Two Ideas for Promoting Multi-Sectorial Analysis

By Thornton (Tip) Parker

This discussion goes beyond MMT and MS, and advocates of those ideas may or may not agree.  Much written here is prefaced with “I think”.

Wealth and income concentration:  The claim that money in the hands of the wealthy trickles down through the economy is just backward.  Money is like cream—it rises to the top.  In 2007, the ten percent with the highest incomes received nearly half of all personal incomes in the country.  This concentration was not just due to merit, much of it was  structural, institutional, and rent seeking.  In part because of Occupy, the public is gradually becoming aware of this fundamental problem.       

The economy can be depicted as a circular flow of goods and services flowing in one direction from producers to consumers and back as labor, and money to pay for them going in the other.  Household purchases account for about seventy percent of the flow.  If households can’t earn or borrow enough to keep buying, the flow slows down.  Borrowing commits future income and leads to less purchasing power in the future.  The Great Recession was partly caused by households, having committed too much of their future income during the credit and housing bubbles, were not able to keep purchasing as they had been.

The economy has evolved to serve mass markets by providing the goods and services that most people need or want.  But the spending patterns of the wealthiest ten percent are not like those of most people.  A family with ten times as much income as a median family does not eat ten times as much food or buy ten times as many cars and toasters.  So the economy now depends heavily on people who get about half of the personal income to make the purchases which are seventy percent of the economic flow.  That can’t work for long.

The wealthy use much of their money just to make more money by gambling through hedge funds, leveraged buy-out funds, and other financial schemes.  They take some out of the economy by spending in other countries and hiding from taxes with off-shore accounts.  They are not using much to make productive investments to create more jobs that would provide good pay and benefits in this country.  Too much of what high earners receive leaks out of the Main Street economy to Wall Street, and often to other countries.

I do not think that MMT and MS consider the leak adequately. They explain why the government must create more new dollars to offset private sector and foreign surpluses.  But they do not explain how to prevent many of those dollars from flowing up and increasing the wealth concentration.  I suspect that more dollars flow out of the Main Street economy through the leak than as payments for net imports.  Just the need of many middle and lower income families to borrow ensures that some of their income will flow up in the form of interest and finance charges.  (Margrit Kennedy has recently estimated that thirty-five to forty percent of all purchases go to interest.)

The effect of concentration might be analyzed by dividing households into two subgroups, one for the wealthy (say top 10%) and one the rest.  Showing each subgroup’s surplus or deficit in relation to the rest of the private sector and the foreign and government sectors would show how much of a problem inequality really is.

I know of no easy way to do that, but conceptually, it would debunk the idea that income inequality is an envy, special pleading, or made-up class warfare issue.  It would also show that taxes can do more than just prevent inflation, they can be used to limit the leak of money out of the productive parts of the economy.

Economic proof:  In most sciences, new discoveries gain acceptance when others are able to replicate and validate them.  Advocates of MMT and MS have a hard time convincing other economists, partly because it is hard for the others to replicate and validate the basic formulae by using widely accepted economic data.

Many economists use the data reported by the Federal Reserve Board each quarter in its “Flow of Funds Accounts.”   Unfortunately, one cannot just use the data directly to see that the flows among the three sectors of the economy do balance to zero.  The Levy Economics Institute of Bard College uses the data to show the balancing, but their analysis is complicated because many factors are involved.

It seems likely, however, that a relatively few factors account for much of the difference between what the Levy Institute says are private sector savings and the savings reported in the Flow of Funds Accounts.  If that is so, a list of the largest factors (in descending order of importance) along with a simple explanation of how to apply them would help many economists become more confident of the balance idea by doing their own back-of-an-envelope analyses.

23 Responses to Two Ideas for Promoting Multi-Sectorial Analysis

  1. The Great Recession was partly caused by households, having committed too much of their future income during the credit and housing bubbles, were not able to keep purchasing as they had been. Thornton (Tip) Parker

    Not really their fault. Credit is the creation of new purchasing power. It is NOT the lending of existing purchasing power from savers to borrowers with the banks as intermediaries (“loanable funds theory”) as most people think. That new purchasing power drives up prices to the point where nearly everyone has to borrow or be forever priced out of the market by those who do borrow.

    • Thornton Parker

      I was trying to say that after future income has been committed to loan repayment, it can’t be used for additional purchases. A spree of over-borrowing must be followed by a period of contraction of both debts and consumption.

  2. “I do not think that MMT and MS consider the leak adequately.”
    I’m currently reading ‘The Bubble and beyond’ by Michael Hudson; it goes into detail on the leak and covers the problem nicely.
    There is also some excellent analysis of the credit problem by Steven Keen, his work focuses on endogenous money (i.e. money created within the system such as by banks) and draws heavily on Minsky.

    • Thornton Parker

      I have been following Michael’s work for years. It took me a long time to become convinced that the underlying ideas of Modern Monetary Theory and Monetary Sovereignty are right. What I am trying to do with my postings on this site is to help those who are developing and explaining the ideas at the technical level find ways to explain the essence of them to the general public and political leaders who will never spend the time I did.

  3. “Many economists use the data reported by the Federal Reserve Board each quarter in its “Flow of Funds Accounts.”   Unfortunately, one cannot just use the data directly to see that the flows among the three sectors of the economy do balance to zero.” Check this paper by the Fed http://www.federalreserve.gov/pubs/feds/2012/201281/201281pap.pdf
    The Integrated Macroeconomic Accounts of the United States
    Especially Table 1., page 6 where it clearly shows the three sectors (the domestic private sector and the government is broken down further into subsectors but if you consolidate them there are really the three sectors that you talk about)and how they balance to zero. The flows of money is also clearly shown in some nice diagrams.

  4. Sorry Thornton, but I am not clear about what your “two ideas” are. Is one idea that MMT needs to address the issue of “leakages”? Is another idea that the Levy Institute needs to simplify their explanations? While the idea of dividing households into two separate subgroups would show the extent and effect of “inequality” , to a large extent, this is already a known and recognised fact, although probably not quantified. However, I fail to see what practical benefit would arise from a detailed analysis of this data.
    As for F. Beard’s reply, the reason why the supply of credit under the current financial system does, in fact, tend to drive up prices is because or the deliberate and consistent disconnect between the productive needs and capacity of the society and the consumption ability.
    As such, ‘money’ , created as credit, should be directly related to production and increasing production is the definition of a growing economy. However, the fundamental purpose of production is consumption – there is absolutely no point in producing anything if it is not going to be consumed.
    To focus on the ‘money’ aspects, a growing economy requires an expanding supply of ‘money’ tickets which should be directly related to the measure of production – where that ‘production’ is defined in terms of goods and services required by the society. Those goods and services, along with the facilities related to them, represent the assets that justify the creation of a ‘sound’ money supply. While this has nothing to do with gold or silver or any other physical metal, as long as the growth in supply is properly, and rationally controlled through the level of production activity and supply demand, there is no reason why the price of goods and services would rise.

    • Thornton Parker

      I may be asking for more from the proponents of MMT than they can provide. But the tenor of their comments can lead one to believe that the economy can be restored to health by simply running more deficits. My point is that the wealthy few are like a fourth sector whose surpluses are like foreign sector surpluses. If this is true, then ways need to be found to channel more into those who make the household purchases which comprise 70% of the GDP.

      • “the economy can be restored to health by simply running more deficits”

        Well, yeah. More deficits ==> more jobs ==> more income for the households that make the purchases that are 70% of GDP.

        “Health” is not equal to perfection, or full employment, however. JG is necessary to achieve full employment with price stability.

  5. I like it Tip and would like to see more discussion along these lines. Thanks.

  6. The vast majority of inequality is because those at the very bottom have no jobs and no income. Beyond that, wages have stagnated lately as inflation has continued, reducing the discretionary income of many of those who have jobs. A return to near full employment would fix a lot of the inequality. JG would fix a lot more of it. “A rising tide lifts all boats.”

    Many have suggested a transaction tax on derivatives trades. That would put a damper on speculation.

    Increasing sales for US businesses, brought about by a return to near full employment, would make them a better investment, and lead to a shift of investment tactics by the rich, and increased investment by businesses in new productive capacity.

    There may be some remaining trends that tend to increase inequality. A crackdown on control fraud might help. It seems quite possible, though, that we could return to the level of inequality that prevailed before the recent increase, just by fixing the economy.

    Despite the existence of a few very rich families, there is quite a lot of movement of Americans up and down the income scale during their lives. Most of us start out in the bottom quintile, and move into the middle three quintiles as we progress through our careers, and then tend to fall back after retirement. Efforts to equalize the income of entry-level workers with experienced senior professionals would be misguided. Entry-level is a temporary condition which tends to rectify itself, at least in a healthy economy.

    • Thornton Parker

      My sense is that for at least thirty years, there has been a deliberate attempt to shift incomes from the middle and lower levels up to the top few. This has included fighting unions, promoting product sales that require borrowing in order to receive more in interest, fighting consumer protection efforts, etc. As a result, most of the productivity gains have gone up, rather than out to all. If this is so, it will require more than federal deficit spending to correct.

      • I guess it depends on what you think “correction” is. Managements will continue to fight unions. Sometimes they will lose (GM). Sellers will continue to promote sales (that’s what they do), and will make financing available if they can to customers who want it. Consumer protection can get very weird sometimes. I’m sure Ford would be happy not to have to put a disclaimer on their current advertising saying “Don’t try this. Cars can’t fly”, but, alas, we must protect consumers (and lawyers – or maybe just lawyers, the h**l with the consumers).

        More deficits (at the moment) would lead to a more healthy economy, and that is the best thing we can do to raise low incomes. Taxing away the wealth of the wealthy does nothing to help anyone else. Even if their propensity to spend is low, it removes spending from the economy, which hurts everyone holding or looking for a job.

        Nevertheless, as an analytical tool your approach could be useful. To the extent that increased incomes go to people with low propensity to spend, it will require more income increases to achieve the desired effect. What is not clear is how any particular change will affect the various sectors. I think higher employment would increase incomes at the low end a lot more than at the high end. Other changes might have different effects.

        Even if they do, it is not clear that they would be “bad” just because the direct benefits go to the wealthy. Reduced capital gains tax rates presumably incent the wealthy to convert their interest income to capital gain income, if they can. To take more risk in return for higher reward. To start or finance new businesses and unproven technologies. The result of the changed behavior might have more wide-ranging effects than simply to increase the incomes of the wealthy.

  7. “Advocates of MMT and MS have a hard time convincing other economists, partly because it is hard for the others to replicate and validate the basic formulae by using widely accepted economic data.”
    The works of Wynne Godley, among others, are based on examination of empirical evidence for stock flows. The Levy institute scholars also would be able to challenge your statement. Have you consulted with any of them?

    • Thornton Parker

      Yes, as a matter of fact, I have. And I was told that if I have a couple of years to spend on it, I can eventually get to the point where I understand it, but there are probably better uses of my time.

      MMT is in the selling phase of its cycle. A good sales technique is to put one’s self in the customer’s shoes. So think about an elected official who’s political future depend on voters’ perceptions. Why would that official gamble his or her future on convincing constituents about a set of ideas that are directly counter to what the opposition is spending millions of dollars to oppose? I know advocates of specific programs which may be in danger who are not willing to make that gamble.

      • That MMT is in a selling phase is a critical observation. Selling is about changing minds. Successful salesmen don’t antagonize their prospects by belittling their current opinions. They don’t pick fights with their potential customers. MMTers need to enhance their selling skills. The selling process is not a war or a fight.

  8. Some years ago, Scientific American presented a study of a forrest ecosystem energy flow. Looking at wikipedia’s offering: http://en.wikipedia.org/wiki/Ecosystem_ecology one is struck at the similarity between what is being described and the monetary dynamics of MMT and MS (assuming this to be money supply, sometimes indication of acronyms is helpful, there are so damned many and somehow microbic salvage doesn’t fit). Point being what is being described as ‘leakage’ is instead some alternative ‘energy flow’ through the economic ecosystem. In the same concept, both savings and taxes can be incorporated into the ecosystem diagram to show the capability to dynamically change flows through the system. Curiously Adam Smiths “Wealth of Nations …” book I reads like an economic geography of the observed period of early manufacture and Karl Marx’s observations half a century later upon the development of early industrialization upon the economic ecology. Such a flow chart of necessity account for all economic inputs and economic outputs and the changes occurring in economic relationships within the ecology. Mapping the economic dynamics of the neo-whatever pseudo-economic theology should be enough to disprove that entire theology as an economic function and discredit the high priests as political chancers, their ‘mathematic formulae’ often the drivel of economic charlatans deceptions, their principles sold to the highest bidder for the glister of fame and/or fortune.

    • MS stands for Monetary Sovereignty, I think, in this context. Refers to Rodger Malcolm Mitchell’s blog and economic theory. Very close to MMT in the basics, but with some policy differences.

  9. Tip,

    Good post… you make some interesting mathematical observations..

    As Paul Meli often points out, at bank loan inception, as “loans create deposits”, the USD balances are created to account for the principle portion of the loan, but no provision is made to account for the system balances needed for the interest payments that are due on the loan…

    I guess what is “hoped for” in this system, is that the borrower will somehow happen upon the USD balances created by the principle portions of other future loans (which is Ponzi-like imo), or, the USD balances created by government deficit spending; in order for the borrower to be able to pay the interest in the future. It does not appear that the pool of previous USD savings are available as total global USD system savings is non-zero in every year…

    So these appear to be the only 2 sources where the balances required for the net borrowers in the system to make future interest payments can come from; ie future loan principle balances and deficits.

    Right now we have policy makers actively seeking to eliminate the one source (deficits) and bank credit is flat…. Perhaps to your overall point here this is not a well designed system… leaves a lot to chance.

    rsp,

  10. @Tip Parker;

    No one is better on demand leakages than Bill Mitchell over at the Billy Blog – highly recommended:

    http://bilbo.economicoutlook.net/blog/

    Your main point seems to be: “…they [MMT and MS] do not explain how to prevent many of those dollars from flowing up and increasing the wealth concentration.”

    Yes, I think you are largely correct. MMT only claims to provide an accurate description of the monetary system, along with a menu of fiscal policy choices this system makes possible. It does not substitute for the political and philosophical clarity we need to make these choices wisely. Nor is it able to undo, overnight, the effects of a massively-funded, forty-years-and-counting campaign of deception waged by the plutocracy, aided and abetted by a bought-outright economics profession, with the aim of convincing people that governments, government spending and especially deficit spending are all evil incarnate.

    The tendency of Capitalism to concentrate wealth at the very top is inherent to it, of course, and Marx showed , as far back as 1865, that it contains no internal mechanism for limiting or even moderating this tendency. Communism and Keynesianism were the 20th Century’s two grand experiments in providing an external limit to inequality. Communism succeeded too well and delivered egalitarian misery for the masses along with a relatively egalitarian standard of luxury for the apparatchiks. Keynesianism succeeded well enough in practice, but failed as theory – mainly because western liberals sold it out for a tenured place in the establishment. That and a small mess of the great-tasting Wall Street potage that was being passed out back then.

    MMT is an evolved and improved version of the economic tradition to which both Keynes and Marx belong. We need to co-evolve a political program which will be based upon, but necessarily separate from, MMT itself. It can’t be too complicated. I would just call it the Jobs Program (people are suspicious of “guarantees”). What the neo-liberals are proving every day, all over the world, is that none of them can deliver a real-world economic recovery or restore full employment. They don’t know how – they’ve forgotten. They’ve erased the knowledge from their institutional memory. The dominant corporatist faction of the Democratic Party is almost as bad in this respect as the Republicans, and is objectively *more* dangerous to the safety net, as Barack Obama is in the process of demonstrating. As Bill Black is saying on this site day after day, Obamae would have grand-bargained it away two years ago if the Tea Party hadn’t intervened.

    In my (really, honestly) humble opinion, Jobs-Jobs-Jobs (and the living-minimum-wage that comes with it) should be our program, our message, our platform and our identity from now on. The moral and political purpose of everything else in MMT is just to strengthen our argument that full employment and rising wages are possible -without inflation and without war. And, in the end, this is how post-Keynesian economic policy limits inequality too. If workers win back the share of productivity growth they have forfeited since 1980, and win back the workplace bargaining power that guaranteed employment and healthcare automatically provide, the plutocrats will have lost. Period. Let’s just hope that, this time, we have the wisdom and unity to make it stick.

    • Thornton Parker

      I agree with much that you say. But I also think that the real battle is one of power — power to acquire the largest share of financial flow. The Jobs Program is a good idea that could help many people. I don’t see, however, how it can make fundamental changes in the amount of personal incomes that are captured by those at the top. And if the mass market economy is to remain intact, that flow up will have to be diverted away from the top.

      • If someone invents a better mousetrap, and his mousetrap factory hires 100 workers and pays them $50,000 each, and he sells 1 million mousetraps a year for $6 each, the workers get $5M and the owner gets $1M. Who gets “the largest share” of this financial flow? What would be the numbers you would like to see? How would you achieve those numbers?