This week in macro was brought to us by the letter F. Fiscal First, there was the celebration over the impact of Big Fiscal policy on the U.S. economy. Hallelujah! It wasn’t all that long ago that leading economists were arguing that the Trump tax cuts had so wrecked the nation’s finances, that it would be next to impossible for Congress to fire off enough fiscal support to thwart an economic downturn. That was obviously wrong.
‘Lower taxes and higher spending are boosting private sector disposable income, but this attribution suggests that the beneficiaries will not use much if any of the extra cash to pay for goods, services, or real assets.’ Why is that? Why would additional income not be used for either consumption or investment? On what grounds does this suggestion rest? Seems like non sensical speculation
RE: Bill Mitchell's quote: "Eventually, if the rate hikes continue, there will be a rise in unemployment as the spending of the wealthy will reach saturation point."
Is there really any good evidence that rising interest rates have a non-negligible influence on the PCE of the wealthy, the class that is getting this income? I.e. that their PCE is ever NOT saturated? Those economists who argue that higher interest rates drive more PCE probably can't imagine what it's like to live without a real budget constraint. The wealthy really are different from you and me....
It is true that there are some poor coupon clippers out there who will spend more, but I suspect that population is probably pretty small. On the one hand, they see their interest income going up, but their asset values (bonds) going down.
Will wealthy people buy more assets, like yachts, Rolex's or collectible art? Not if they have one hand on an interest rate chart and another hand on the phone with their financial advisor looking at their balance sheet. But if they want to take that vacation to Tahiti, they WILL buy the tickets if they have the time and desire. Period. Paying is the easy part. If they have any constraint, it is a desire constraint or time constraint, not a budget constraint. And since their desires are always filled to the max with the leisure time they have, their propensity to spend with increases in interest income is always "saturated."
You apparently think there's a non-trivial relationship between interest rates and PCE. since you keep bringing this up. Can you elaborate further on why this might be the case? Otherwise, I wish MMT economists would just stop this nonsense that "isn't it great we have rich people to help us with counter-cyclical spending"?
Thank you Dr Kelton for an excellent article .Very helpful to an average Super Senior Non-Economist, fairly new to MMT!
On another MMT subject--MMT's No#1 Economic Policy proposal for our Country according to Dr. Wray in his recent book is "A Government Guaranteed Job Program". MMT has moved impressively
into the national conversation and become a major factor in the general public's understanding of the 'Deficit Myth ". Why do we not hear more in MMT writings and discussions about the GGJP to educate the public and get--- MMT'S NO#1 POLICY -front and center in the national discussion as well ??? Just from a common sense standpoint to me, the GGJP would be ,along with National Health,
Program the most stabilizing, equalizing thing we could do ! SO PLEASE bring MMT'S NO#1 FRONT AND CENTER-Thank You
I believe that all the interest rate manipulations by the Fed transfers wealth from labor and small businesses to the class of Oligarchs we've created because of our belief in 'trickle down.' This transfer of wealth has a name, the 'allocative effect.' I really don't understand why the Fed still embraces what was called the 'Treasury View' which was discredited during the Great Depression. But here we are.
In Australia things are a lot worse. We transitioned in May 2022 from about nine lost years with awful climate change denying conservative federal governments that in the end however undertook a reasonable fiscal stimulus plan when the pandemic struck, apart from most funds going to big business and the wealthy but that nevertheless got us through the worst.
The new nominally progressive Labor federal government that won office in May 2022 started off well speeding up the transition to renewable power, funding improvements to the national electricity grid, removing some onerous restrictions on trade unions, protecting the natural environment a bit better and a few other minor things BUT in the past year or so of high global inflation the federal Departments of Treasury and Finance and the Reserve Bank of Australia have come down like a ton of bricks on this complicit and neoliberal Labor federal government with a hard line neoclassical/monetarist path of tight fiscal austerity and record interest rates. State governments that have most responsibility for healthcare have had funding support from the federal government reduced increasing their deficits and federal programs desperate for funding such as aged care, disabled care, public housing, unemployment benefits and many more have received no additional funds or funding cuts.
The current Australian federal Labor government is now aiming for a surplus of about A$19 billion and the cash rate is 4.1%. These idiots will plunge us into a recession eventually and so many of the less well off will suffer needlessly.
There is no point voting back the conservative LNP as they are also back to being full on Milton Friedmanites as well.
The Greens although with fiscally looser policies than the duopoly still fail to make decisive political gains primarily due to constant vilification by a Murdoch and similar media mogul dominated mainstream mass media that effectively controls the world view of far too many.
At least I see the US is not as fiscally constipated as Australia but beware a return to destructive austerity pushed by the forces of greed in Wall Street and elsewhere.
More than two years to get everyone back to work from causes that were *not* economic in nature speaks of failure of fiscal expenditure this time, not success. That the causes were not economic at root suggests that what brought people gradually back to work, rather than immediately, was the gradual withdrawal of this anti-stimulative (simply paying the states that wanted to lock down, lock out and lock up dissidents to continue this highly regressive policy) "stimulus."
‘Lower taxes and higher spending are boosting private sector disposable income, but this attribution suggests that the beneficiaries will not use much if any of the extra cash to pay for goods, services, or real assets.’ Why is that? Why would additional income not be used for either consumption or investment? On what grounds does this suggestion rest? Seems like non sensical speculation
RE: Bill Mitchell's quote: "Eventually, if the rate hikes continue, there will be a rise in unemployment as the spending of the wealthy will reach saturation point."
Is there really any good evidence that rising interest rates have a non-negligible influence on the PCE of the wealthy, the class that is getting this income? I.e. that their PCE is ever NOT saturated? Those economists who argue that higher interest rates drive more PCE probably can't imagine what it's like to live without a real budget constraint. The wealthy really are different from you and me....
It is true that there are some poor coupon clippers out there who will spend more, but I suspect that population is probably pretty small. On the one hand, they see their interest income going up, but their asset values (bonds) going down.
Will wealthy people buy more assets, like yachts, Rolex's or collectible art? Not if they have one hand on an interest rate chart and another hand on the phone with their financial advisor looking at their balance sheet. But if they want to take that vacation to Tahiti, they WILL buy the tickets if they have the time and desire. Period. Paying is the easy part. If they have any constraint, it is a desire constraint or time constraint, not a budget constraint. And since their desires are always filled to the max with the leisure time they have, their propensity to spend with increases in interest income is always "saturated."
You apparently think there's a non-trivial relationship between interest rates and PCE. since you keep bringing this up. Can you elaborate further on why this might be the case? Otherwise, I wish MMT economists would just stop this nonsense that "isn't it great we have rich people to help us with counter-cyclical spending"?
Thank you Dr Kelton for an excellent article .Very helpful to an average Super Senior Non-Economist, fairly new to MMT!
On another MMT subject--MMT's No#1 Economic Policy proposal for our Country according to Dr. Wray in his recent book is "A Government Guaranteed Job Program". MMT has moved impressively
into the national conversation and become a major factor in the general public's understanding of the 'Deficit Myth ". Why do we not hear more in MMT writings and discussions about the GGJP to educate the public and get--- MMT'S NO#1 POLICY -front and center in the national discussion as well ??? Just from a common sense standpoint to me, the GGJP would be ,along with National Health,
Program the most stabilizing, equalizing thing we could do ! SO PLEASE bring MMT'S NO#1 FRONT AND CENTER-Thank You
I believe that all the interest rate manipulations by the Fed transfers wealth from labor and small businesses to the class of Oligarchs we've created because of our belief in 'trickle down.' This transfer of wealth has a name, the 'allocative effect.' I really don't understand why the Fed still embraces what was called the 'Treasury View' which was discredited during the Great Depression. But here we are.
In Australia things are a lot worse. We transitioned in May 2022 from about nine lost years with awful climate change denying conservative federal governments that in the end however undertook a reasonable fiscal stimulus plan when the pandemic struck, apart from most funds going to big business and the wealthy but that nevertheless got us through the worst.
The new nominally progressive Labor federal government that won office in May 2022 started off well speeding up the transition to renewable power, funding improvements to the national electricity grid, removing some onerous restrictions on trade unions, protecting the natural environment a bit better and a few other minor things BUT in the past year or so of high global inflation the federal Departments of Treasury and Finance and the Reserve Bank of Australia have come down like a ton of bricks on this complicit and neoliberal Labor federal government with a hard line neoclassical/monetarist path of tight fiscal austerity and record interest rates. State governments that have most responsibility for healthcare have had funding support from the federal government reduced increasing their deficits and federal programs desperate for funding such as aged care, disabled care, public housing, unemployment benefits and many more have received no additional funds or funding cuts.
The current Australian federal Labor government is now aiming for a surplus of about A$19 billion and the cash rate is 4.1%. These idiots will plunge us into a recession eventually and so many of the less well off will suffer needlessly.
There is no point voting back the conservative LNP as they are also back to being full on Milton Friedmanites as well.
The Greens although with fiscally looser policies than the duopoly still fail to make decisive political gains primarily due to constant vilification by a Murdoch and similar media mogul dominated mainstream mass media that effectively controls the world view of far too many.
At least I see the US is not as fiscally constipated as Australia but beware a return to destructive austerity pushed by the forces of greed in Wall Street and elsewhere.
https://www.theguardian.com/business/2023/jun/30/australia-budget-surplus-swells-to-19bn-due-to-surging-tax-revenue
More than two years to get everyone back to work from causes that were *not* economic in nature speaks of failure of fiscal expenditure this time, not success. That the causes were not economic at root suggests that what brought people gradually back to work, rather than immediately, was the gradual withdrawal of this anti-stimulative (simply paying the states that wanted to lock down, lock out and lock up dissidents to continue this highly regressive policy) "stimulus."
"If and when that happens, the automatic stabilizers will push the fiscal deficit higher. "
We need to make more of this simple fact.
The closer the increase in the deficit matches the increase in spending, the more *deflationary* it is.
If a $30bn budget spend increases the deficit by $30bn, then we have a deflation problem.
If a $30bn budget spend causes no change in the deficit, then we're stretching the supply side to the full and need to be careful.
It's the non-'deficit spending' bit of increased spending that is potentially inflationary. Not the 'deficit spending' bit.
A must read especially when it comes to big fiscal.