventory
Also, taxes can be reduced without moving anything anywhere. See ‘the 7 deadly innocent frauds’ on this site, thanks!
If there is going to be some sort of tax, why not have it on leverage?
Ban off balance sheet structures, then have a tax graduated on leverage ratios?
Prudently run banks have decent leverage, highly leveraged banks are not prudent.
Once you get above 25 to 1, start taxing. at 30 to 1 tax a good amount. at 40 to one make it very difficult to operate.
We aren’t really concerned here with raising revenue. We are much more concerned about systemic risks. Essentially everyone agrees that taxes discourage behavior, so lets tax high levrage.
So why do this on asset base when really what we want to do is keep banks prudent? I really don’t care that JPM is huge. I care that Goldman Sachs can threaten to not pay JPM if it doesn’t get paid by AIG, and then the entire system is screwed.
We can avoid JPMs and AIGs by taxing leverage ratios. Everything on the balance sheet.
Not saying it is a perfect plan, only one that targets what we want.
SCOTT: The ELR is its own beast, and I don’t want to take it up here. My question was focused on how best to implement taxes tied to automatic stabilizers. There are lots of reasons I don’t like Obama’s standby tax, but right now I was just focused on the target.
beowulf: No, it would work by draining private sector savings.
Ramanan: As wonderful as the quip is, and it really is wonderful, I poked around the site and the answers did not seem easy to find. If you actually have an answer, do let me know.
zaid: I think you hit on many serious problems with the standby tax. But even assuming they are solved, and I don’t think the can be, is it targeting the right transaction? Is it even targeting a good transaction?
all: Let me stake a claim here. Traditional micro is focused on raising revenues efficiently. It does not believe that taxes are connected to inflation at all. PKs correctly link taxation to inflation, so they would want to maximally reduce the number of transactions with their tax, as that would have most inflation impact (raising revenues efficiently is not a goal).
So, you want to tax something with very elastic demand and a broad base, so you reduce transactions at an economy wide level as much as possible. Maybe just a general sales tax? But that is not very elastic.
How about my federal real estate tax (replacing all other federal taxation and maybe even state taxes as well) on ‘dwellings’ payable quarterly so a change can take effect relatively quickly?
Yes, Warren, that’s what I was going to say. I similarly don’t disagree with the notion of having a broad based tax at as low rate as possible. I just don’t think income/consumption are the optimal things to tax. Tax something you don’t want, like use of resources.
I also don’t see why transactions are necessarily good things for taxing; in fact, the Fed already is required to charge banks for any use they make of Fed payments services, and, as Warren noted, this is just passed through. Not my expertise, though, so can’t say more than that, and may be missing something.
I’d also tax fossil fuels and such and stop subsidizing an absolutely horrid national system of “food” (if you can call it that) production. However, I think any revenue raised with these sorts of “behavior modifying” taxes should result in $ for $ offsets by crediting back (in the aggregate) income/consumption/property tax revenues (whichever is the broad-based method of taxation in the economy) so it’s effect on AD is neutral, while the micro effect of the tax is as desired.
I think there are a lot of other small things that can be done to enhance automatic stabilizers that would all add up and become rather significant. For instance, set the ELR base wage to index at the inflation target (and perhaps add trend productivity growth or some fraction of it to enable the lower-income earners to at least slowly improve real standard of living). Index any unemployment benefits to inflation target, not inflation. Index tax bracket(s) to inflation target, not inflation. Index SS and such to inflation target, not inflation. Index any significant tax deductions like max-size mortgage to inflation target not inflation. And so forth.
Finally, as a more permanent version of Warren’s per capita block grants to states suggestion, I’d have the Fed govt promise to meet any state’s cyclical budget shortfall forever provided the state can demonstrate that the budget would have been balanced if there had been full employment (to avoid moral hazard); the CBO/OMB could rather easily draw up standard criteria states would need to meet.
I think all of those things together (particularly ELR) would have strong automatic stabilizer effects. A better financial regulatory regime along the lines Warren suggests would still be a necessary complement, though.
Warren,
Real estate may be the best form of taxation economically, but the US Constitution makes it damn near impossible for the federal government to tax real estate because as a “direct tax”, it would have to be collected from each state strictly on the basis of its population (however, there’s nothing to stop the federal government from bribing and/or bullying states to use real estate taxes as their own sole form of taxation).
The United States Court of Appeals for the District of Columbia Circuit has stated: “Only three taxes are definitely known to be direct: (1) a capitation [ . . . ], (2) a tax upon real property, and (3) a tax upon personal property.”[7]
In the United States, Article I, Section 9 of the Constitution requires that direct taxes imposed by the national government be apportioned among the states on the basis of population.
http://en.wikipedia.org/wiki/Direct_tax#Specific_U.S._constitutional_law_meaning
Warren: Ah yes, the old property tax. Almost a “head tax” (the most “efficient” tax) but not quite. You’re targeting something very inelastic here — is that by design? If so, why?
You’re giving yourself the option of draining net savings from a pretty broad pool with no impact on economic activity. Is this really the best way to use fiscal policy to control inflation? Why?
Scott: You’re begging the question. Sure, you can use fiscal to produce desired outcomes, and this is very common and widespread position. I am focused, as I’ve said before, on taxation strategy to control inflation — which is a pure PK perspective.
It is sounding to me like this is not something PKs have thought of much, if at all. Potentially an interesting research area for those few academics in the field.
Yes, I don’t have much specific to say about a transactions tax, at least from an expert perspective.
My point is that there are two issues. First, what’s the big revenue source for the govt. I think a broad based tax with a low rate is the way to go there. But while that reduces inflation compared to not having the tax obviously, it’s not necessarily countercyclical enough year in and year out. You need other things to get a much stronger countercyclical force along the lines I’ve suggested above.
Yes, your suggestions enhance the automatic stabilizers that already (kind of) exist.
I still don’t have a good framework to assess whether targeting elastic or inelastic demand is the best way to drain private sector savings and reduce inflation, so I’m going to stick with elastic demand, as transactions are critical to inflation and this is how you get less of them.
Hamilton watch:
http://www.econbrowser.com/archives/2010/01/how_the_federal.html#comments
“I have suggested that the right way to think about these operations is that the Fed acquired the funds for these operations by borrowing them from banks in the form of the huge expansion of interest-bearing reserves. In essence, the Fed is borrowing short through banks’ excess reserves and lending long through the MBS purchases, and profiting from the interest rate spread.”
Well, he’s still got the causality backward. Though he finally has the asset liability linkage right. Contrary to claim, he’s never suggested it before. But he’s learning. Slowly. Very slowly. Maybe.
JKH,
He then goes on to say “However, the difference between what the Fed has been doing in 2009 and true quantitative easing is that under the latter strategy, the Fed would be funding the MBS purchases with zero-interest money, with the intent of the operations indeed being to get that cash into circulation rather than trying to construct a device to persuade banks to hoard it.”…..!?
I dont know if this was posted here before, but I recently came across it at the NY Fed site, it is an article from the NY Fed; Excerpt from the Summary: “Through a series of examples, Keister and McAndrews explain that the buildup of reserves in the banking system is a by-product of the liquidity facilities and other credit programs introduced by the Federal Reserve in response to the crisis. The majority of the newly created reserves necessarily end up being held as excess reserves and, therefore, the data on excess reserves provide no useful insight into the lending decisions and other activities of banks.”
So it looks like some people at the NY Fed are at least in paradigm on this issue of “lending out reserves”.
Although somebody has to tell the boss!
Bernanke: “Ultimately, if the economy normalized, and the Fed took no action, the banks would take those reserves, try to lend them out..”
Resp,
Matt,
Yes, that paper’s been around. It’s very good for the most part.
But if you look closely though, it deals with the “multiplier” in a very coy way. They refer to the “textbook notion” and the “textbook account” of the multiplier, without actually endorsing it. In doing so, they give the wrong explanation (consistent with a concept they don’t actually endorse) for why the multiplier isn’t “working” the way it’s “supposed to”. I.e. they say it’s not working because of interest on reserves, which actually isn’t the right explanation. If there was no interest on reserves, then the fed funds rate would always be zero. But that just changes the risk free rate. The “multiplier” wouldn’t start working just because of that. It’s very tricky what they do in that article. But the more important point is that they get the causality right, and they use the language of reserves as a “by-product” of asset policies, which is what I was saying some time ago in discussions with Scott F., etc.
My guess is that they’re coy about the explanation because they don’t want to upset some of their academic brethren. But you’re right, they should have a meeting with the boss.
And what’s Bernanke going to say?
“Sorry Mr President. You know all that stuff we told you that got you to implement TARP etc? It’s all bogus, the entire academic field has no idea how any of this works and is 100% wrong. The Fed is pointless at best, harmful at worst, and what you need to do is to run a massive deficit by cutting taxes. And then fire me”.
The problem is much larger than a couple of underlings having a heart to heart with their boss.
Did I say it wasn’t? Don’t recall TARP being on the agenda for this particular point.
Actually, I was copied in on a discussion between the authors and a PK friend who was critiquing them on just this point. Their response was essentially that they understood the multiplier was false but for some vague reasons (which they sort of explained and sort of didn’t) they chose not to directly undercut it. Disappointing.
It is disappointing. Some progress has been made in the explanations, but there’s still a lot of bad thinking out there on the multiplier risk idea. Too bad they can’t cut it off at the pass as part of the exit strategy communication.
JKH: LOL — I guess I meant bigger than even that!
Nick Rowe recently had a post wondering if it was reasonable to compare economists with the global warming/climate modeling crowd. I don’t want to get into politics, but the tight integration between policy and the academy is strongly paralleled. And the Grey Lady is obviously and correctly identified as being the most important journal to publish in of all!
One of the authors McAndrews has another interesting paper: on PDCF – (another one in the alphabet soup of lending programs!) http://www.ny.frb.org/research/current_issues/ci15-4.pdf – goes into some good technicalities.
good discussion, thanks.
i’ve been offered tea party support to run for the dem nomination for US senate in ct. where dodd is stepping down.
might be a good forum to get the word out.
Based on the success of Scott Brown up here in Mass. (who, of course, is a typical Republican deficit terrorist, but at least he’s against more tax hikes…), I’d say you could probably make a run of it.
Warren,
The morning after Dodd stated that he would not run, CNBC on early ‘sqwuak box’ held an uninterupted interview with Blumenthal via telephone that must have went 10 minutes. Here’s a link.
Then he got to go on Kudlow’s show later on video here is the link.
To be fair, if you are considering a run for the same office, CNBC should provide you equal air time on their cable channel.
Resp,
I saw this today from The Guardian:
Unions call for guaranteed jobs for long term unemployed
A coalition of labour market experts including the TUC, the Work Foundation and James Purnell MP – the former work and pensions secretary – will today urge the government to guarantee anyone claiming Jobs Seekers Allowance (JSA) for 12 months or longer be given a job.
The coalition argues that if the government fails to implement the so-called “universal jobs guarantee”, unemployment will continue to rise for years after the recession ends. With official figures next week expected to show that the UK economy emerged from recession in the final three months of 2009 after six consecutive quarters of contraction, the coalition is warning of a repeat of the 1990s, when it took six years from the end of the recession for long-term unemployment to return to pre-recession levels. Official figures show that long-term unemployment peaked in spring 1993, with 1,243,000 people out of work for at least 12 months.
It was reported last week that the government is considering a scheme similar to the one suggested by the coalition, but Whitehall sources deny any decision has been made. A Labour source said: “Ministers are looking at exactly this kind of approach. Their first priority is youth employment but they are considering help for the very long term unemployed.” In a letter to secretary of state for work and pensions Yvette Cooper, the coalition, says that unemployment remains a huge concern. “There must not be a repeat of the last two recessions, when millions of people were stuck in semi-permanent unemployment long after the economy had recovered,” said TUC general secretary Brendan Barber.
More at:
http://www.guardian.co.uk/business/2010/jan/18/unemployment-unions-recession-job-losses