Let's Put the Fed in Charge of Robinhood Fiscal Policy
Current monetary policy has led to extremely low interest rates, which creates a problem for the Federal Reserve if the economy starts to tank. When interest rates are high, the Fed can lower them to stimulate the economy. But, when interest rates are near zero, that inhibits the Fed's ability to provide further stimulus.
Some economists like Robert Skidelsky now argue that monetary policy has run its course. He argues that the Fed and government policy makers need to recognize the limits of monetary policy and should therefore start looking at ways to use fiscal policy now. If policy makers simply wait until the next recession, it may be too late.
In response, other economists like Kenneth Rogoff say that fiscal policy is too politicized and slow to respond in times of crisis. This is why many economists favor monetary policy. If the economy starts to tank, the technocrats at the Fed can respond very quickly. If we assume that congress is in charge of all fiscal policy - both taxation and government spending - then it can take a long time to figure out which taxes to raise or lower, and by how much. Congress can also spend too much time trying to decide on how to increase (or decrease) spending. And, of course, congress can argue at length about how much the government needs to borrow to pay for new spending.
My proposal is that the congress should pass an act, which I call the Robinhood Act. This act would put the technocrats at the Federal Reserve in charge of a particular sub-set of fiscal policy, which I'm going to call Robinhood Fiscal Policy. In very simple terms, this sub-set of fiscal policy deals with taxing the very rich and giving to everyone else.
More specifically, Robinhood Fiscal Policy would consist of two things:
When the congress writes the Robinhood Act, they would define how billionaires would be taxed, but they would give the technocrats at the Fed the discretion of adjusting this tax to increase (or decrease) the amount of revenue to be raised with the tax. I will leave it to professional economists to weigh in on the specifics of how this tax would work. One simple idea would be to have an income tax on the billionaire class. The congress would leave it up to the Fed to decide what the tax rate should be for this particular tax.
Further, I think it would be good for the billionaire class to know that the proceeds from this tax can only be used for one purpose: to pay for a Basic Income Guarantee for everyone who is not a billionaire. My guess is that many billionaires - both conservative and liberal - would support this kind of wealth and income transfer.
My hope is that we can put many of our political differences on fiscal policy aside if we take the issue of how the government spends money off the table when we debate the merits of Robinhood Fiscal Policy. I'm not suggesting that we take all fiscal policy out of the hands of congress. They will still be in the business of setting most tax policy, spending policy, and borrowing policy. They're just handing over authority on a sub-set of tax and spending policy: the Billionaire Tax and the Basic Income Guarantee.
I'm also not suggesting the the Basic Income Guarantee should be seen as a substitute for other government programs. I'm suggesting that it can and should be used to stimulate aggregate demand. If managed by the Fed, it would be a quick and efficient way to get more money into the hands of the general public in times of economic crisis. Think of it as a way of dropping money out of helicopters that doesn't involve printing money and creating a lot of litter.
For those of you who are not familiar with monetary policy, you should realize that the Fed already redistributes wealth and income by setting interest rates.
Giving the Fed power over Robinhood Fiscal Policy would also redistribute wealth and income. Here is one way that it could work in times of fiscal crisis:
If the economy starts to tank, then the Fed could increase both the Billionaire Tax (BT) and the Basic Income Guarantee (BIG). If both are raised by an equivalent amount, then it stimulates the economy by increasing consumer spending. This is true because billionaires already spend what they want to spend on consumer goods. They save most of their income. Non-billionaires, on the other hand, will tend to spend more on consumer goods. The poor spend almost all of any extra income they may receive on consumer goods. In general, the more affluent your are, the more you tend to save any extra income you receive. This is all basic Econ 101.
Now, it's true that the extra revenue the Fed will eventually receive from raising the Billionaire Tax won't come in immediately. This shouldn't be a problem, however. Why, you ask: it's the Fed!
When the congress writes the Robinhood Act, it could specify that the Fed should manage Robinhood Fiscal Policy by setting up two funds:
The Fed already manages one set of books (i.e. a set of asset, liability, income, and expense accounts) for what I'm calling The Bank Fund. To better understand how Robinhood Fisal Policy would work, I'm suggesting that the Fed should set up a separate set of books for the Robinhood Fund.
The proceeds from the Billionaire Tax will be income, they will go into the Robinhood Fund. Expenditures on the Basic Income Guarantee will come out of the Robinhood Fund. If there is a time delay in collecting proceeds from the Billionaire Tax, the Robinhood Fund will still be able to increase the Basic Income Guarantee expenditures. How, you ask: by borrowing money from the Fed's Bank Fund.
Note that this sort of lending already happens when the Fed indirectly loans money to the US Treasury. In practice, the commercial banking system gets in the middle here, and makes a tidy, risk free profit by doing so. Instead of loaning money directly to the US Treasury, the Fed loans money to commercial banks at a very low rate of interest. They turn around and loan this money to the US Treasury at a higher rate of interest. Think of it: risk free profits complements of the Federal Reserve. This is an example of what I call Sheriff of Nottingham Economics. It's not very fair, but it's nice work, if you can get it.
Now, when the Fed's Bank Fund loans money to the Robinhood Fund, I suggest that they leave the commercial banking system out of it. This is supposed to be about Robinhood Economics, not Sheriff of Nottingham Economics. Instead, the Fed's Bank Fund could loan money to the Robinhood Fund directly and quickly. This would make it possible for the Robinhood Fund to stimulate the economy in a timely fashion without having to wait around for congress to make up its mind. So, Kenneth Rogoff - put that in your pipe and smoke it.
----------------------------------
Beshears, Fred
The Five Sector Circular Flow Model of an Economy
https://innovationmemes.blogspot.com/2017/10/the-five-sector-circular-flow-model-of.html
If you need to brush up on your macroeconomics, this is a little primer.
---
Negative Nominal Interest Rates may Be Coming: Time to buy a Safe
https://innovationmemes.blogspot.com/2020/02/negative-nominal-interest-rates-may-be.html
---
Robinhood Macroeconomics
https://innovationmemes.blogspot.com/2017/09/robin-hood-macroeconomics.html
---
Why Free Market Fundamentalism Results In Sheriff of Nottingham Economics
https://innovationmemes.blogspot.com/2019/08/why-free-market-fundamentalism-results.html
----------------------------------
Harding, Robin
Coronavirus: why central bankers say it is time for fiscal stimulus
Many policymakers are calling for more government spending in response to economic disruption
by Robin Harding in Tokyo, Brendan Greeley in Washington and Martin Arnold in Frankfurt
3/6/2020
https://www.ft.com/content/606f1c8c-5f96-11ea-8033-fa40a0d65a98
"""
The US Federal Reserve, which Ms Yellen used to chair, had already been forced to cut its target interest rate to a range of 1.5-1.75 per cent during 2019 because of concerns about global growth. Mr Draghi’s European Central Bank and the Bank of Japan still had negative interest rates, despite a decade of aggressive monetary stimulus. If any kind of shock were to hit the economy, there was little room to respond.
“All four of us said ‘fiscal policy’, not having any clue coronavirus was coming,” says Mr Posen, a former BoE policymaker who is now head of the Peterson Institute in Washington, describing the panel at the American Economic Association’s annual meeting.
Just weeks later, that shock arrived. First coronavirus ripped through Wuhan, prompting perhaps the largest quarantine in history and all but shutting down China’s economy. Then the number of cases began to rise around the world, slowly but inexorably, prompting the OECD to warn this week of a global downturn.
"""
----------------------------------
Rogoff, Kenneth
Fantasy Fiscal Policy
by Kenneth Rogoff
Feb 3, 2020
https://www.project-syndicate.org/commentary/resisting-risky-fiscal-policy-by-kenneth-rogoff-2020-02
"""
Many leading central bankers now argue that, instead of just playing its traditional role of deciding the allocation of government spending, investment, taxes, and transfers, fiscal policy must substitute for monetary policy in economic fine-tuning and fighting recession. That would be a big mistake.
"""
----------------------------------
Skidelsky, Robert
The Monetarist Fantasy Is Over
by Robert Skidelsky
Feb 17, 2020
UK Prime Minister Boris Johnson, determined to overcome Treasury resistance to his vast spending ambitions, has ousted Chancellor of the Exchequer Sajid Javid. But Johnson’s latest coup also is indicative of a global shift from monetary to fiscal policy.
https://www.project-syndicate.org/commentary/boris-johnson-global-shift-from-monetary-to-fiscal-policy-by-robert-skidelsky-2020-02
"""
Kenneth Rogoff of Harvard recently argued that fiscal stabilization policy “is far too politicized to substitute consistently for modern independent technocratic central banks.” But instead of considering how this defect might be overcome, Rogoff sees no alternative to continuing with the prevailing monetary-policy regime – despite the overwhelming evidence that central banks are unable to play their assigned role. At least fiscal policy might in principle be up to the task of economic stabilization; there is no chance that central banks will be.
"""
--------------------------------
Strain, Michael
Don’t Cut the Payroll Tax. Just Send People Money.
Here’s a better way to goose the coronavirus economy.
By Michael R. Strain
March 11, 2020
https://www.bloomberg.com/opinion/articles/2020-03-11/payroll-tax-cut-isn-t-best-way-to-perk-up-coronavirus-economy
--------------------------------
Tankersly, Jim
The Liberal Economists Behind the Wealth Tax Debate
Gabriel Zucman and Emmanuel Saez have crashed the Democratic primary with their idea — and angered some economists.
Gabriel Zucman, left, and Emmanuel Saez of the University of California, Berkeley, are the most polarizing economists in the 2020 campaign.
By Jim Tankersley and Ben Casselman
Feb. 21, 2020
https://www.nytimes.com/2020/02/21/us/politics/the-liberal-economists-behind-the-wealth-tax-debate.html
"""
BERKELEY, Calif. — One of the most liberal policy proposals animating the Democratic presidential primaries is the handiwork of two French economists who are not formally advising any campaign and have barely met the candidates running for the White House.
Gabriel Zucman and Emmanuel Saez are the driving force behind proposals for a wealth tax, an idea embraced by Senators Bernie Sanders and Elizabeth Warren as a way to reduce economic inequality by forcing the richest Americans to pay taxes on everything they own and diverting that money to public services like universal health care and free college tuition.
"""
----
FMB Note: I like the wealth tax idea being put forward by Zucman and Saez. It's being referenced by both the Sanders and Warren campaign as one way to pay for a number of programs such as universal health care and free college tuition.
I'm also in favor of universal health care and free college tuition (although I think the US should create a US Open University to make the latter less expensive for tax payers and to create free public online textbooks and courses).
Of course, if Sanders or Warren get elected they will need to get their new taxes and programs passed by congress, which is a worthwhile effort that I support. There is the chance that these taxes and programs won't get passed by congress. And, if they are, there's the chance that a future Republican administration will try to undue what the Democrats have accomplished. I still think it's a worthwhile effort, but one needs to keep the challenges in mind.
Another possible use for a wealth tax would be to put it in the hands of the Federal Reserve, which could use the proceeds to fund a Basic Income Guarantee for everyone who is not wealthy. Ideally, this would help de-politicize the use of the wealth tax so it could be used along with a BIG to manage the economy.
Some economists like Robert Skidelsky now argue that monetary policy has run its course. He argues that the Fed and government policy makers need to recognize the limits of monetary policy and should therefore start looking at ways to use fiscal policy now. If policy makers simply wait until the next recession, it may be too late.
In response, other economists like Kenneth Rogoff say that fiscal policy is too politicized and slow to respond in times of crisis. This is why many economists favor monetary policy. If the economy starts to tank, the technocrats at the Fed can respond very quickly. If we assume that congress is in charge of all fiscal policy - both taxation and government spending - then it can take a long time to figure out which taxes to raise or lower, and by how much. Congress can also spend too much time trying to decide on how to increase (or decrease) spending. And, of course, congress can argue at length about how much the government needs to borrow to pay for new spending.
My proposal is that the congress should pass an act, which I call the Robinhood Act. This act would put the technocrats at the Federal Reserve in charge of a particular sub-set of fiscal policy, which I'm going to call Robinhood Fiscal Policy. In very simple terms, this sub-set of fiscal policy deals with taxing the very rich and giving to everyone else.
More specifically, Robinhood Fiscal Policy would consist of two things:
- a Billionaire Tax (BT) and
- a Basic Income Guarantee (BIG)
When the congress writes the Robinhood Act, they would define how billionaires would be taxed, but they would give the technocrats at the Fed the discretion of adjusting this tax to increase (or decrease) the amount of revenue to be raised with the tax. I will leave it to professional economists to weigh in on the specifics of how this tax would work. One simple idea would be to have an income tax on the billionaire class. The congress would leave it up to the Fed to decide what the tax rate should be for this particular tax.
Further, I think it would be good for the billionaire class to know that the proceeds from this tax can only be used for one purpose: to pay for a Basic Income Guarantee for everyone who is not a billionaire. My guess is that many billionaires - both conservative and liberal - would support this kind of wealth and income transfer.
My hope is that we can put many of our political differences on fiscal policy aside if we take the issue of how the government spends money off the table when we debate the merits of Robinhood Fiscal Policy. I'm not suggesting that we take all fiscal policy out of the hands of congress. They will still be in the business of setting most tax policy, spending policy, and borrowing policy. They're just handing over authority on a sub-set of tax and spending policy: the Billionaire Tax and the Basic Income Guarantee.
I'm also not suggesting the the Basic Income Guarantee should be seen as a substitute for other government programs. I'm suggesting that it can and should be used to stimulate aggregate demand. If managed by the Fed, it would be a quick and efficient way to get more money into the hands of the general public in times of economic crisis. Think of it as a way of dropping money out of helicopters that doesn't involve printing money and creating a lot of litter.
For those of you who are not familiar with monetary policy, you should realize that the Fed already redistributes wealth and income by setting interest rates.
- When the Fed lowers interest rates, it's being nice to borrowers, but savers may not be too happy.
- When the Fed raises interest rates, it's being nice to savers, but borrowers may not be too happy.
Giving the Fed power over Robinhood Fiscal Policy would also redistribute wealth and income. Here is one way that it could work in times of fiscal crisis:
If the economy starts to tank, then the Fed could increase both the Billionaire Tax (BT) and the Basic Income Guarantee (BIG). If both are raised by an equivalent amount, then it stimulates the economy by increasing consumer spending. This is true because billionaires already spend what they want to spend on consumer goods. They save most of their income. Non-billionaires, on the other hand, will tend to spend more on consumer goods. The poor spend almost all of any extra income they may receive on consumer goods. In general, the more affluent your are, the more you tend to save any extra income you receive. This is all basic Econ 101.
Now, it's true that the extra revenue the Fed will eventually receive from raising the Billionaire Tax won't come in immediately. This shouldn't be a problem, however. Why, you ask: it's the Fed!
When the congress writes the Robinhood Act, it could specify that the Fed should manage Robinhood Fiscal Policy by setting up two funds:
- The Bank Fund and
- The Robinhood Fund
The Fed already manages one set of books (i.e. a set of asset, liability, income, and expense accounts) for what I'm calling The Bank Fund. To better understand how Robinhood Fisal Policy would work, I'm suggesting that the Fed should set up a separate set of books for the Robinhood Fund.
The proceeds from the Billionaire Tax will be income, they will go into the Robinhood Fund. Expenditures on the Basic Income Guarantee will come out of the Robinhood Fund. If there is a time delay in collecting proceeds from the Billionaire Tax, the Robinhood Fund will still be able to increase the Basic Income Guarantee expenditures. How, you ask: by borrowing money from the Fed's Bank Fund.
Note that this sort of lending already happens when the Fed indirectly loans money to the US Treasury. In practice, the commercial banking system gets in the middle here, and makes a tidy, risk free profit by doing so. Instead of loaning money directly to the US Treasury, the Fed loans money to commercial banks at a very low rate of interest. They turn around and loan this money to the US Treasury at a higher rate of interest. Think of it: risk free profits complements of the Federal Reserve. This is an example of what I call Sheriff of Nottingham Economics. It's not very fair, but it's nice work, if you can get it.
Now, when the Fed's Bank Fund loans money to the Robinhood Fund, I suggest that they leave the commercial banking system out of it. This is supposed to be about Robinhood Economics, not Sheriff of Nottingham Economics. Instead, the Fed's Bank Fund could loan money to the Robinhood Fund directly and quickly. This would make it possible for the Robinhood Fund to stimulate the economy in a timely fashion without having to wait around for congress to make up its mind. So, Kenneth Rogoff - put that in your pipe and smoke it.
References
----------------------------------
Beshears, Fred
The Five Sector Circular Flow Model of an Economy
https://innovationmemes.blogspot.com/2017/10/the-five-sector-circular-flow-model-of.html
If you need to brush up on your macroeconomics, this is a little primer.
---
Negative Nominal Interest Rates may Be Coming: Time to buy a Safe
https://innovationmemes.blogspot.com/2020/02/negative-nominal-interest-rates-may-be.html
---
Robinhood Macroeconomics
https://innovationmemes.blogspot.com/2017/09/robin-hood-macroeconomics.html
---
Why Free Market Fundamentalism Results In Sheriff of Nottingham Economics
https://innovationmemes.blogspot.com/2019/08/why-free-market-fundamentalism-results.html
----------------------------------
Harding, Robin
Coronavirus: why central bankers say it is time for fiscal stimulus
Many policymakers are calling for more government spending in response to economic disruption
by Robin Harding in Tokyo, Brendan Greeley in Washington and Martin Arnold in Frankfurt
3/6/2020
https://www.ft.com/content/606f1c8c-5f96-11ea-8033-fa40a0d65a98
"""
The US Federal Reserve, which Ms Yellen used to chair, had already been forced to cut its target interest rate to a range of 1.5-1.75 per cent during 2019 because of concerns about global growth. Mr Draghi’s European Central Bank and the Bank of Japan still had negative interest rates, despite a decade of aggressive monetary stimulus. If any kind of shock were to hit the economy, there was little room to respond.
“All four of us said ‘fiscal policy’, not having any clue coronavirus was coming,” says Mr Posen, a former BoE policymaker who is now head of the Peterson Institute in Washington, describing the panel at the American Economic Association’s annual meeting.
Just weeks later, that shock arrived. First coronavirus ripped through Wuhan, prompting perhaps the largest quarantine in history and all but shutting down China’s economy. Then the number of cases began to rise around the world, slowly but inexorably, prompting the OECD to warn this week of a global downturn.
"""
----------------------------------
Rogoff, Kenneth
Fantasy Fiscal Policy
by Kenneth Rogoff
Feb 3, 2020
https://www.project-syndicate.org/commentary/resisting-risky-fiscal-policy-by-kenneth-rogoff-2020-02
"""
Many leading central bankers now argue that, instead of just playing its traditional role of deciding the allocation of government spending, investment, taxes, and transfers, fiscal policy must substitute for monetary policy in economic fine-tuning and fighting recession. That would be a big mistake.
"""
----------------------------------
Skidelsky, Robert
The Monetarist Fantasy Is Over
by Robert Skidelsky
Feb 17, 2020
UK Prime Minister Boris Johnson, determined to overcome Treasury resistance to his vast spending ambitions, has ousted Chancellor of the Exchequer Sajid Javid. But Johnson’s latest coup also is indicative of a global shift from monetary to fiscal policy.
https://www.project-syndicate.org/commentary/boris-johnson-global-shift-from-monetary-to-fiscal-policy-by-robert-skidelsky-2020-02
"""
Kenneth Rogoff of Harvard recently argued that fiscal stabilization policy “is far too politicized to substitute consistently for modern independent technocratic central banks.” But instead of considering how this defect might be overcome, Rogoff sees no alternative to continuing with the prevailing monetary-policy regime – despite the overwhelming evidence that central banks are unable to play their assigned role. At least fiscal policy might in principle be up to the task of economic stabilization; there is no chance that central banks will be.
"""
--------------------------------
Strain, Michael
Don’t Cut the Payroll Tax. Just Send People Money.
Here’s a better way to goose the coronavirus economy.
By Michael R. Strain
March 11, 2020
https://www.bloomberg.com/opinion/articles/2020-03-11/payroll-tax-cut-isn-t-best-way-to-perk-up-coronavirus-economy
Tankersly, Jim
The Liberal Economists Behind the Wealth Tax Debate
Gabriel Zucman and Emmanuel Saez have crashed the Democratic primary with their idea — and angered some economists.
Gabriel Zucman, left, and Emmanuel Saez of the University of California, Berkeley, are the most polarizing economists in the 2020 campaign.
By Jim Tankersley and Ben Casselman
Feb. 21, 2020
https://www.nytimes.com/2020/02/21/us/politics/the-liberal-economists-behind-the-wealth-tax-debate.html
"""
BERKELEY, Calif. — One of the most liberal policy proposals animating the Democratic presidential primaries is the handiwork of two French economists who are not formally advising any campaign and have barely met the candidates running for the White House.
Gabriel Zucman and Emmanuel Saez are the driving force behind proposals for a wealth tax, an idea embraced by Senators Bernie Sanders and Elizabeth Warren as a way to reduce economic inequality by forcing the richest Americans to pay taxes on everything they own and diverting that money to public services like universal health care and free college tuition.
"""
----
FMB Note: I like the wealth tax idea being put forward by Zucman and Saez. It's being referenced by both the Sanders and Warren campaign as one way to pay for a number of programs such as universal health care and free college tuition.
I'm also in favor of universal health care and free college tuition (although I think the US should create a US Open University to make the latter less expensive for tax payers and to create free public online textbooks and courses).
Of course, if Sanders or Warren get elected they will need to get their new taxes and programs passed by congress, which is a worthwhile effort that I support. There is the chance that these taxes and programs won't get passed by congress. And, if they are, there's the chance that a future Republican administration will try to undue what the Democrats have accomplished. I still think it's a worthwhile effort, but one needs to keep the challenges in mind.
Another possible use for a wealth tax would be to put it in the hands of the Federal Reserve, which could use the proceeds to fund a Basic Income Guarantee for everyone who is not wealthy. Ideally, this would help de-politicize the use of the wealth tax so it could be used along with a BIG to manage the economy.
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