Yesterday I mentioned that I didn’t know where the figure of $200 per week that the Republicans have proposed came from. I do have a pretty good idea of where the $600/week in the CARES Act came from: it’s $15/hour for 40 hours a week. Those wanting to “Fight for 15” must be delighted.
There’s a real risk that the HEROES Act, the successor to the CARES Act, will make that permanent. It will create the expectation that that people will be paid whether they work or even looks for jobs or not. The reason it’s a risk is that 40% of American workers earn $15/hour or less. You may find that horrifying but it’s the reality.
You can legislate, as has been done, a benefit of $600 a week without a work requirement. You can’t pay for it without an effective tax rate higher than anything than has been realized in the U. S. in its history or just issuing ourselves credit which, if done without accompanying increases in production, will result in inflation and risks a loss of confidence in the currency. That’s what has been done. As a panic-stricken move during an emergency it can be justified. It’s far harder to justify as a persistent strategy.
You can legislate a minimum wage of $15/hour but you can’t legislate that workers will be worth $15/hour. And if you believe in supply and demand you can’t believe that you can maintain a minimum wage of $15/hour without controlling immigration and, indeed, without reducing legal immigration of low skill workers to a level much lower than it is presently.
If compassion leads you to believe that no one should earn less than $600/week in the U. S. it should be done via wage supplements paid via employers rather than through raising the minimum wage or simply granting a benefit.
The adverse effects of maintaining the $600/week income subsidy will be substantial. Who would look for or take a job at less than $15/hour when they can do nothing and make the same income? Only the very honorable or the very determined, which is not how I’d describe most of the people. Some people will simply sit idle in a stupor. Those are the least of our worries. Many will supplement their weekly stipend with illegal earnings—off the books, dealing in illegal goods and services, theft, and so on.
One of the odd things that stands out to me about the $600 per week is that an unemployed person is eligible for it even if he or she was a dependent working part-time. There are a lot of high school students that were holding part-time jobs in the early spring mainly for some spending money that are now possibly making a lot more than they could ever make at any job. AFAIK, if the person is eligible for $1 of unemployment benefits, they get the $600.00, which seems widely disproportionate to what one would assume the need to be.
The presumption I guess is to pay for it the electorate must elect Biden who is campaigning for tax increases.
How effective would Biden’s proposed tax increases can be. Raising corporate taxes when corporate profits are at a historical low — would raise little. Raising the marginal rate is offset by increasing the SALT deduction. The big revenue raiser is taxing capital gains as ordinary income — but that could trigger a stock market crash on Nov 4; killing that goose.
Democrats may have to go for a VAT; with very little exceptions to raise the amount needed.
Unless someone can figure out a way to compel rich people to remain in the U. S., I suspect the only way to increase the effective tax rate to the level required will be a VAT. And a VAT that would be high enough would destroy state and local governments. I might add that imposing a VAT with the idea of spurring consumer spending sounds self-defeating to me.
My own view is that there is an absolute limit to government spending which varies from country to country. That is conditioned by the willingness of the population to pay, how much enforcement would be required, and previous borrowing.
Once you start borrowing to pay operating expenses the end is nigh.
‘You can legislate a minimum wage of $15/hour but you can’t legislate that workers will be worth $15/hour.’
You can bet that Bernie, AOC, and the other people that wrote Biden’s draft agenda have an answer for that. The answer will be nuts, but they’ll have an answer.
‘And if you believe in supply and demand you can’t believe that you can maintain a minimum wage of $15/hour without controlling immigration’
The Democrats don’t want to believe in that law because it produces unequal outcomes. Besides MMT says you can maintain any level of spending you want without repercussions. Right now fiscal restraint is so far off the table it’s been dragged out of the door, into the street, and washed into the sewer.
‘Unless someone can figure out a way to compel rich people to remain in the U. S., I suspect the only way to increase the effective tax rate to the level required will be a VAT.’
Easy. Pass a law requiring any immigrant hand over their assets to the government, both domestic and foreign That’ll keep ’em in the rigged game. Unconstitutional, you say? Why should we pay attention to a document authored by dead white male supremacist slavers and their enablers when there are needy to take care of? As for VAT, you wanna see inflation take off? You wanna see the black market take over the marketplace? Impose a universal VAT and watch.
And might you think I’m being overly cynical about the situation, we’ve three more months to go before November 3. I’m afraid we’re just starting to ramp up to full bat-shit crazy in the way of violence, lunatic proposals, and demands.
‘m afraid no matter who wins the election we’re going to see a societal explosion that will make 1968 look good. If the left loses, they’ll try to burn the mother down out of rage. If the left wins, they’ll burn the mother down in celebration.
No, it doesn’t. That’s what I have called “folk MMT”. Real MMT says just what I have: extending credit beyond increases in aggregate product produces inflation. I think the risks of that are higher than most of its proponents and I think there is a non-zero risk of hyperinflation.
No doubt since the degree to which there was a “societal explosion” in 1968 is greatly exaggerated. The presidential approval rating at the end of February 1968 that caused Lyndon Johnson not to seek re-election was higher than Obama’s at the end of February 2012 and higher than Bush’s at the end of February 2004.
What actually happened was an explosion among those eligible for the draft and their contemporaries along with urban upheaval following the assassination of MLK. Most of the society was not upheaving at all.
I thought the $600 was just a way to get a lot of money into the economy quickly. I dont expect this to be tied to a serious effort to increase the minimum wage to $15/hour. I also dont see where there is any serious effort to make that $600 the default for those not working.
Steve
Since Democrats position does not list any conditions for when the $600 benefit will end, the reasonable assumption is they are serious about making it permanent.
I will a devils advocate that deflation is the near term danger. There
has been a serious destruction demand — restaurants, theaters, foreign trade (exports), commercial real estate. Decreasing demand leads to pressure on prices (deflation). The government’s main response is borrowing; and because the borrowing is for productive investments it is deflationary.
Former Dallas Fed economist Lacy Hunt is persuasive in that regard; https://www.youtube.com/watch?v=UhwK0rV0JDA
Medium-term, long-term, the risk of deflation changes to hyper-inflation, if borrowers lose confidence in the US government. The conditions for that event are being put in place. Power actors (the Chinese, Russian governments) who want confidence in the US shaken. An alternative to the US dollar as a safe haven (the Euro if the EU is granted independent taxing powers). An unstable social situation in the US. And of course, the medium-term / long-term becomes short term someday…
The best analogy to the perils of deflation and hyper-inflation is an airplane approaching “coffin corner” (https://en.wikipedia.org/wiki/Coffin_corner_(aerodynamics)#:~:text=Coffin%20corner%20(also%20known%20as,an%20airplane%20in%20stable%20flight.)
I think the best course is to be moderate — be generous with support for the unemployed but focus now on making the support sustainable.
I missed one word — the Government’s main response is borrowing not for productive investments.
I don’t much care what the intentions were or are. I care about what’s being done. A $600/week unemployment benefit that will continue as long as you’re unemployed is a de facto $15/hour minimum wage. That means that some substantial percentage of jobs will simply vanish—they won’t be worth paying that much for. I don’t know whether that will be 1% or 40%. It could be even higher depending on how many people would prefer to sit idle than to work for whatever over $15/hour is being offered.
Our economy is mostly based on personal consumption expenditures. When you close down retail and services as was done, you can’t keep the economy going by putting money into people’s pockets. That is what I meant when I wrote some time ago that “this is not your grandfather’s economic contraction”. You can keep people from starving by giving them a lot less than $600/week but the remaining money or at least a lot of it will be saved. There aren’t any other alternatives.
“You can bet that Bernie, AOC, and the other people that wrote Biden’s draft agenda have an answer for that. The answer will be nuts, but they’ll have an answer”
Made me laugh, it’s funny. That is if you’re not a college educated young person with $30,000 in student loans just let go from a waiter’s job because the restaurant closed.
What it boils down to is that they feel they were lied to, taking on debt with the promise of careers that never materialized. Now, even the paupers job is gone, but the interest grows on their debt.
I’ve begun to believe that a lot of the anger we’re seeing from the crowds in Portland, etc. is economic, no matter what it says on their placards.
In Louisiana, unemployment benefits are 65% of wages capped at $250/week. The government made people 100% unemployed, but they will only make them %65 whole. And, you are required to actively seek employment or education.
Here is an idea. How about the government making people 100% whole with no additional money? The IRS has data for people paying taxes. Calculate the average hourly rate and the hours per week for the last 3 months, and use that to determine the weekly unemployment payment.
For any potential delays, there could be $400/week for two weeks. The IRS could distribute the payments as a tax refund. Enlist Big Tech to create an app.
If I understand correctly, there are millions of jobs available, but nobody will do them. So, the unemployed restaurant assistant-manager should be flipping burgers, and the office manager should be delivering packages. Really?
Side-note:
An economy is production based. Consumption is facilitated by production. The US economy appears to be consumption based because the US produces few of the goods and services it consumes. If demand drove production, there would be self-driving electric cars able to go hundreds of miles, but we are stuck manually driving gas-guzzlers.
@Dave Schuler
… and I think there is a non-zero risk of hyperinflation.
But, the risk is almost zero. The risk is hyperdeflation. Instead of purchasing a loaf of bread with a wheelbarrow full of dollars, the baker will sell a wheelbarrow full of loaves of bread for a dollar.
The monetary system is a balance sheet system. The monetary system is balanced by the financial system. It is a house of cards built by leveraging assets to create the next layer of dollars. When a layer collapses, it is like a building’s floors pancaking onto each other, and the safety margin, if any, will determine whether the building stands.
Asset destructions destroys dollars, and there are few dollars available to purchase goods and services. Deflation is the result.
For all those whining and moaning about the Modern Monetary System, you should have been a little more concerned over the past 50 years. All those banking regulations you wanted removed were keeping limiting the creation of fiat dollars, but it was those fiat dollars that you craved.
Many still refuse to accept that Phil Graham is a complete idiot and that repealing Glass-Steagall was a horrible idea. Others encouraged and facilitated the creation of assets by leveraging houses sold to those who could never maintain the upkeep or mortgage note. At any point, G-S could have been reinstated, and the housing mess could have been avoided.
The existing system did not spring forth fully formed from the brow of Lord Keynes, and there is good news. The MMS can be fixed and MMT eliminated with a few easy steps.
For the Keynesians:
1. restore G-S
2. restore FDR’s ban on private gold ownership
3. restore the gold cover for M1/M2
4. restore Bretton Woods
The fiat money will be constrained by the gold supply, and government debt will be borrowed. (Under MMS, money is created when it is lent. You cannot borrow money that does not exist.)
For the non-Keynesians:
1. restore the gold standard for M1/M2
2. abolish the Fed
The fiat money will be eliminated, and it will be replaced with hard money and banknotes (checks). Now, a check will only be backed by the solvency of the bank in addition to the account holder. You will get the free-market-capitalism you have been carping about for the last 50 years.
I suspect there will be no change. No matter, I have my hot dogs and marshmallows. I have my weapons and ammo. This bitch can burn to the ground.
Burn, Baby Burn
@Drew
Thanks, but I only crawl out of my hole every now and then. You should have sent your daughter to Tulane. She could have had a third-world experience in a first-world country. Kinda like Chicago but with parades.
I see there is a debate in the OTB comments about whether you have stolen @HL92’s identity. Reality has a way of wacking a person upside the head.
“Many still refuse to accept that Phil Graham is a complete idiot ”
I thought that he was a complete crook, not idiot, but I guess I could go along with that.
Steve
“A $600/week unemployment benefit that will continue as long as you’re unemployed is a de facto $15/hour minimum wage. ”
Uhh, it was only scheduled for 2 (3?) months. They are debating about extension.
Steve
Hey, we have parades, too. In 2019 we had
St. Patrick’s Day Parade
Thanksgiving Parade
Bud Billiken Parade
Pride Parade
Memorial Day Parade
26th Street Mexican Independence Day Parade
Columbus Day Parade
Toys for Tots Motorcycle Parade
and those are just the big ones. There are tons of local parades, too. In more normal years one passes in front of my house every July 4.
Your cajun food is better than ours. That I’ll give you.
You’re arguing time inconsistency (that the same legislators in the same circumstances will do something different) or assuming something else will change in three months. What?
I can’t see the House voting down extending the benefit in October 2020. Can you?