Keynes on cutting the payroll tax in a downturn

It seems he favored the idea.  Mario Rizzo directs me to his letter to James Meade, circa 1942:

I
am converted to your proposal…for varying rates of contributions in
good and bad times. (June 16, 1942). Keynes, Collected Writings, vol.
27, p. 208. 

…[Y]ou
are able to show fluctuations in income of an order of magnitude which
is significant in the context… So far as employees are concerned,
reductions in contributions are more likely to lead to increased
expenditure as compared with saving than a reduction in income tax
would, and are free from the objection to a reduction in income tax
that the wealthier classes would benefit disproportionately. At the
same time, the reduction to employers, operating as a mitigation of the
costs of production, will come in particularly helpfully in bad times.  (July 1, 1942). Keynes, Collected Writings, vol. 27, p. 218.

Will today's Keynesians follow suit?

Comments

Well, the letter was written in 1942, which was during WWII, so we know the answer to that: it's only relevant if they want it to be.

Will today's Keynesians follow suit?

Of course not.

"Keynesians" has very little to do with the man or his writings, but is a catchall for:

"We very few, but very smart, technocrats should spend more money than we collect because it is a good, progressive idea. It is a good progressive idea because, well, trust us, we listen to NPR, read the New York Times, adore Paul Krugman and despise the Chicago School (and even know a little something about them); we think Bush is a dunderhead and, so, that's all you need to know. And wasteful spending on our constituents is just the way Washington works, wink wink, so stop being partisan. Now go post a comment on Matthew Yglesias's blog. Did I mention I went to Harvard and am very smart?"

Guy,
I think negative externalities accrue when we disparage poor expert consensus in a way that doesn't clearly lead to advocating for better expert consensus.

As for unearthing an old Keynes letter, I understand it may be fighting fire with fire, but really, I think the economics and legal profession should move away the prerational human tendency to want to derive policy wisdom from interpreting the texts of ancestors. Let's leave that to religious fundamentalism.

I'm more intrigued by the empirical work of folks like Romer and Barro and others, than the dueling sacred texts of Keynes and Mises.

Why would anyone respond differently to a reduction in the payroll tax versus a reduction in the income tax? I daresay millions of Americans don't even know the difference. I do know the difference, and I certainly don't put them in separate mental baskets. It's all just money the Feds steal from me and then waste, whether it's nominally slated for Social Security or general revenue matters not at all. If Super Duper Tax Cut ABC reduces my monthly tax bleed by $X from the income tax column, and Ultra Mega Tax Cut JKL reduces it by $X from the payroll tax column, I am (at a point in time) 100% indifferent between the two.

Frankly I'm a bit annoyed with the economics profession about this tax cuts/spend issue. The one thing you hope as a non-economist is that the people who devote their life to this stuff will have clear and balanced ideas. Sadly, the balance of opinion is split completely down party/ideology lines. The fact that you all hang on to your ideologies is particularly troubling when none of you predicted this mess. Clearly your models are ovrly simplistic and the world is just too complex for you to understand. In that case you should say so, instead of pushing for something you have no serious reason to think will work. Mankiw isn't an idiot and neither is Krugman. Both have access to the same information. Why on Earth do they disagree so vociferously? Why does Alex always come to conclusions that fit his libertarian bias? Roubini's the only one who called this (and CR with the housing bust) and you guys just laugh it off as if he got lucky. I'd like some mea culpas.

The question the public should all ask is "What is the appropriate thing to do when you can't trust the experts to be balanced?"

Mark, thanks.

Finn,
From my perspective I don't think we should be looking for balance as a proxy for putting empiricism and transparency about uncertainty over ideology, we should instead be looking explicitly for our experts to put empiricism and transparency about uncertainty over ideology. I suspect the problem is perverse incentives (particularly for celebrity or at a lesser level for blog constituents, and in the case at least of Republicans, maybe for presidential appointment) and the corruption of power (having expert status at the level of Mankiw and Krugman is a form of power).

The solution might be strong alternative incentives such as prizes for the behavior we want to incentivize in our economic experts.

1) The best source I've found on Keynes' influence on British policymaking for the post WWII era is in the following article . . . written by a British scholar who had full access to Keynes' collected works:

The "Keynesian Revolution" in Economic Policy-Making Author(s): Alan Booth Source: The Economic History Review, New Series, Vol. 36, No. 1 (Feb., 1983), pp. 103-123 Published by: Blackwell Publishing on behalf of the Economic History Society Stable URL: http://www.jstor.org/stable/2598900. There seems, alas, no ungated version.

....

2) The background for Keynes' role in that policymaking can be sketched in. The traditional and major infuence in economic policymaking was the British Treasury, generally manned in WWII at the top with orthodox thinking . . . though a few of the newer, young recruits were sympathetic to Keynes writing. Pitted against the Treasury was a new Economic Section of temporary civil servant economists . . . the director of the section an Austrian-influenced economist and former head of LSE, Lionel Robbins. Even so, the other economists like James Meade --- who would later win a Nobel Prize in economics --- were heavily imbued in Keynes theoretical work.

Keynes himself wasn't part of the Economic Section. Elevated to the House of Lords in the war, he did correspond extensively with Meade and others --- hence Wilson's important research into what Keynes' views actually were --- but that was the extent of his policymaking influence. It was indirect. And overwhelmingly, he sided with the Keynesians in the Economic Section and encouraged Meade and others to work with the Treasury officials and arrive at some compromise that would be accepted by it.

.....

3) Now to the point raise by Tyler's interesting quote. The background here is particularly important.

As Booth notes, Keynes wanted the Treasury after WWII to create two budgets: one for capital account and one for ordinary governmental expenditures. The capital account would include public-works spending and expanded social security outlays, plus some other items. Specifically, to quote a paragraph by Booth, followed by a long letter that Keynes wrote (buggy paragraphing for readability):

"The problem for budgetary policy, thus, lay in phases two and three, and here Keynes's views on reform of the national accounts had their impact. Keynes wanted to group public sector investment, the social security fund, and certain other categories of public income and expenditure in a separate capital account.

"The ordinary current account should be balanced, the capital account need not be. All this is recognized by Wilson, but he does not acknowledge (because the relevant paper was not included in the Collected Writings) that Keynes was prepared, albeit reluctantly, to see a deficit even in the current account if all else failed to cure unemployment during the third stage noted above. He [Keynes] wrote [to Herald Brittain, a top Treasury official) :

"[Your] note does not sufficiently distinguish between the proposed policy of deficit financing (in certain circumstances) and the proposal for a capital budget. These two suggested methods for maintaining stability of employment, so far from being the same thing, are really the opposite of one another.

"The proposal for a capital budget aims at maintaining equilibrium by increasing or decreasing the scale of investment. Deficit financing, on the other hand, aims at securing it by increasing or decreasing the scale of consumption. Personally, I am primarily an adherent of the capital budget method. A generation or two later, when the demand for capital is much more saturated than it is now, I might change my mind.

"Though, even then I think I should be in favour of long-term methods of increasing consumption and would not have much faith in trying to do the trick by short-term fluctuations in consumption habits, which is what deficit financing would be trying to influence. I am much attracted by Meade's social security proposal because that does seem to me to have exceptional technical advantages, particularly owing to its rapidity of operation, in which respect it is much superior to anything which could be done by means of a capital budget.

"But, in general, I do not like deficit-financing, except as a last resort, in which case it will happen whether I like it or not. I should support the Treasury in rejecting deficit financing as a regular and deliberate instrument for maintaining equilibrium.

"The capital budget is something entirely distinct and should not be regarded as raising questions of prudence and conservatism in financing.67"

...

Booth's footnote 67" "The social security plan and contra-cyclical public works were in the front line [defense against recessions], but, in reserve, were less detailed proposals for consumer credits, and, at the insistence of Cherwell, work began on tax changes to regulate aggregate demand. P.R.O. CAB I24/2IO, Cherwell to Woolton, 29 March I944.

....

The moral? You decide for yourself.

.....

Michael Gordon, AKA, the buggy professor

I'm all for changes in the payroll taxes, so long as we are going to at least pretend that they are permanent. A holiday is about the least sensible idea ever. It is entirely reasonable to expect businesses to respond to a holiday by shifting taxable behavior in time, shifting production forward to the 3rd quarter (which is the suggested date for the holiday start) and exacerbating the drop in employment and consumption over Q1/Q2. We also have to be pretty sure that the downturn overall will end within 12 months, because when that holiday comes to an end we can continue to expect those business to return to lowered levels of production.

Actually today's liberals --Keynesian -- had rather follow Milton Friedmans advice and use the Earned Income Tax Credit.

"The moral? You decide for yourself."

I've decided that Keynes was largely opposed to budget deficits.

I've also decided that Keynesian economics, as taught for the last 60 or more years, is a massive misrepresentation of Keynes' writings.

As for the 'stimulus' package, i've decided that its a massive exercise in pork barreling, that uses the sham of 'Keynesianism' as its rationalization.

"Wasn't the deficit running at Keynesian levels already (for the last 5 year at least)?"

Excellent point.

What does standard macro theory say about an economy going into recession when the federal budget is *already in deficit*?

Doesn't the deficit (in theory) plug the gap between ex ante and ex post investment, and if so, doesn't the current economic decline in the context of an existing (and large) budget deficit refute standard macro theory?

Further, suppose that the current deficit was (in a parallel universe) in balance going into this recession. Would the stimulus package need to be the same size, or bigger? That is, does the current deficit 'count', or do we set a new baseline continuously?

What does textbook theory have to say about any of this? If "not much", then are we making it up as we go?

Well, yesterday's Keynesians did, circa 2001, 2003, 2006, so the payroll tax is already cut and has been for five years, and is still cut, using the term payroll tax to be the tax taken out of pay.

As cutting the taxes taken out of pay hasn't resulted in job creation anything like that of the higher tax 80s or higher tax 90s, don't you think Keynes would change him mind and oppose tax cuts?

Keynes wasn't an ideologue and easily changed his mind when data, events, or argument changed his mind on something. Apparently that drove some noted opponents of Keynes nuts because they would prepare their argument for a debate, and then Keynes was arguing something new because he changed his mind.

Those who like tax cuts keep looking for reasons to support tax cuts in the face of lots of evidence that tax cuts don't boost the economy nor create jobs.

cutting the payroll tax in a downturn

Let me tell you how this small business owner will cut the payroll tax: overall compensation (wages, bonuses, benefits) will be reduced (including mine) and positions will not be filled. If there is money left over, quaintly called "profit", it will be spent automating and simplifying processes as much as possible. Oh, and bartering will increase.

Pretty simple, really.

As a tax burden and the burden of complying with that tax regime increase, owners of businesses look for ways to lower that tax and simplify compliance. There are many advantages to owning your own small/micro business, including much more freedom from company policies and practices you have no influence in making or enforcing. A large bonus, from my perspective, is an increased awareness of the presence and the burdens of the state.

The number of small businesses of all stripes will continue to increase as it becomes more sensible to pursue your interests working for yourself rather than working for someone else, especially BigCo. This in turn will lead to more citizens asking why they must pay for government policies and practices that they have no influence in making or enforcing.

"The one thing you hope as a non-economist is that the people who devote their life to this stuff will have clear and balanced ideas. Sadly, the balance of opinion is split completely down party/ideology lines."

If only this were true. Even Mark Zandi, economic adviser to the McCain campaign and economist for Moody's, agrees with President Obama that the government needs to be spending massive sums of money to stimulate this economy or it will be a disaster. It's nice to make all-encompassing statements about economists falling along ideological lines, but that doesn't make them true. Basically you have a situation where 36 out of 41 republicans think the stimulus package should be 100% tax cuts. How do you reason with a party who completely eschews all economic theory and follows ideology over country?

Additionally, in regards to the excerpt form Keynes, who was it who raised those payroll taxes originally back in the 80's? Oh yeah, it was Reagan. Who then reduced income taxes thus putting a larger tax burden on the lower-class while giving a large break to the wealthy.

Payroll Taxes reduction is the need of the hour and should be implemented for 2009

Mark
HR Outsourcing

Get off your high horse and stop being offended by a bag! Now I am going to continue my search to locate one of these so people can give me the sideways glare on the street and enrage themselves further! HAHA

I understand it may be fighting fire with fire, but really, I think the economics and legal profession should move away the prerational human tendency to want to derive policy wisdom from interpreting the texts of ancestors. Let's leave that to religious fundamentalism.

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