Paul Krugman’s latest piece in the NY Times is quite good.  Unfortunately, it is a bit too political for my taste.  But the general message is right.  Dr. Krugman says it’s time to recognize that the markets don’t think we’re Greece.  They don’t think we’re bankrupt.  They’re worried about growth.  And that means the government can afford to take further action.  I fully agree.  But where we part ways is in what action we can/should take.  Dr. Krugman says:

“The point is that it’s now time — long past time — to get serious about the real crisis the economy faces. The Fed needs to stop making excuses, while the president needs to come up with real job-creation proposals. And if Republicans block those proposals, he needs to make a Harry Truman-style campaign against the do-nothing G.O.P.

This might or might not work. But we already know what isn’t working: the economic policy of the past two years — and the millions of Americans who should have jobs, but don’t.”

We have to be honest with ourselves at this point.  There is simply no way the Republicans are going to pass a spending bill on jobs.  Not a chance in hell.  But a tax cut could be very appealing.  In this regard I agree 100% with John Carney of CNBC who says that Dr. Krugman should push for a full payroll tax holiday.  John says:

“Republicans are willing to accept deficits caused by tax cuts. The barrier is Democrats, who think that tax cuts are unfair because they help the wealthy disproportionately.

Someone like Krugman would be an ideal candidate to explain that we can argue about fairness later. Now is the time for stimulative action. Time for a tax cut.

So, come on, Paul. How about it?”

I think that’s spot on.  And Dr. Krugman is the kind of economist who would make ears perk up in Washington.  The only problem is whether Dr. Krugman is willing to walk across the aisle in these trying times and shake some hands to get some more fiscal policy?

In a sort of sick way, we are looking more and more European every day because of our failure to unite.   To me, this is the sort of compromise we can all love.  The Democrats get more fiscal stimulus and the Republicans get their beloved tax cuts. I think it would be a bold and patriotic move for someone like Dr. Krugman (or even Tim Geithner or the President himself) to come out and push aggressively for more aid to the American people.  The only question is whether we are willing to unite as Americans to make it happen?

How about it Dr. Krugman?   How about it Mr. Geithner?  How about it Mr. Obama?   Extend an olive branch.  And if it gets thrown back in your face you’ll always be able to say you tried to help Main Street when they needed you most….

PS – If you push for a payroll tax holiday please make sure Dr. Bernanke doesn’t bulldoze into the picture thinking he needs to help “finance” the tax cut with QE3.  He sufficiently squashed the last tax cut with QE2.


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. If deficits don’t matter (we’re the reserve currency), let’s just end the income tax. That would be an instant stimulus.

  2. Cullen, a brilliant solution.

    If Krugman won’t do it, send the idea to Bill Clinton.

  3. With the memories of painful 2008-2009 time fresh, I am getting the dejavu sensation all over again. Something needs to be done quickly or else this second wave seem to have potential to be more destructive than the first one we had.

  4. the rich benefit disproportionately from tax cuts? don’t the rich pay more in taxes too?

    payroll tax holiday? whats that going to solve?

    how about some long term solutions.

    like cutting regulations, reforming the tax code, and ending some wars. why does the united states need to spend more on defense than the entire world combined?

  5. TPC: “Dr. Krugman says it’s time to recognize that the markets don’t think we’re Greece. They don’t think we’re bankrupt. They’re worried about growth.”

    Why should governments care about foolish markets full of silly sales poeple? Armed with FED money they produce knowingly one bubble after another and are crying for government support like litle babies, if the bubble bursts. Governments should stop liquidity flooding and teach the market participants to behave like adult business poeple.

    As TPC says from time to time: there is no capitalism without loosers.

    I want to add that the current (Fed and government) policy helps the foolish market participants to stay in business. As a consequence the markets get more and more foolish and are becoming a terrific danger for the society.

    P.S.: No, I am not upset, because I am loosing money. I am net strongly short since 27/28 of July, because these bubbles burst in a to some extent predictive way.

  6. Cullen, I agree with your criticisms of Krugman, yet a cut in the payroll tax would hurt Social Security for *political* reasons. If Congress were full of people who’d studied MMT, you would be very right, of course. The problem is that this needed cut would be used as a political tool by the many deficit hawks in Congress, many of whom are fanatic True Believers. They want to cut Social Security at all costs and would focus on the fact that the Trust Fund would have to be repaid from the general budget for the lost revenues it covered — and they would use this fact to demand that SS itself be cut. And they would probably get their way. FDR was afraid of this kind of thing, so he deliberately separated SS from the general budget.

    If you advocate a payroll tax cut, you also need to present a realistic strategy for protecting SS from furious political attack. Do you have such a strategy? Am I missing something in your argument?

  7. Dear Cullen and others,

    I am not a trained economist and especially new to MMT, which however touches me as very compelling.

    Therefore a question which may sound foolish to you: Is my understanding correct that MMT implies that in a fiat currency system goverment debt and central bank reserves are essentially interchangeable kinds of government liabilities?

    Hence government debt could be seen as part of a wider meassure of M (Cash+reserves+tresury debt) rather than the other way arround (to see the liability side of FED as a form of debt)?

    Piling up of government debt therefore in my understanding should imply for the future increasing danger of inflation (more money arround to pay for assets), but not the risk of bancruptcy.

    Am I on the right track?

    Thanks for any expert advice!

  8. I’m with you on all these points, James. But Cullen is right in that these will be emergency measures to generate growth and avoid a deflationary spiral.

  9. Cullen,
    I have to disagree with you on one point. The Republicationsdon’t seem to be prepared to accept deficits generated byntax cuts, despite what the rhetoric might hace you believe. Fully half of the original stimulus package was in the form of tax cuts and the GOP has been complaining about that ever since it passed. We can argue about whether it was too little (yes, in my view) or too big or merely misdirected (also true), but the fact that much of it consisted of tax cuts seems to have escaped the notice of most GOP members of Congress.

    That sai, the only concern I would have with a payroll tax holiday is that it will not likely produce the hiring boom needed. It is a necessary but not sufficient step. We should also create an infrastructure bank, fund it and begin repairing our crumbling infrastructure. That will both create jobs and accomplish much need improvements which in turn would likely yield furthr private sector investment?

  10. I think this sounds like a desperate, hollow strategy. In addition, it plays into Starve the beast, “a fiscal-political strategy of some American conservatives[1][2] to cut taxes, depriving the government of revenue that enables spending on social programs such as Social Security, Medicare, and Medicaid, in an effort to create a fiscal budget crisis that would then force the federal government to reduce spending” so the corporations and lobbyists can deregulate, privatize, and globalize (aka apply “market forces”) to entitlement programs. Next they will be after our 401k and IRA money. There is no limit to the greed of unbridled capitalism..

    I realize the US is not revenue constringed. But more deficit spending, higher national debt, will feed the fear mongering scaring the voters into voting against their own best interests. Perhaps we need to ask the question if neo-libertinism has not ruined the middle class and hence our domestic economy. Dr. Robert Reich seems to think so.

  11. Agreed – I think the payroll tax cut is bringing a knife to a gunfight at this point. The people who do have jobs would likely just save it. Would love to see it accompanied by infrastructure spending (including nuclear power plants!) that would make us more wealthy in the long run.

  12. Right on Doc!

    There are four players:
    Consumers, Producers, the filthy rich, govt.
    Consumers are in debt.
    Producers and the Rich got rich driving the consumers into debt.
    The Govt did very little. (It is always responds with too little too late)
    The govt is and should always be the arbiter between consumers and producers and the poor and the rich. What is happening now is a idrect result of corporations trying to escape inflation back in the 70s-80s. They escaped and the consumer was left holding the bag. We need another payroll tax rebate on each check and the rich should fund it.

  13. Ted,

    I had an argument with someone who shares your view just last night and he kept avoiding the same question I am going to, respectfully, ask you.

    What in the last 30+ years of this country’s history makes you think the money will just be saved?! We have, at every opportunity, shown to be a country and culture of spending.

    That being said we could just go round & round and disagree, which is fine. I will say, however, that the debt burdened private sector can only get to the point of chosing between saving & spending additional income AFTER they’ve paid down their debts. There is no argument I have heard against the idea that first and foremost added income will be used to pay off debt- this is EXACTLY what needs to happen in a balance sheet recession!


    Best regards,


  14. this all well and good….spend abunch n tax cut, stimulate the economy….exactly what we need(right now), i agree.

    and then when everybodys got a job and things are whirling n revenues coming in, slowly riegn it in, just leaving a good steady economy.

    never happening……

    as soon as we have solved our econ problems it’ll be “wow, we’ve got all this money coming in(especially with projected revenues!), everything is FINE now—lets do something for our people, lets expand entitlements to god knows who, mandate everyone owns a house”,….WHATEVER.

    and its the same old thing all over again.

    NOBODY will ever take the beer keg away at midnight like they need to….EVER

    human nature—–the ingredient left out of this cake…. the same thing karl marx left out.

  15. My only concern with a full payroll tax holiday is that we will then be debating what cuts elsewhere we need to make to “pay for it”. Until someone forcefully and convincingly dispels any notion that we cant “afford” SS without a payroll tax, we will be stuck in this never ending game of cutting spending one place to pay for tax cuts in another place…….. pathetic!

  16. Your right Cullen, but it makes me mad b/c the multipliers are higher on gov spending than on tax cuts in periods of deleveraging (Koo has mentioned this a couple of times and cited studies that focus on post credit bubble pops). It’s so freaking simple, yet ideology is all that matters in this country. The deficit will rise with austerity in times of deleveraging (do people really need to see more evidence in order to believe this??) yet we embrace it. Data shows tax cuts won’t stimulate aggregate demand like spending will as long as the private sector is deleveraging yet they insist on tax cuts. Our country deserves what we get: we elect fanatic tea partiers and intellectually incapable Republicans, and then complain when our economy goes to sh#@.

  17. If the deficit was equal to the amount of credit (horizontal money) paid off each month and IF the banks were prohibited from any further credit creation, then no one could complain about “money printing” because the money supply (base money + credit) would not change.

    So how much credit is paid off monthly these days, I wonder? Anyone know?

  18. Our country deserves what we get: we elect fanatic tea partiers and intellectually incapable Republicans, and then complain when our economy goes to sh#@. Kevin

    They are obviously trying to “starve the Beast”. Many do not like the spending on useless wars, “Big Sister”, government schools that don’t teach, etc.

    The solution then is to keep the deficit but lose the unpopular spending. How? Just send out equal “debt bailout checks” to every US citizen, including savers. Who could complain about that?


    Somebody wake up the Republicans and tell them that a recovery will not be built upon the backs of the poor this time. Fuggitaboutit

  20. I agree that Dr. Krugman has undermined his own credibility with political vitriol.

    I also agree that a payroll tax cut is the correct prescription but it needs to be complete and permanent. Temporary tax cuts under Presidents Bush and Obama have had little effect. In order to get a change in behavior, the cuts have to be lasting.

    Kevin brings up a very good point regarding Dr. Koo’s concerns with regard to effectiveness of tax cuts versus spending during a balance sheet recession. The beauty of the cut in payroll taxes is the behavior change needed to obtain benefits from he cuts. For a business to increase its benefit, it would have to hire more employees.

    In the long term, we would need to pay for the cuts. Tax reform, closing loopholes and reducing corporate welfare would all be needed.

  21. The more I think about it, the more it seems to me that ending the income tax is indeed a very good idea. Some MMTers like Mosler have been saying this all along. We should not be discouraging labor! We should instead have property taxes and taxes on rent (financial rent, that is!) and the payroll tax that automatically adjusts to business cycle – when unemployment goes up it goes down and when inflation goes up it goes up.
    Some MMTers are on top of that, by the way:
    And yes, deficits per se don’t matter. It is the size of the deficits relative to the non-govt sectors desire to save currency that does.

  22. I have a general MMT question. MMT is how the monetary system really functions. As such the deficit and the amount of treasury debt is really not a catastrophic matter. So why hasn’t anyone prominent said this? Bernake or Geithner must know about this right? Why haven’t they stood up and said “the outstanding treasury debt is merely a function of the amount of money spent in the history of the U.S. The U.S. can print any amount it needs to pay so do not worry about the deficit or debt ceiling.” Why go through the whole dog and pony show about the debt ceiling in the first place?

    Also I’ve seen this question before but haven’t found the answer: For QE the Fed buys treasuries through open market operations. As such it is not just reserve banks they are buying the bonds from, correct? If this is the case, what is stopping these entities from taking their cash that used to be treasuries and bidding up commodities?

    Thank you for taking this into consideration.

  23. I just heard Will Cain on CNN talk about the balance sheet recession we are in. That is the first time I have heard anyone use that term on CNN (or anywhere else in the mainstream media). Is he a known proponent of MMT. If not, he sounds like a good prospect for educating to reach a bigger audience for MMT.

    Brian — I am not an expert on MMT but the answer to your first set of questions is one of two things: Ignorance of the reality of our monetary system, or a refusal to acknowledge this reality because it would change the debate so radically that those who actually control our political/economic system (mostly the bankers) would lose some of that power. What you have seen over the past 20 years is a massive transfer of wealth from the middle class to the wealthy. As to your second set of questions, while I’m not sure if that mechanism is right, I do believe that is the effect we have seen. Traders have moved to hard assets to avoid the “debasement” of the dollar (and other currencies).

  24. Well you need “banks” too. Banks are like “government”, an other institution (private), they are used by “the wealthy” to increase debt.

    Instead you could increase net financial assets using “government” without debt, so you can use both institutions for the same purpose (increase money supply and production) but with two very different results.

  25. Is the term “balance sheet recession” unique to MMT? I think I read here that it’s first used by Richard Koo? I’m curious the sort of derivation of this coinage . . . .does it means something like “paper only” recession? Recession that is mostly relative to accounting? It doesn’t therefore mean “not a real recession” does it? I’d be happy if someone could provide a quick gloss on this term “balance sheet recession” and whether it’s always MMT code.

  26. “The U.S. can print any amount it needs to pay so do not worry about the deficit or debt ceiling.”

    This would be a gross misrepresentation of MMT. Deficits matter a great deal. Think of the economy like a giant store. Right now at this store the shelves are stocked but there aren’t enough customers because they’d prefer to save. So people are being laid off throughout the store, in the stock room, at the cash register, even the janitors. Because there is plenty of excess inventory collecting dust on the shelves (excess capacity in the real world), the government can take fiscal steps to get people to shop in the form of tax cuts, or do the shopping themselves, without disrupting things too much. But inflation can and will result if the government attempts to print and stimulate even as activity at the economic store picks up and the shelves empty out. The other side of the inflation coin could happen if a hurricane (or a war in the case of a Weimar Republic) ravaged the store and destroyed the inventory. Obviously printing in a case like this would do no good because there is no capacity to absorb it. Hyperinflationists can’t understand this. It goes against every fiber of their being.

  27. Guys, no one said this was some great fix. It’s more percocet for our cancer patient. I know that. The point is to just stabilize the patient for a few more years….

  28. and then when everybodys got a job and things are whirling n revenues coming in, slowly riegn it in, just leaving a good steady economy.

    never happening…… boatman

    Perhaps because it can’t happen without causing a recession. Ever think of that? Our debt-money system requires ever increasing debt just to pay the interest on existing debt.

    If we wish a nice steady economy then we need non-debt based money.

  29. Dan — I don’t know if it is unique to MMT, but it doesn’t mean “paper only” or “not real”. As I understand it, it refers to the fact that the balance sheets of the private sector have been drastically reduced by the bursting of the housing bubble, and it is very real. I believe the amount of reduction in total residential real estate values was approximately $2.3 trillion As a result, the private sector has reduced spending in order to pay off debt (deleverage) and save more in order to repair their balance sheets. This reduction in aggregate demand is the cause of the recession.

  30. When housing or any asset is driven up by financial means, it is empty calories. It seems like the economy is growing, but it is mostly banker ledger entries.

    By taxing labor and not taxing the rent value of land, money vectors away from productive enterprises and toward financial interests.

    Here is an example: An investor sees some commercial property for sale and figures he can buy it and rent it out. If he can rent it for less than the financing, then he will buy the property. In this way, if the property isn’t taxed, the value of the property becomes “financialized” and converted to usury payments. This is a revenue stream loss to the government, and causes empty calorie non-productive growth.

    The same thing happens with homeowners, or even stock holders in a bubble. They refinance their home, taking out fake equity, and sending more and more debt servicing to the financial types. A self reinforcing loop happens, with more credit money to loan out. Again, the government by not taxing this has effectively shifted tax income to the bankers in the form of their increased usury payments.

    When the bubble collapses you have a BSR, and also debt deflation. The debt servicing remains, and is a bigger part of the economy than before. People pay debt down rather than pay for the real goods and services the economy needs to provide jobs.

    By taxing the rent value of land, you can offset income taxes. It makes no sense to tax income, or the real economy, and then let the financial side have a free ride. Giving tax breaks for land and simultaneously encouraging empty calorie debt formation is insane. An economy should only grow when it is real goods and services.

    We should tax the free lunch, and simultaneously allow income taxes to drop. In this way, the income stream to the Government is the same, but the productive side of the economy is no longer burdened with high income taxes. By taxing the free lunch, rent seeking in the banking class is short circuited, and they are denied their ever expanding corrosive influence.

  31. I considered Banks as producers(of wealth/services) Investment Banks produce more wealth, but IMO is worth less overall to the system. If you believe Minsky then too much money in markets are destablizing. At some point you will need to bring back the 90% tax bracket. (fair or not)

  32. Cullen — Did you mix up savings account and checking accounts, or am I mixed up. I would call cash a checking account and UST’s a savings account. :)

  33. Due to my shorthand and brevity please do not interpret ‘produce wealth’ as production of ‘real’ wealth. I’m just labelling their service. Please understand that in a system that already has low interest rates there is less need for more ‘investment’

  34. Thanks for the replies. So Pub, you are saying deficits only matter in the case of causing inflation by spending more than the economy can handle. They do not matter in the sense of: “we have a huge deficit so we have to borrow more and will eventually default!” With this line of thinking in mind, it was not prudent for the government to cut spending the way it did with the debt ceiling deal, right?

  35. Since I am in an inquisitive mood today I have a few more sets of questions. Please bear with me. I’ve heard various things about the way to help end the recession is by giving huge tax breaks, say even a year long tax holiday where no one pays federal taxes for a year. This will in turn help repair private balance sheets by paying off debt and help the banks heal their balance sheets as well. This sounds good in theory, but I have a few questions.

    1. Wasn’t the recession caused by an unsustainable expansion of credit? What good would it do to give everyone money to pay off their debts? Instead of having too much debt in the system we would now have too much money, causing inflation. I feel like there are no shortcuts around the de-leveraging process. The only thing that will heal it is time.

    2. I hear how there is excess capacity of the U.S. economy that can be utilized by giving people money to buy goods. But isn’t much of this excess capacity unproductive? The major expansion in the economy the past 10 years was due to housing and finance. We now have excess levels of that which must be worked off. The only way to do this is with time. If we give people enough money where everyone is buying the excess housing capacity, that seems like another bubble in the making.

  36. Brian, when people pay off debt the money gets destroyed, so it is not inflationary. The inflationary effect occurred when the money was created – which was when the bank gave you the loan (out of thin air!). When you pay your loan to the bank, the bank cancels an asset and you cancel a liability. By giving people money to pay off debt, you’d allow them to spend more money than otherwise. In an economy starved of demand this is what we need.

    But isn’t much of this excess capacity unproductive?
    No. The unemployment is not confined to the housing sector. It is across the board. And we have lots of stuff to do for which we could use even construction workers.

  37. I feel like there are no shortcuts around the de-leveraging process. The only thing that will heal it is time. Brian

    Only because people need time to pay off their debt. But in this case, “money is time” so the process could easily be hastened.

  38. Won’t the excess housing capacity still be a drag on the economy though? With that much overhead supply the downward pressure on housing prices should continue for a while. Even if more people are able to pay their mortgages and debt due to this huge tax break, if the value of their house is declining relative to their mortgage they will have less propensity to spend.

  39. Chris,
    I actually don’t think we’re in disagreement here. I agree with you that the private sector had been spending for the previous 30 years or so – I remember reading dozens of articles in the mid-2000s bemoaning our unsustainable negative savings rates. The difference is that once the crisis hit in 2008, the private sector switched gears and started saving and/or paying off debt, which has exacerbated the downturn. I think Cullen and the gang would agree with me on this point. As evidence, I’d point to the sectoral balance charts that are shown so often on this website:

    Couldn’t agree more that those in debt will likely pay off debt before saving, which is a great thing to see in a balance sheet recession. Not arguing that this type of tax cut wouldn’t help, but that it wouldn’t help the unemployed enough and wastes a good opportunity to make investments in our country at historically low interest rates.

    Hope that helps. Appreciate the civil discussion.

  40. Ted,

    Allow me to chime in. I do largely agree with you. This isn’t a fix all. But it helps. If we can get more money into people’s pockets it will help them pay down their debt and hopefully get back to spending. This should marginally increase aggregate demand and help fuel the labor recovery. But we’re facing massive problems here and a $300B tax cut won’t fix it. But the last thing we should do is allow the pvt sector to just crater….

  41. Jefferson maintained the view that some vagueness was needed to accommodate an unknown future. Witness the effect of the cotton gin invention on slavery,and the resulting prosperity of southern planters, and the railroads displacing canals. As he might have said, “who knew”?

  42. That is why Keynes was not followed; in good economies, do not lower taxes, grow a reserve to spend as stimulus in bad times. Gov’t will never be allowed to keep taxes up in good times. (Of course when he said this we were all still on the Gold standard).

  43. “I feel like there are no shortcuts around the de-leveraging process.”

    Nationalize the banks, examine their balance sheets, and take a big eraser to them. Mark the asset down to the market value. This is a forced deleverage…the banker simply does not get future unwarranted profits. Boo Hoo.

    When you spit out the banks and re-privatize them, make them 100% reserve. (I couldn’t resist. Everybody knows that is my stance.)

    The other way to force delveraging is to deficit spend directly into industry and bypass the banks. The vertical government money enters the economy and eventually vectors into the credit banking (horizontal) system. That vertical money then is forced off the books as the horizontal bank ledger drops toward zero.

    Taxing the rent value of land will keep people from refinancing and starting another property bubble. Plus, not taxing labor would immediately drop the cost of employing somebody by 30%. All of a sudden, labor is much cheaper to employ, and the economy is off to the races.

  44. OK, but I think is misleading, because banks ‘produce’ money (or credit-money) at the expense of leverage of the population. Which is a very special asset class in a capitalistic economy because of its qualities, for simplification is fine but most people should know that ‘banks’ are an other different agent other than producers, consumers, governments and capitalists.

  45. Wow, what a novel concept!

    Don’t tax labor! Tax wealth.

    That’s an idea that will take a generation to take hold. It’s like I never even considered it a possibility.

    Anything that is taxed is at least somewhat discouraged; clearly, we do not need to discourage labor (human productivity) in this country.

    Keep it up guys, we may yet save the world.

  46. Brian — Yes, exactly. The housing overhead will take some time to work off. However, as more people go back to work, they will be able to return to the housing market. Hopefully, housing values have begun to level off and the downside is more limited.

  47. Given the current and future environment of low growth this may be a very decent solution. But you would have to offset the lack of credit by higher spending (something than a lot of people maybe would not accept) or by negative rates beyond X amount of money so the actual money stock is ‘circulated’ and invested into the economy (rising the importance of the ‘medium of exchange’ function of money).

  48. Nice to see him taking the issue head-on. He has a good point. The R’s don’t want to do anything that could help. But in terms of the fiscal side, this really does look like that last ditch effort. Would it really hurt to make a big push for this, have some Dem support, initiate a bill and let the R’s kill it. Fine. At leaset the Dems tried to do something…..Right? PK is dead right that the R’s have already killed a payroll tax cut, but where are the D’s strong negotiators? Why be so weak spined and defeatist about it (not that PK is, but the D’s certainly have been)? You’ll miss every single shot you don’t take…..

  49. Whenever somebody says a critique is “too political,” they are essentially saying we can’t have any real accountability. If no one ever has to be accountable for their actions. How can government be effective of no one is accountable?

  50. So two Reps come out against it and the Dems roll over like dogs. This is what I’m talking about. How many times have the R’s initiated a bill that they knew Obama would veto? This is about learning how to negotiate and getting something. The R’s just steamrolled over the D’s with the debt ceiling debate because the D’s demanded nothing (even though they had all the cards). I don’t get it….The D’s need to learn how to make a stink about these issues. Ask the American people if they want lower taxes. And then put the onus on the R’s to reject it and explain to Americans why they don’t get lower taxes but the Bush tax cuts remain in place? Play some hardball. Get tough for heaven’s sake.

  51. Wow, Cullen! Congrats on the nod from PK! I agree with him and I agree with you. Spineless losers the Dems could extract huge political win by showing theat the Repugs couldn’t care less about the middle class and the small guy…. if they weren’t the spineless losers they are, together with the Loser in Chief.

  52. Leverage, I agreed, there would have to be plenty of direct vertical spending in a 100% reserve world. I would prefer to direct spend into our individual states by head count. This will reaffirm Federalism and help stop the march toward neo-feudalism. The Federal Government should be small and constrained to its core duties.

    The borrow short to go long problem could be fixed with some sort of mutual fund type arangement where the “savers” agree to put their money aside for long term.

    Eventually humanity will come to realize that money has its basis in the law, and that fiscal and monetary policy are flip sides of the same coin.

    We could drain the money supply by taxation or not vertical spending as much. I don’t think negative rates would be required. That is more of a Silvio Gissel idea, and his ideas are more relevant to a (unlawful) non 100% reserve world.

    Taxing wealth is a free lunch, because much of that wealth goes into hiding and demands to be served. Also, modern people have lost sight of the idea of unearned wealth. Rentiers and other rent seekers were taxed at labor rates or higher in the past, as it was understood that their income was not real “goods and services.” The progressive era taxed wealth at 90%.

  53. Yeah, sure, tank the Social Security system. Great idea. Not.

    It is so sad that the main idea supposed liberals have these days is to wipe out one of the best social programs we’ve ever had, Social Security, by effectively defunding it.

  54. There’s no such thing as Social Security running out of money just like the USA can’t run out of money. This idea that it would result in underfunded SS is simply not accurate.

  55. Would someone please demonstrate with evidence when tax cuts have been stimulative? W cut twice and look where it got us. Many corporations pay 0 tax and many others pay well below the stated corporate rate, but they won’t hire here in the US because there’s no demand growth. Small businesses never hire on the basis of expected tax cuts; they hire entirely based on demand. Period. When are you guys going to wake up to reality? Or is reality not your real game?

  56. Tax cuts, by definition, add net financial assets to the private sector. Just like spending does. The only real difference is that the govt allocates one and not the other. So, really, the onus is on you to explain to me why a tax cut for the middle class is any different than something like unemployment benefits? Sure, one gets spent faster, but from a purely government accounting perspective, the effect is exactly the same on net financial assets ($ 4 $). Would I prefer spending? It depends on what it is. But we’re not going to get that. So, beggars can’t be choosers. We should fight for the tax cut and the increase in net financial assets (even if the multiplier won’t be as substantial).

  57. Not sure if income tax should go away entirely but certainly there’s no reason that anyone earning under SS FICA cap ($106k) should pay FICA AND income taxes. Alternately, add capital income and brackets to income above $106k to FICA in order to replace the income tax with a expanded, loophole-free FICA system.

    Either way, Tsy can float the FICA taxes to control aggregate demand. The Fed could do the same, or at least control “hot potatoes”, by adjusting its various transaction fees.

  58. Sure, you can’t technically run out of money as long as you are willing to simply create more of it (out of proportion with the creation of new goods and services) and hence lessen its value.

    Is that what you are proposing? Just let inflation “solve” the problem?

    If so this is getting scarier by the minute.

    Maybe you should clarify what you meant by your statement.

  59. Right. Inflation is always the bogey. Not govt solvency in the same sense that a household is solvent. I have argued, rightly, for 3 years + now that inflation was well overhyped and not an issue. I’ve argued that hyperinflation was never a risk in the USA. I think I’ve been more than right about those issues for a very long time now. And I think that message is still the same today. Inflation won’t become a serious issue in the USA until we print in excess of our productive capacity. Being in a balance sheet recession, I’d say we’re far from that point right now.

    If you’re interested in my perspective on hyperinflation you might want to read the following:

    If you’re not familiar with my views on the monetary system you might see here:

  60. That is wonderful that you got a bit of recognition from PK, even if it was a back-handed dismissal.

    At the very least, Paul’s opinions at least get discussed (or shredded, in the Faux News Empire). The conversation NEEDS to shift, and everyone has to do their part to shift the conversation to the REAL crisis; the disincentive (or inability) for America’s worker to engage in productive enterprises.

    Since PK has far greater access to the ruling elite, he’s probably better attuned as to what actually COULD become a policy, than all of us relative nobodies.

  61. Cullen
    Progressive caucus produced a bill with all you ask for and what happened. Did you ever hear about it? Did Obama even announce it? How i know it? by being progressive and reading progressive blogs like crooksandliars and hullaballo. Krugman also noted about it.
    Can a minority bring up a bill in Congress? No it can’t. Reid tried to bring up a bill in Senate and what happened? filibustered.
    And with media that loves drama only, not reason, will not talk about it. What they talk about it is “both sides do it” mantra

  62. Cullen
    We should fight for the tax cut and the increase in net financial assets.
    Should differentiate between tax cuts for poor and middle class and tax cuts to rich.
    Tax cuts for poor doesn’t do nothing since they do not make enough to have tax liability, but they still pay full ammount of payroll tax. And since all of their income is consuming income, all tax credit they get is going to be consumed (highest multiplier).
    Tax cuts to middle class is effective as it helps if they are in debt, which they are. but there is a lot of non-consumed income higher the income.(high/mixed multiplier)
    Tax cuts to high incomes contribute fully to savings not to consuming, and also bribing politicians to keep their taxes low. (close to zero multiplier)

  63. DanB
    Is that what you are proposing? Just let inflation “solve” the problem?
    Since 1937 US govt debt did not go down 1C in dollar amount, not one cent ever. And it was 160% of GDP during WWII. But it did go down and up as percentage of GDP, which matters more. How? by inflation only.

  64. Roger
    Since PK has far greater access to the ruling elite, he’s probably better attuned as to what actually COULD become a policy, than all of us relative nobodies.
    I’m reading PK daily, and his assessment of possible policy is that only FED can do something. Fed can keep doing QE and more importantly is announcing the inflation target of 5-6% in order to push the cash from sidelines and into economy. Threat of the inflation(destroying the cash value) would push it from savings into market. Only announce the high target, not really cause it.

  65. This article is totally absurd. First of all, we already have payroll tax cuts which Obama negotiated as part of the extension of the Bush tax cuts. Second, Republicans have rejected any proposals to extend/increase the payroll tax cut several times.

    Paul Krugman has already said that payroll tax cuts would be a decent idea, although he believes not as efficient as stimulus spending. Your criticism of his piece is simply completely ignorant of realities.

  66. Agreed, just wishing we could do more. I should have been more clear that wealthy people with jobs and no debt are the ones who would likely save it. Just saw Krugman’s response – can I shake him down for plagiarism? ;)

    Best blog/discussion out here Cullen, keep up the good work.

  67. ok, so if you are not advocating inflation then please explain how the US government cannot run out of money.

    To my understanding the government can get money via either taxation, borrowing, or printing (creating) money. The latter can lead to inflation as your paper on monetary theory acknowledged so I assume you don’t mean they can never run out of money by simply creating more.

    Taxing they can always theoretically do more of but at some point they can’t do it politically or it simply depresses economic activity too much.

    Finally, borrowing is also something that has its limits. How far in debt can you go, 150% of GDP, 200%, 300%? Clearly there is almost certainly a limit.

    Therefore, it would seem to me that the US government, and the Social Security system, most certainly CAN run out of money. In fact, if the payroll tax is cut significantly SS almost certainly WILL run out of money.

    By saying the US government can’t run out of money you are making what to me appears to be a HUGE statement that is anything but obvious. Please elaborate on what the exact mechanics are of why the US government can’t run out of money. I know I am asking alot, but I bet many others have this same question.

  68. You’re not going to understand my position unless you read my primer on the monetary system. In essence, a fiat currency issuer with monetary sovereignty in a floating exchange rate system never “finances” its spending. It doesn’t have to raise money to spend. It just spends when it wants to. So there’s no such thing as running out of money. The only threat to such a nation is inflation, a decline in the std of living and ultimately hyperinflation. So the govt has to be very aware of the amount of money it issues and how it spends it.

    You might want to poke through the second link I provided above. It’s pretty dense material, but I think you might be pleasantly surprised when you get through it all. Feel free to call it blasphemous or ask questions. That’s generally the reaction.


  69. CT:

    I don’t the threat of inflation will put wealthy savers money into the market, at least not spent into the economy. It would likely go into commodities and precious metals, like it has been flowing recently.

    I think PK is wrong that the FED can fix this.

  70. There isn’t anyone that the Republicans will pay more attention to than Paul Krugman. Brilliant suggestion!

  71. That printing money option is just a joke. They mean by this just increasing bank reserves that are no use to anyone. “Borrowing” option instead is in essence printing of money, it adds directly to the money supply. It is always done this way, there is no other way to print money. Government just issues bonds (the so called “borrowing”) to convert newly created dollar liabilities to interest-bearing assets.

    Isn’t this all inflationary? Not until it reaches certain (high) level. The idea that we have some kind of fixed money supply is dead wrong, we have highly flexible money supply anyway since banks can issue credit. Basic banking operations are explained in this documentary: however governments do not fund their expenditures on bank credit except in eurozone, and eurozone is now collapsing.

  72. As PK is gleefully pointing out,you’ve forgotten the Republicans have already rejected a payroll tax holiday. The criticism anyway was fairly trivial since I don’t see how you can separate the politics from the economics of this issue since the Republican approach to economics is entirely the product of partisan politics. As a noted conservative commentator pointed out the other day on the economics since 2000 Krug has been pretty much right most of the time while conservatives have been largely wrong. I think he glosses over political realities but I’ve increasingly come to the view that strictly on the economics Krug is THE man.

  73. “But the general message is right. Dr. Krugman says it’s time to recognize that the markets don’t think we’re Greece.”

    Er…this has been apparent for over two years. The only people who claimed it was otherwise were conservative commentators and think tanks whose opinions were recycled by Republican politicians.

  74. Herein lies the problem with you all. You need to think big now if we are going to solve this problem. Payroll tax solves nothing really. How about a complete income tax break. How about hiring people to repair the infrastructure in this country and get the politicians out of the way for the country and the people to solve the problems. If MMT applies then totally apply it. Thinking small is not going to work right now as we need employment. How about we get some drilling and get that pipeline moving invest in green energy. While we are at it lets bailout all of the states as well.

    A couple of policies need changing. Like you want a hand out come to work for the Fed or your going to starve unless your elderly or disabled. Lets nationalize child care so they can go to work. We need to change the education system and actually teach again so people can read and write and do simple math.

    This is the problem you all think too small. While we are at lets just close the borders and hang huge Tariffs so the manufacturing jobs in this country re-start. I could go on and on. We need to demolish the excess housing inventory or better yet just give it to everyone.

    I am tired of plugging a little of this and a little of that, it is time to go whole hog!

  75. Payroll tax “holiday” is a terrible idea because it’s primary purpose is to start defunding social security. Everyone knows social security’s finances are in fine shape (2.5T surplus…). Defunding it is a sure way of making there be a problem, then you can cut it. An employer side “holiday” is just pure gravy for the employer, as they won’t hire more because there’s no demand to buy their products or services anyways. Money’s gotta get in the hands of those who actually need it.

    How about a tax cut for the middle class and poor by having them pay a negative federal income tax rate? Since that’s a tax “cut”, that should go over well with the republicans. But it might not, since the republicans really only like tax cuts when it’s for the wealthy. Be honest now.

  76. Actually, I think the law states that social security can’t pay out more than it has. So in effect, social security is much like a household rather than a government. Am I wrong on this?

  77. I would love to see a FICA tax holiday on the employee side for a year or two. With that and even more important a commitment to become at least 90% energy independant in 20 years. This will go along with an upgrade of our nations electrical grid. For the first time in decades, we have the people available to pull this off and with our current deflationary struggle this will fix that. The payroll tax holiday will allow for deleverage needed. I don’t know anybody that would argue that we need a goal to supply our own energy supply domestically but as with any other large idea we get stuck of the financing aspect. Imagine unemployment shrinking dramatically by these energy endeavours. This would provide long term stability in our energy based inflation which we prolly have the least control over currently. Granted our debt would rise but even outside of the MMT scope, I could justify this debt and risk with the long term rewards possible. What could happen? A further downgrade in our “credit rating”. I don’t see this remotely possible given our political climate but it would be fantastic. This wouldn’t even have to be even mostly government employees, government hired contractors but a partnership with private entities for the further benefit of all involved in the nation. Ahh dreams….

  78. Finding new ideas for taxing is like promoting “new math.” It doesn’t work. Stick with the basics. (1)Reduce taxes to reduce the risk constraints on businesses and people and (2) reduce the spending to permit more money being spent in areas where these is a multiple factor of income generation.