Wednesday, 30 July 2014
Scott Sumner still promotes market monetarism.
Scott’s “Market Monetarism” has come in for plenty of criticism recently, e.g. by Tony Yates and Simon Wren-Lewis. Plus I’ve been bashing away at MM for some time, e.g. here and here and here.
However, Scott won’t give up. He continues to repeat the same stuff, so let’s run through some of the errors in his latest effort.
First, he claims that money fed into the private sector via fiscal stimulus will or may have to be removed later via what he calls “distortionary” taxation. He has never to my knowledged explained why taxes are distortionary.
Obviously taxes CAN BE distortionary: e.g. a tax just on red cars but not cars of a different colour. On the other hand taxes can be very distortion free: e.g. a flat percentage tax on everyone’s income.
Moreover, MM itself is distortionary in that it involves asset purchases and thus feeds money into a narrow section of the population, the asset rich, rather than feeding money into Main Street.
Next, there is this bizarre paragraph (which I’ve put in blue):
The fiscal part of this plan is inefficient for the same reason as it would be inefficient to give people money when not at the zero bound---the deadweight cost of taxation. Some people respond that the funds are created out of thin air, so there is no deadweight cost. That's wrong for two reasons. First, the funds will probably have to be partly removed when the economy exits the zero bound, in order to prevent high inflation. That requires distortionary taxes. Yup, there's still no free lunch. And even if the funds never had to be removed, if we are at the zero bound forever, there is an opportunity cost; the same funds could be used to reduce distortionary taxation.
Now that final sentence is meaningless and for the following reasons. One way of implementing fiscal stimulus is to cut taxes, and if that’s the method chosen, then Scott is saying “cutting taxes involves an opportunity cost, namely that the relevant money could have been used to cut taxes”. The word “tautology” springs to mind.
The only alternative way of implementing fiscal stimulus is to raise public spending. In that case it’s fair enough to say that public spending involves an opportunity cost, namely cutting taxes. I.e.cutting taxes is the alternative to more public spendinng.
But if a democratically elected government takes the decision to raise public spending rather than cut taxes, and assuming that government fairly represents the views of the people, then the general view is that the relevant country gets better value for money by raising public spending rather than cutting taxes. In which case it’s nonsense to suggest that cutting taxes would have been better than raising public spending, or to witter on about “opportunity costs”.