By Thornton “Tip” Parker
As NEP readers know, the economy consists of private, government, and foreign sectors. Financial flows among the sectors always add up to zero; that is, one sector’s deficits must be offset by surpluses in either or both of the others.
If the private sector imports more than it exports, ignoring investment flows, it will run a financial deficit while the foreign sector runs a surplus and the economy will then slow down as money in the private sector becomes scarce. Unless the trade deficit is reduced, the only way to keep the economy running is for the government to run large deficits, as is it is doing now. While few people understand the sectoral view of the economy, many are aware of problems that this one-dimensional view does not explain. The causes of many of those problems can be explained if the private sector is divided into two layers. The top layer includes the most affluent few (the 1% for simplicity) while the vast majority of those less well off (the 99%) are in the second layer. The foreign sector may have layers worth considering also, but let’s ignore them now.
Financial flows among the two private sector layers and the other sectors must add to zero. When the 1% run surpluses and increase their savings, the foreign sector, the government sector, or the lower layer must run deficits. The top layer has the same effect of removing money from the second layer as the foreign sector. Those on the top layer see nothing wrong with the continuing, cream-like rise of money to the top. They see it as success. But lost savings and income stagnation is producing wide-spread discontent in the second layer that simply increasing federal deficits will not mitigate.
I believe that MMT will be unsatisfying to most people as long as it concentrates on the administrivia of how the Treasury, Fed, and banks work. It would offer much more if its analyses were expanded to show how top layer surpluses have the same effect as the general public foreign surpluses.
Many people and politicians could understand this quickly. Bernie and Trump, in his more coherent moments, have hit on it, and it is a horse that MMT could ride. It could open the door to a wide range of actions to restore society and the economy by improving the balance of flows between the two layers, including:
- Breaking up the big banks. Bank interest, service charges, and penalties have become like a major tax on the 99% because there is so little competition. As an opening gambit, propose that any bank with more than 5% of the industry’s total assets must be divided in half.
- Limiting scope of investment banks. Make them revert to partnerships and remove from their members the protections afforded to corporations.
- Strengthening anti-trust. If we believe that competitive markets limit rent seeking, make markets more competitive in communications, food, airlines, health care, insurance, and other industries where consumers have few alternatives.
- Using taxes constructively. The federal government does not have to collet taxes to pay its bills, but it can use them to channel resources from the top to the second layer. This can include a Tycoon and Silver Spoon tax on large inheritances; a Freeloader tax on companies that get incentives from local governments and then fail to meet their commitments; a Gaming tax on short term financial trading that is inversely proportional to holding periods, and an Excess Earnings tax on executive compensations that are more than (x times) the lowest incomes in a company.
- Simplifying corporate income taxes. Make companies think twice before moving operations to other countries (or keeping them there) by having them use one set of books and report the same income to stockholders and the IRS.. Earnings from outside the country would be taxed as they are reported to stockholders and taxes paid to other countries could be deductions but not credits for their income taxes. This would eliminate thousands of over-paid, unproductive jobs while reducing incentives to move to other countries.
Many other actions can be proposed that may be better than these in addition to a jobs guarantee program. But my basic point is that now, MMT primarily says that federal spending should be increased to improve the lives of most people. It does not say why the increased spending will not quickly float up to those at the top. It says that taxes are like brakes to limit inflation as inflation is presently measured. But it does not recognize that growing stock values and incomes in finance, real estate and other rent seeking industries are forms of inflation.
It is more than a coincidence that federal deficits and inequality have grown simultaneously. The upward flow within the private sector links them. For the democracy to remain a healthy, ways must be found to limit the upward flow and redirect it toward the vast majority of the country’s population. MMT could become a more powerful tool for bringing this about by expanding analyses of the sectoral financial flows to show the flows between layers within the private sector. It may also show more about the causes of business cycles and how to break what appears to be a trend toward ever larger federal deficits.
Indeed, the flow of money from the lower level private sector to the upper level functions essentially as would a tax levied on the lower level by the government sector- it is both regressive and deflationary for the lower level and inflationary for the upper level and, unlike a federal tax, it adds to the federal deficit. A lose, lose, lose, lose preposition. It should be possible to turn the “deficits =bad” meme against the 1% who promote it by showing that relationship. Bring back more and steeper tax brackets and long live the death tax.
A paper called “How simple regulations can greatly reduce inequality” by J. R. Iglesias (link below) shows how a proportional tax on all agents and redistributed to all agents in proportion to wealth can reduce inequality (Gini coeffient of 0.16) and eliminate poverty. That might also be a constructive tax. And if the IRS/SSA collects/distributes the funds without going through the rest of the Federal government/Congress the overhead would be minimal and the check showing up your bank account would be like the Guaranteed Income while the wealthy would still exist, but a little less rich.
” ….The causes of many of those problems can be explained if the private sector is divided into two layers. The top layer includes the most affluent few (the 1% for simplicity) while the vast majority of those less well off (the 99%) are in the second layer. ”
U.S. sectoral balance analysis offers little of real use in its current , commonly-used configuration. Adding the consideration of inequality , as you suggest , could do wonders to correct that. I would only point out that when the private sector is broken down between business and households , as many do , the same corrective needs to be applied to the business side , as a similar inequality dynamic has occurred there. Whether the most useful cutoff would be the top 1% or some other fraction can be determined by examining who has captured the bulk of the gains over recent decades – iow , two classes , “the helped” and “the hurt”.
1. Is there data available for these flows?
2. When you break up the big banks, don’t do it like we did AT&T, simply creating localized monopolies. Make the bank divest 1/2 of its business in each city and state, not all its business in 1/2 the states.
“It does not say why the increased spending will not quickly float up to those at the top.”
Well some of us do. We all know for example that the Job Guarantee is paid for in real terms by increased production that is then distributed by the scheme to the poor. We expect businesses to turn up the production and productivity spigot and produce that output without pushing prices. Any areas that are seen pushing prices are candidates for competition authority investigations and action to increase competition in that area to keep prices down. And that’s down to the natural process where a business pushing volume will out compete a business pushing price.
The line is that we expect the additional spending of the job guarantee to be met with economic expansion. If it is met with anything else then income will have to be removed from the rich to compensate. I think that is a pretty good carrot and stick statement.
Remember that MMT is pure monetary economics. It has to be translated by others into political statements and action.
I don’t find the 99%/1% divide useful. It’s not really a matter of wealth. It is a matter of influence and connections. There is indeed a correlation, but tax soaking the wealthy will not remove their influence or connections, or stop them using those to influence the government power relationships.
The vice is power relationships, not money. To attack those you have to offer jail time for anything that tries to turn one person one vote into one dollar one vote.
Breaking up the big banks. Thornton “Tip” Parker
Why are banks privileged in the first place? If fiat is the money of all the citizens then why may only a usury cartel consisting of depository institutions (aka “banks”) deal with it in the form of inherently risk-free, convenient account balances at the central bank itself?
And why must the economy have only one payment system? That must work through the banks? So that the banks effectively hold the economy hostage? When individual citizen, their businesses, etc. accounts at the central bank would constitute a payment system that bypasses* the banks?
*Assuming that government-provided deposit insurance has been abolished too. Then, by definition, all remaining deposits with banks would be at-risk, not necessarily liquid INVESTMENTS, not co-mingled with the funds needed for the day-to-day operation of the economy.
For democracy to work, all parts of every population must be adequately provisioned
Paul Meli writes: Sadly, this shouldn’t need much explanation.
it should be obvious that money flows don’t ‘circulate”, they’re linear.
An analogy would be the flow of electrons in a battery. The battery must be recharged in order to maintain the flow. Money flows must be ‘recharged’ by the currency issuer to maintain flow. It does this by either creating new currency or taxing away excess liquidity (savings), recycling the surplus.
You know, it’s actually a miscast topic.
What really happens in a human culture is credit flows and return-on-coordination. Track any population over 10 generations, and – one way or another – you get an expanding, “tribal” experience. Cultural skills are recycled into the growing culture, either with agility, or as Max Planck observed, one tombstone at a time. Adaptive evolution is optimized when all parts of an organization catalyze all other parts. Maximum teamwork.
We can practice achieving examples of net context-awareness such as “Total Soccer”
… but not “Total Democracy?”
The last time we had anything close to total cultural mobilization was in the midst of WWII, when our achievements astounded even ourselves.
We just denominate some, but not all, intra-aggregate credits (autocatalysis) with arbitrary bookkeeping units we call a currency system.
There’s always some dominant lobby of the day, saying that it’s different this time, and that THEIR form of Institutional Momentum is more important than the aggregate outcome.
Can a culture’s Adaptive Rate continue, and increase, if it doesn’t manage to instill that multi-generational perspective into it’s K-12 educational process?
If not, we keep throwing out what each generation relearns, while wondering why our rate of cultural evolution is constrained. Go figure!
“The last time we had anything close to total cultural mobilization was in the midst of WWII, when our achievements astounded even ourselves.”
Then our NeoLiberals picked themselves up off the trashbin, dusted themselves, and ever since have been trying to drag us back into the dark ages …. again!
For every money flow within our social something else is exchanged, like goods, services, access rights, savings certificates, etc. So the flows are balanced in two ways, though the above claimed banking money flows and within the agents as material quantities are exchanged. We need to see the whole of the big picture to properly appreciate how this works. The partial picture as in MMT for example is at fault.
Most anything can be called a sector (or class) for purposes of analysis. We could look at a consumer or user sector vs a producer sector for instance, and analyze that in terms of crossover, where people sometimes produce and sometimes consumes. Add to that things like the military and financial industry which consumes but never produces – -it being problematic how much of that should be considered necessary overhead (not much at all I would say).
There is also the problem of waste and inefficiency: the ‘down the rat hole’ sector. If we ship some wood to Thailand, where they make it into a bowl, and ship it back, is that shipping production, consuming, or just waste? What about the speculators and stock brokers?
More realistic models then have multiple sorts of sectors (or sets in math) superimposed on each other — something like blue things, red things, brown things, flowers, bugs, birds, living or dead, pleasant or stinky, in which something may be in multiple sets but also with some characteristics of different classes within a give set (blue and red beetle). How something is classified depends a lot on what we are trying to learn, say about it, or make an evaluation of, in relation to some other (probably more universal) class model. I guess we should have some smart theoretical math (especially set theory) and semiotic people work on this, and set up some computer models and programs, like Steve Keen did with the Minsky program. (Or adapt a Mario Bros. game with all the leaky sewer pipes to circuit theory.)
This is an important contribution. The MMT explanations I have seen so far are good explanations for the subset of economic issues they address. The other issues have been brushed off with the statement that MMT does not address these issue. This article is a call to address those issues.
I have another issue with MMT that I have never seen addressed, although I have asked many times. The picture of the three pots ignores the factor of mark-to-market. Wealth in a single sector may act as if it is growing autonomously with no flows from other pots because we tend to value just about everything with a mark-to-market method. You can argue that this increase is just imaginary, but it is not real money, but for that matter fiat money isn’t any more real. No matter whether mark-to-market growth (and decline) is real, economic actors act in many ways as if it is real. If we want to explain what really happens in an economy, we have to talk about how real people really behave.
I want to thank all of you who commented on this.
Over the past forty years or so, we have seen increasing inequality, hollowing out of the middle class, increasing trade deficits, expansion of the financial services industry, slower recoveries from recessions, and increasing deficits in the private and government sectors. It seems to me that these must be related, somehow. My article was to take a stab at thinking about how their interrelationships may be understood.