参考
FUNCTIONAL FINANCE AND THE FEDERAL DEBT（Adobe PDF） www.gc.cuny.edu/CUNY.../lerner-function-finance.pdf -キャッシュ Author(s): ABBA P. LERNER. Source: Social Research, Vol. 10, No. 1 ( FEBRUARY 1943) ... all be undertake only to the results of these actions on the economy established traditional doctrine about what is sound or unsound.
FUNCTIONAL FINANCE AND THE FEDERAL DEBT Author(s): ABBA P. LERNER 1943
https://nam-students.blogspot.com/2019/03/functional-finance-and-federal-debt.html
機能的財政と二つのルールこうした公共目的の観点に基づいて、ＭＭＴから直接導かれる帰結とされるのが、「機能的財政（functional finance）」と呼ばれる政策論です。機能的財政は、「公共投資などの財政政策を中心とした経済政策によって総需要を拡大し、完全雇用を達成する」という『一般理論』のビジョンを引き継ぐ形で、序章でも紹介した米国の経済学者、アバ・ラーナーが提唱したものです。ラーナーは、一九四三年に出版された「機能的財政と連邦債務」という論文で、機能的財政について以下のように定義しています。
その中核となる発想は、支出や課税、借入れや償還、貨幣の新規発行や回収といった政府の財政政策は、こうした行動が経済にもたらす「結果」という観点のみに基づいて実行されるべきであって、何が健全で何が不健全かという確立された伝統的な教義に従うべきではない☆、というものである。「効果」だけで判断するというこの原則は、人間の他の多くの活動領域でも適用されてきたものであって、スコラ哲学に対抗するものとしての科学的方法として知られている。経済の中でどのように作用し、あるいは機能しているかによって、財政的な手段の是非を判断する原則を、我々は「機能的財政」と呼ぼう〔＊92〕。
以下p.39/,p.xv
David Colander
https://community.middlebury.edu/~colander/resume.html
The Free Market Solution to Inflation
The Collegiate Forum, Fall 1978
https://www.boeckler.de/pdf/v_2008_10_31_moore_2.pdf
As Abba Lerner frequently used to proclaim, “In the long run we are always in the short run.” Class notes, The John Hopkins University, 1957.
https://community.middlebury.edu/~colander/articles/Functional%20Finance,%20New%20Classical%20Economics%20and%20Great%20Great%20Grandsons.pdf
As Abba Lerner frequently used to proclaim, “In the long run we are always in the short run.” Class notes, The John Hopkins University, 1957.
The above letter from John Maynard Keynes to Abba Lerner celebrating his book The. Economics of ... Standard economics simply avoided ... simply a collection of ongoing short runs and, in the long run, we find ourselves in another short run.
FUNCTIONAL FINANCE AND THE FEDERAL DEBT Author(s): ABBA P. LERNER 1943
https://nam-students.blogspot.com/2019/03/functional-finance-and-federal-debt.html@
https://freeassociations2020.blogspot.com/2020/05/functional-finance-and-federal-debt.html
https://freeassociations2020.blogspot.com/2020/05/functional-finance-and-federal-debt.html
https://translate.google.com/translate?sl=en&tl=ja&u=https%3A%2F%2Fnam-students.blogspot.com%2F2019%2F03%2Ffunctional-finance-and-federal-debt.html
Abba Lerner clarified this when he said, "In the long run we are simply in another short run.
Abba Lerner clarified this when he said, "In the long run we are simply in another short run.
FUNCTIONAL FINANCE AND THE FEDERAL DEBT Author(s): ABBA P. LERNER Source: Social Research, Vol. 10, No. 1 (FEBRUARY 1943), pp. 38-51 Published by: The Johns Hopkins University Press Stable URL: https://www.jstor.org/stable/40981939 Accessed: 12-02-2019 22:06 UTC
FUNCTIONAL FINANCE AND THE FEDERAL DEBT.
BY ABBA P. LERNER
BY ABBA P. LERNER
Apart from the necessity of winning the war, there is no task facing society today so important as the elimination of economic in- security. If we fail in this after the war the present threat to demo- cratic civilization will arise again. It is therefore essential that we grapple with this problem even if it involves a little careful thinking and even if the thought proves somewhat contrary to our precon- ceptions. In recent years the principles by which appropriate government action can maintain prosperity have been adequately developed, but the proponents of the new principles have either not seen their full logical implications or shown an over-solicitousness which caused them to try to save the public from the necessary mental exercise. This has worked like a boomerang. Many of our publicly minded men who have come to see that deficit spending actually works still oppose the permanent maintenance of prosperity be- cause in their failure to see how it all works they are easily fright- ened by fairy tales of terrible consequences.
Ⅰ
As formulated by Alvin Hansen and others who have developed and popularized it, the new fiscal theory (which was first put for- ward in substantially complete form by J. M. Keynes in England) sounds a little less novel and absurd to our preconditioned ears than it does when presented in its simplest and most logical form, with all the unorthodox implications expressly formulated. In some cases the less shocking formulation may be intentional, as a tactical device to gain serious attention. In other cases it is due not to a desire to sugar the pill but to the fact that the writers themselves have not seen all the unorthodox implications- perhaps sub- consciously compromising with their own orthodox education.
39
But now it is these compromises that are under fire. Now more than ever it is necessary to pose the theorems in the purest form. Only thus will it be possible to clear the air of objections which really are concerned with awkwardnesses that appear only when the new theory is forced into the old theoretical framework. Fundamentally the new theory, like almost every important dis- covery, is extremely simple. Indeed it is this simplicity which makes the public suspect it as too slick. Even learned professors who find it hard to abandon ingrained habits of thought have complained that it is "merely logical' ' when they could find no flaw in it. What progress the theory has made so far has been achieved not by simpli- fying it but by dressing it up to make it more complicated and accompanying the presentation with impressive but irrelevant sta- tistics. The central idea is that government fiscal policy, its spending and taxing, its borrowing and repayment of loans, its issue of new money and its withdrawal of money, shall all be undertaken with an eye only to the results of these actions on the economy and not to any established traditional doctrine about what is sound or unsound. This principle of judging only by effects has been applied in many other fields of human activity, where it is known as the method of science as opposed to scholasticism. The principle of judging fiscal measures by the way they work or function in the economy we may call Functional Finance. The first financial responsibility of the government (since no- body else can undertake that responsibility) is to keep the total rate of spending in the country on goods and services neither greater nor less than that rate which at the current prices would buy all the goods that it is possible to produce. If total spending is allowed to go above this there will be inflation, and if it is allowed to go below this there will be unemployment. The government can in- crease total spending by spending more itself or by reducing taxes so that the taxpayers have more money left to spend. 40 It can reduce total spending by spending less itself or by raising taxes so that tax- payers have less money left to spend. By these means total spending can be kept at the required level, where it will be enough to buy the goods that can be produced by all who want to work, and yet not enough to bring inflation by demanding (at current prices) more than can be produced. In applying this first law of Functional Finance, the government may find itself collecting more in taxes than it is spending, or spend- ing more than it collects in taxes. In the former case it can keep the difference in its coffers or use it to repay some of the national debt, and in the latter case it would have to provide the difference by borrowing or printing money. In neither case should the gov- ernment feel that there is anything especially good or bad about this result; it should merely concentrate on keeping the total rate of spending neither too small nor too great, in this way preventing both unemployment and inflation. An interesting, and to many a shocking, corollary is that taxing is never to be undertaken merely because the government needs to make money payments. According to the principles of Functional Finance, taxation must be judged only by its effects. Its main effects are two: the taxpayer has less money left to spend and the govern- ment has more money. The second effect can be brought about so much more easily by printing the money that only the first effect is significant. Taxation should therefore be imposed only when it is desirable that the taxpayers shall have less money to spend, for example, when they would otherwise spend enough to bring about inflation. The second law of Functional Finance is that the government should borrow money only if it is desirable that the public should have less money and more government bonds, for these are the effects of government borrowing. This might be desirable if other- wise the rate of interest would be reduced too low (by attempts on the part of the holders of the cash to lend it out) and induce too much investment, thus bringing about inflation. 41 Conversely, the government should lend money (or repay some of its debt) only if it is desirable to increase the money or to reduce the quantity of government bonds in the hands of the public. When taxing, spend- ing, borrowing and lending (or repaying loans) are governed by the principles of Functional Finance, any excess of money outlays over money revenues, if it cannot be met out of money hoards, must be met by printing new money, and any excess of revenues over outlays can be destroyed or used to replenish hoards. The almost instinctive revulsion that we have to the idea of printing money, and the tendency to identify it with inflation, can be overcome if we calm ourselves and take note that this printing does not affect the amount of money spent. That is regulated by the first law of Functional Finance, which refers especially to inflation and unemployment. The printing of money takes place only when it is needed to implement Functional Finance in spending or lend- ing (or repayment of government debt).1 In brief, Functional Finance rejects completely the traditional doctrines of "sound finance" and the principle of trying to balance the budget over a solar year or any other arbitrary period. In their place it prescribes: first, the adjustment of total spending (by every- body in the economy, including the government) in order to elim- inate both unemployment and inflation, using government spend- ing when total spending is too low and taxation when total spend- ing is too high; second, the adjustment of public holdings of money and of government bonds, by government borrowing or debt repayment, in order to achieve the rate of interest which results in the most desirable level of investment; and, third, the printing, hoarding or destruction of money as needed for carrying out the first two parts of the program.
1Borrowing money from the banks, on conditions which permit the banks to issue new credit money based on their additional holdings of government securities, must be considered for our purpose as printing money. In effect the banks are acting as agents for the government in issuing credit or bank money.
42
Ⅱ
In judging the formulations of economists on this subject it is dif- ficult to distinguish between tact in smoothing over the more staggering statements of Functional Finance and insufficient clarity on the part of those who do not fully realize the extremes that are im- plied in their relatively orthodox formulations. First there were the pump-primers, whose argument was that the government merely had to get things going and then the economy could go on by itself. There are very few pump-primers left now. A formula similar in some ways to pump-priming was developed by Scandinavian econ- omists in terms of a series of cyclical, capital and other special budg- ets which had to be balanced not annually but over longer periods. Like the pump-priming formula it fails because there is no reason for supposing that the spending and taxation policy which main- tains full employment and prevents inflation must necessarily bal- ance the budget over a decade any more than during a year or at the end of each fortnight. As soon as this was seen - the lack of any guarantee that the main- tenance of prosperity would permit the budget to be balanced even over longer periods-it had to be recognized that the result might be a continually increasing national debt (if the additional spending were provided by the government's borrowing of the money and not by printing the excess of its spending over its tax revenues). At this point two things should have been made clear: first, that this possibility presented no danger to society, no matter what un- imagined heights the national debt might reach, so long as Func- tional Finance maintained the proper level of total demand for current output; and second (though this is much less important), that there is an automatic tendency for the budget to be balanced in the long run as a resultroi the application of Functional Finance, even if there is no place for the principle of balancing the budget. No matter how much interest has to be paid on the debt, taxation must not be applied unless it is necessary to keep spending down to prevent inflation. The interest can be paid by borrowing still more. As long as the public is willing to keep on lending to the govern- ment there is no difficulty, no matter how many zeros are added to the national debt. If the public becomes reluctant to keep on lending, it must either hoard the money or spend it. 43 If the public hoards, the government can print the money to meet its interest and other obligations, and the only effect is that the public holds government currency instead of government bonds and the government is saved the trouble of making interest payments. If the public spends, this will increase the rate of total spending so that it will not be neces- sary for the government to borrow for this purpose; and if the rate of spending becomes too great, then is the time to tax to prevent inflation. The proceeds can then be used to pay interest and repay government debt. In every case Functional Finance provides a sim- ple, quasi-automatic response. But either this was not seen clearly or it was considered too shock- ing or too logical to be told to the public. Instead it was argued, for example by Alvin Hansen, that as long as there is a reasonable ratio between national income and debt, the interest payment on the national debt can easily come from taxes paid out of the in- creased national income created by the deficit financing. This unnecessary "appeasement" opened the way to an extremely effective opposition to Functional Finance. Even men who have a clear understanding of the mechanism whereby government spending in times of depression can increase the national income by several times the amount laid out by the government, and who understand perfectly well that the national debt, when it is not owed to other nations, is not a burden on the nation in the same way as an individual's debt to other individuals is a burden on the individual, have come out strongly against "deficit spending."* It has been argued that "it would be impossible to devise a program better adapted to the systematic undermining of the private-enter- prise system and the hastening of the final catastrophe than 'deficit spending/ "$ These objections are based on the recognition that although every dollar spent by the government may create several dollars of a income in the course of the next year or two, the effects then dis- appear.
An excellent example of this is the persuasive article by John T. Flynn in Harper's Magazine for July 1942. 8Flynn, ibid.
44
From this it follows that if the national income is to be maintained at a high level the government has to keep up its contribution to spending for as long as private spending is insufficient by itself to provide full employment. This might mean an indefinite continuation of government support to spending (though not neces- sarily at an increasing rate); and if, as the "appeasement" formula- tion suggests, all this spending comes out of borrowing, the debt will keep on growing until it is no longer in a "reasonable" ratio to income. This leads to the crux of the argument. If the interest on the debt must be raised out of taxes (again an assumption that is un- challenged by the "appeasement" formulation) it will in time con- stitute an important fraction of the national income. The very high income tax necessary to collect this amount of money and pay it to the holders of government bonds will discourage risky private in- vestment, by so reducing the net return on it that the investor is not compensated for the risk of losing his capital. This will make it necessary for the government to undertake still more deficit financing to keep up the level of income and employment. Still heavier taxation will then be necessary to pay the interest on the growing debt- until the burden of taxation is so crushing that private investment becomes unprofitable, and the private enterprise economy collapses. Private firms and corporations will all be bankrupted by the taxes, and the government will have to take over all industry. This argument is not new. The identical calamities, although they are now receiving much more attention than usual, were promised when the first income tax law of one penny in the pound was proposed. All this only makes it more important to evaluate the significance of the argument.
Ⅲ
There are four major errors in the argument against deficit spending, four reasons why its apparent conclusiveness is only illusory.
FUNCTIONAL FINANCE 45
In the first place, the same high income tax that reduces the re- turn on the investment is deductible for the loss that is incurred if the investment turns out a failure. As a result of this the net return on the risk of loss is unaffected by the income tax rate, no matter how high that may be. Consider an investor in the $50,000- a-year income class who has accumulated $10,000 to invest. At 6 per- cent this would yield $600, but after paying income tax on this addition to his income at 60 cents in the dollar he would have only $240 left. It is argued, therefore, that he would not invest because this is insufficient compensation for the risk of losing $10,000. This argument forgets that if the $10,000 is all lost, the net loss to the investor, after he has deducted his income tax allowance, will be only $4,000, and the rate of return on the amount he actually risks is still exactly 6 percent; $240 is 6 percent of $4,000. The effect of the income tax is to make the rich man act as a kind of agent work- ing for society on commission. He receives only a part of the return on the investment, but he loses only a part of the money that is invested. Any investment that was worth undertaking in the absence of the income tax is still worth undertaking. Of course, this correction of the argument is strictly true only where 100 percent of the loss is deductible from taxable income, where relief from taxation occurs at the same rate as the tax on returns. There is a good case against certain limitations on permis- sible deduction from the income tax base for losses incurred, but that is another story. Something of the argument remains, too, if the loss would put the taxpayer into a lower income tax bracket, where the rebate (and the tax) is at a lower rate. There would then be some reduction in the net return as compared with the potential net loss. But this would apply only to such investments as are large enough to threaten to impoverish the investor if they fail. It was for the express purpose of dealing with this problem that the cor- poration was devised, making it possible for many individuals to combine and undertake risky enterprises without any one person having to risk all his fortune on one venture. 46 But quite apart from corporate investment, this problem would be met almost entirely if the maximum rate of income tax were reached at a relatively low level, say at $25,000 a year (low, that is, from the point of view of the rich men who are the supposed source of risk capital). Even if all income in excess of $25,000 were taxed at 90 percent there would be no discouragement in the investment of any part of income over this level. True, the net return, after payment of tax, would be only one-tenth of the nominal interest payments, but the amount risked by the investors would also be only ten percent of the actual capital invested, and therefore the net return on the capital actually risked by the investor would be unaffected. In the second place, this argument against deficit spending in time of depression would be indefensible even if the harm done by debt were as great as has been suggested. It must be remembered that spending by the government increases the real national income of goods and services by several times the amount spent by the gov- ernment, and that the burden is measured not by the amount of the interest payments but only by the inconveniences involved in the process of transferring the money from the taxpayers to the bondholders. Therefore objecting to deficit spending is like argu- ing that if you are offered a job when out of work on the condition that you promise to pay your wife interest on a part of the money earned (or that your wife pay it to you) it would be wiser to con- tinue to be unemployed, because in time you will be owing your wife a great deal of money (or she will be owing it to you), and this might cause matrimonial difficulties in the future. Even if the in- terest payments were really lost to society, instead of being merely transferred within the society, they would come to much less than the loss through permitting unemployment to continue. That loss would be several times as great as the capital on which these interest payments have to be made. In the third place, there is no good reason for supposing that the government would have to raise all the interest on the national debt by current taxes. We have seen that Functional Finance per- mits taxation only when the direct effect of the tax is in the social interest, as when it prevents excessive investment which would bring about inflation. 47 If taxes imposed to pre- vent inflation do not result in sufficient proceeds, the interest on the debt can be met by borrowing or printing the money. There is no risk of inflation from this, because if there were such a risk a greater amount would have to be collected in taxes. This means that the absolute size of the national debt does not matter at all, and that however large the interest payments that have to be made, these do not constitute any burden upon society as a whole. A completely fantastic exaggeration may illustrate the point. Suppose the national debt reaches the stupendous total of ten thousand billion dollars (that is, ten trillion, $10,000,000,- 000,000), so that the interest on it is 300 billion a year. Suppose the real national income of goods and services which can be produced by the economy when fully employed is 150 billion. The interest alone, therefore, comes to twice the real national income. There is no doubt that a debt of this size would be called "unreasonable." But even in this fantastic case the payment of the interest constitutes no burden on society. Although the real income is only 150 billion dollars the money income is 450 billion- 150 billion in income from the production of goods and services and 300 billion in income from ownership of the government bonds which constitute the na- tional debt. Of this money income of 450 billion, 300 billion has to be collected in taxes by the government for interest payments (if 10 trillion is the legal debt limit), but after payment of these taxes there remains 150 billion dollars in the hands of the tax- payers, and this is enough to pay for all the goods and services that the economy can produce. Indeed it would do the public no good to have any more money left after tax payments, because if it spent more than 150 billion dollars it would merely be raising the prices of the goods bought. It would not be able to obtain more goods to consume than the country is able to produce. Of course this illustration must not be taken to imply that a debt of this size is at all likely to come about as a result of the application of Functional Finance. As will be shown below, there is a natural tendency for the national debt to stop growing long before it comes anywhere near the astronomical figures that we have been playing with. 48 The unfounded assumption that current interest on the debt must be collected in taxes springs from the idea that the debt must be kept in a "reasonable" or "manageable" ratio to income (what- ever that may be). If this restriction is accepted, borrowing to pay the interest is eliminated as soon as the limit of "reasonableness" is reached, and if we further rule out, as an indecent thought, the possibility oí printing the money, there remains only the possibility of raising the interest payments by taxes. Fortunately there is no need to assume these limitations so long as Functional Finance is on guard against inflation, for it is the fear of inflation which is the only rational basis for suspicion of the printing of money. Finally, there is no reason for assuming that, as a result of the continued application of Functional Finance to maintain full em- ployment, the government must always be borrowing more money and increasing the national debt. There are a number of reasons for this. First, full employment can be maintained by printing the money needed for it, and this does not increase the debt at all. It is probably advisable, however, to allow debt and money to increase together in a certain balance, as long as one or the other has to increase. Second, since one of the greatest deterrents to private investment is the fear that the depression will come before the investment has paid for itself, the guarantee of permanent full employment will make private investment much more attractive, once investors have got over their suspicions of the new procedure. The greater private investment will diminish the need for deficit spending. Third, as the national debt increases, and with it the sum of pri- vate wealth, there will be an increasingly yield from taxes on higher incomes and inheritances, even if the tax rates are unchanged. These higher tax payments do not represent reductions of spending by the taxpayers. Therefore the government does not have to use these proceeds to maintain the requisite rate of spending, and it can devote them to paying the interest on the national debt.
49
Fourth, as the national debt increases it acts as a self-equilibrat- ing force, gradually diminishing the further need for its growth and finally reaching an equilibrium level where its tendency to grow comes completely to an end. The greater the national debt the greater is the quantity of private wealth. The reason for this is simply that for every dollar of debt owed by the government there is a private creditor who owns the government obligations (pos- sibly through a corporation in which he has shares), and who re- gards these obligations as part of his private fortune. The greater the private fortunes the less is the incentive to add to them by saving out of current income. As current saving is thus discouraged by the great accumulation of past savings, spending out of current income increases (since spending is the only alternative to saving income). This increase in private spending makes it less necessary for the government to undertake deficit financing to keep total spending at the level which provides full employment. When the government debt has become so great that private spending is enough to provide the total spending needed for full employment, there is no need for any deficit financing by the government, the budget is balanced and the national debt automatically stops grow- ing. The size of this equilibrium level of debt depends on many things. It can only be guessed at, and in the very roughest manner. My guess is that it is between 100 and 300 billion dollars. Since the level is a result and not a principle of Functional Finance the latitude of such a guess does not matter; it is not needed for the application of the laws of Functional Finance. Fifth, if for any reason the government does not wish to see private property grow too much (whether in the form of govern- ment bonds or otherwise) it can check this by taxing the rich in- stead of borrowing from them, in its program of financing govern- ment spending to maintain full employment. The rich will not reduce their spending significantly, and thus the effects on the economy, apart from the smaller debt, will be the same as if the money had been borrowed from them. By this means the debt can be reduced to any desired level
50
The answers to the argument against deficit spending may thus be summarized as follows: The national debt does not have to keep on increasing; Even if the national debt does grow, the interest on it does not have to be raised out of current taxes; Even if the interest on the debt is raised out of current taxes, these taxes constitute only the interest on only a fraction of the benefit enjoyed from the government spending, and are not lost to the nation but are merely transferred from taxpayers to bond- holders; High income taxes need not discourage investment, because appropriate deductions for losses can diminish the capital actually risked by the investor in the same proportion as his net income from the investment is reduced.
IV
If the propositions of Functional Finance were put forward with- out fear of appearing too logical, criticisms like those discussed above would not be as popular as they now are, and it would not be necessary to defend Functional Finance from its friends. An especially embarrassing task arises from the claim that Functional Finance (or deficit financing, as it is frequently but unsatisfactorily called) is primarily a defense of private enterprise. In the attempt to gain popularity for Functional Finance, it has been given other names and declared to be essentially directed toward saving private enterprise. I myself have sinned similarly in previous writings in identifying it with democracy,4 thus joining the army of salesmen who wrap up their wares in the flag and tie anything they have to sell to victory or morale. Functional Finance is not especially related to democracy or to private enterprise. It is applicable to a communist society just as well as to a fascist society or a democratic society. It is applicable to any society in which money is used as an important element in the economic mechanism.
4In "Total Democracy and Full Employment," Social Change (May 1941).
51.
It consists of the simple principle of giving up our preconceptions of what is proper or sound or tradi- tional, of what "is done," and instead considering the functions performed in the economy by government taxing and spending and borrowing and lending. It means using these instruments simply as instruments, and not as magic charms that will cause mysterious hurt if they are manipulated by the wrong people or without due reverence for tradition. Like any other mechanism, Functional Finance will work no matter who pulls the levers. Its relationship to democracy and free enterprise consists simply in the fact that if the people who believe in these things will not use Functional Finance, they will stand no chance in the long run against others who will.
David Colander
Preface
Economists are often portrayed as heartless – walking, machine-like creatures who
wejgh costs and benefits and, based on those costs and benefits, spew forth policy
directives - do this; don't do that. That is not how anyone would describe Bill Vickrey.
He was an economist with a heart. For him economics was not some abstract theory
to be used to impress others and win debating points. Instead, it was a set of tools – an
approach that, if used properly, would make society (and by society Bill meant the
Jarge majority of the population) better off. From his work in progressive taxation to
his work on auctions, pricing theory, inflation and macro stabilization policy, Bill
always kept in mind that the goal of policy was to design actual workable policies.
Bill was not without his abstract moments – he delighted in thinking about abstract
issues, and his meanderings into those abstract issues were often far ahead of his
colleagues; they won him a Nobel Prize. But his heart was in applied policy, be it road
pricing (where he worked both on schemes in which drivers would buy stickers and
place them on their windshield, and more sophisticated schemes in which electronic
devices would automatically charge drivers a varying congestion charge) or in changing
an abstract idea I had about creating a market in rights to change prices into a practical
plan designed around a set of growth warrants.
His first substantial contribution to the literature, Agenda for Progressive Taxation,
was the epitome of applied policy; it reflected a deep understanding of the underlying
theory of taxation and a solid command of the tax code. In it he spelled out not just
why a progressive tax is needed, or how to institute a progressive tax in theory, but
how to institute one in practice. It instantly became a classic.
Bill's blind spot was politics, and the politics of implementation derailed many of
his practical policies. But, in many ways, that blind spot was his strength as well. Bill
created simple, practical proposals that were administratively feasible, but were
undiluted by political concerns. This kept them clear and clean.
This collection of Bill's writings is primarily concerned with macro policy issues,
and thus includes some of Bill's lesser-known work. It is a collection that Bill would
have wanted to get out to the public because he felt that a solid macro policy was
necessary to create a foundation of equity and efficiency before one can even start
talking about micro policy.
Bill began to focus on macro policy in the 1980s and, in his presidential address to
the AEA, which is reprinted here, he argued that we need to approach macro policy in
a fundamentally different way than we are currently doing. He argued that we need to
focus on full employment and not be limited by an ambiguous and unimplementable
concept such as the natural rate. In those views he was in broad agreement on most of
the propositions that the Center for Full Employment and Price Stability has made its
Portions of this preface are based upon a talk delivered at the American Economic Association in honor
of William Vickrey's Nobel Prize, That talk was reprinted in Challenge Magazine under the title: "Was
Vickrey Ten Years Ahead of the Profession in Macro?", Challenge, Sept–Oct, pp. 72–86, 1998.
ix
x Full Employment and Price Stability
core focus. I attended that address and I remember overhearing two young economists
sitting in front of me as they shook their heads and asked, 'Who is this kook? Is he for
real?' While the majority of macro economists would have been far more subtle and
polite, they would have agreed in principle with that assessment. Somehow, the thought.
in the 1980s and early 1990s, that you could expand the economy significantly below
the then perceived 6.5 percent natural rate of unemployment qualified Bill as a kook.
Bill knew how the profession felt, and it didn't bother him; after all, in micro, he
had been considered a kook until the profession caught up with him. And, in
transportation, he had roller-skated to work back in the 1950s, predating by 40 years
the roller blading craze. Being years ahead of the profession was a standard operating
policy for Bill.
Bill's early work in macro
Since it is not well known, let me briefly discuss Bill's early work in macro. Many
will be surprised to hear that there was any early work, but, in fact, in 1963 he wrote
a macro text, Metastatics and Macroeconomics. In that book he set out his basic
understanding of macro issues. The first thing one sees when reading that book is that
Bill saw macro as an extension of micro; his 1963 framing of the macro problem in a
general equilibrium micro perspective occurred years before others caught up with
him and created New Classical economics. In the first part of that book he discussed
metastatics, which he defined as an analysis of change through time in which
uncertainty is excluded. In it he developed a general metastatic intertemporal
equilibrium in a hypothetical futures economy 'as a prelude' to dealing with macro
issues.
Of course, Bill was not much at marketing; entitling the book 'Metastatics' was not
a wise marketing move. Had he chosen 'New Classical Economics with Rational
Expectations,' which has essentially the same definition, he may have had more
marketing luck.
Bill's impatience with theorizing for the sake of theorizing shows up in that book.
Bill's interest in theory always flowed from policy issues. Thus, since he could intuit
the policy result of his general equilibrium metastatic model – perfect markets working
perfectly always lead to the conclusion that government should not intervene – he had
no interest in expanding and formalizing metastatics as modern researchers have done.
Instead, Bill saw metastatics as a logical, neat first step into the interesting issues of
macro dynamics. This, of course, was the case of many early Keynesians, and if
younger economists spent a bit more time reading the work of those economists on
whose shoulders they are standing, and less time assuming their Keynesian
predecessors were dumbbells who failed to understand metastatic intertemporal issues,
the profession would be much further along in its understanding
currently is.
The point is that Vickrey, and many early Keynesians, saw nothing inconsistent
between a dynamic interpretation of Keynesian economics and their view of metastatic
general equilibrium. Such a perfect foresight equilibrium was so far from reality that
to waste time studying it would violate the law of significant digits. Their interest was
in dynamic inconsistency issues - issues that they recognized were beyond the
mathematical tools available to them, and thus inappropriate for formal study. It Is
macro than it
Full Employment and Price Stability xi
only now, in the twenty-first century, with the development of the science of complexity,
het such formal work begins to make sense. And what that new work tells us is that
Keynesian economics has a potentially solid theoretical foundation in a framework of
intertemporal dynamics with uncertainty, just as Bill argued it did in his metastatics
book.
Bill was not interested in exploring theory for theory's sake: he was essentially an
economic engineer whose interest was policy; theory for Bill was a way to understand
the economy so that he could design policies and new institutions to make the economy
operate more efficiently and fairly. For Bill, economists were the economy's investment
in institutional technological change.
Bill's interest in macro theory followed from his interest in policy, and in his 1963
hook his reading of the macro policy was relatively clear. We had the tools to expand
the economy, but we did not have the tools to see that that expansion resulted in real
output growth rather than inflation, nor did we have an acceptable braking system to
slow the economy down without causing a recession.
A simple idea
L am pleased that I had a small role in Bill's interest returning to macro. Bill was
intrigued by a little paper I wrote in 1974 called "The Free Market Solution to Inflation.'
The idea in that paper was a simple one: let's say that, instead of its current institutional
structure, the economy had a different institutional structure in which rights to change
nominal prices were rationed in the following way: suppliers could lower or raise
their nominal prices only if they found other suppliers who would agree to raise or
lower their nominal value-added weighted prices by an offsetting amount. Such an
economy, I argued, could have no inflation problem.
Bill was intrigued by my simple idea. It was, for him, a major breakthrough in our
understanding of the institutional structural change we needed in our real-world
economy to solve the inflation problem. It would allow the level of inflation to be
institutionally set, and, by doing so, would allow the economy to reach a preferable
real equilibrium.
This view needs some explanation since it is quite inconsistent with the 'natural
rate' view of aggregate equilibrium, which has become the new orthodoxy. Bill, and
most early Keynesians, did not accept the concept of a unique natural rate of
unemployment. Bill saw the economy as capable of achieving a variety of unemployment
equilibria. Which one it achieved was dependent on expectations, government policy,
and institutions. Thus, Bill considered our economy a multiple equilibria economy.
Unique equilibria existed only in an irrelevant-for-policy metastatic general equilibrium
model.
Bill did not try to develop his model from micro foundations; the interrelationships
In the economy were too complicated for that. Instead, he formulated his concept of
aggregate equilibrium as a systemic concept – one in which the dynamic pressures
pushing the price level up equalled the dynamic pressures pushing the price level
down. Within the range of unemployment where our economy generally operated -
between 4 and 8 percent unemployment – these inflationary pressures were only
minimally affected by aggregate demand. Moreover, core inflationary pressures were
subject to significant shifting around due to institutional changes and random events.
xii Full Employment and Price Stability
Inflation was primarily a supply side/expectational phenomenon. In such a systemic
model, equilibrium is still brought about by individual decision makers, but the
connection between the market incentives they face and the aggregate equilibrium
outcomes their decisions lead to are too tenuous for individuals to take their contribution
to the aggregate equilibrium into account in their decision making; thus, individual
rationality does not imply collective rationality.
The short-run/ong-run connection
The macro policy question for Bill was: what policies should we use to get the economy
to a desirable equilibrium? His support of substantial deficits can be understood in
this light. Bill believed that within the economy's standard operating range, a deficit,
combined with expansionary monetary policy, would push the economy to a preferred
short-run equilibrium. Doing so would create new patterns of trade, coordination, and
technology, increasing productivity and thereby leading the economy to a preferred
long-run equilibrium.
This short-run/long-run connection was central to Vickrey's, and early Keynesians',
analysis of the economy, and underlay their support for expansionary aggregate demand
management policy. The long-run equilibrium toward which the economy gravitated
depended upon what short-run equilibrium government policy led it to.
Expressed in modern terminology: expansionary aggregate demand policy influences
the long-run equilibrium through its effect on the equilibrium selection mechanism.
The unique equilibrium natural rate model misses that effect since it assumes away
the need for an equilibrium selection mechanism.
If one accepts Bill's view of how a short-run expansion can lead to a preferred
long-run equilibrium, Keynes's quip that 'in the long run we're all dead' has been
seriously misinterpreted. It should not be interpreted as meaning that we should forget
about the long run; instead, it should be interpreted as meaning that the long-run
equilibrium is dependent on the short-run equilibrium we choose. Specifically, in the
1930s, early Keynesians believed, I think correctly, that unless we dealt with the
short-run problems, our economic system would not survive. Abba Lerner clarified
this when he said, 'In the long run we are simply in another short run.'
To clarify their views further, what should be added to that is that the short-run
equilibrium we find ourselves in, in the long run, depends on the short-run policies
we adopt now. If Bill's views were right, throughout the 1990s we were operating at
lower output than was possible and economists' unique natural rate vision has cost
our society hundreds of billions of dollars of forgone achievable output. This was the
message Bill wanted to get out.
The death of the natural rate theory
For those of us interested in the spread of ideas, the introduction of the natural rate as
the fulcrum for economic policy is an interesting case study. It caught on because lt
fit the data of the 1970s better than did the standard Phillips curve. It has, however,
never provided an especially good statistical fit with the data, and in the 1990s, it
failed miserably. In terms of predicting how much room existed for expansion in the
1990s, most economists, with the exception of a few such as Bill Vickrey and Bob
Eisner, had serious egg on their face. Given recent experience it is clear that the naturan
Full Employment and Price Stability xiii
ate theory has provided a false certainty about policy prescriptions. It should long
Ta bave been declared dead, just as the false certainty of fine-tuning was declared
dead some 30 years ago.
The natural range theory
The death of the natural rate theory raises the question: what theory are we going to
replace it with? I suggest a far less certain theory, one that reflects our actual knowledge
of the economy. This theory might be called a 'natural range of unemployment theory'
a theory that sees a range of non-accelerating inflation rates of unemployment
equilibria as possible. This range is institutionally determined, and, for the United
States, is somewhere between 3 to 4 percent unemployment on the bottom side, and
8 to 9 percent unemployment on the high side. The macroeconomic policy debate is
primarily about what the appropriate policy should be within the range, with a
secondary policy debate concerning the size of the range. Once the economy is outside
this range, there is little policy debate.
I am attracted to this natural range theory because it is encompassing enough to
accent both Bill's view of the economy and the current mainstream view. These views
differ about the nature of the tradeoff within the natural range. Bill's view paralleled
that of Abba Lerner's that, within this natural range, there was essentially no inflation/
unemployment tradeoff. Alternatively expressed, within this range, the Phillips curve
is flat, and aggregate demand has little effect on inflation. If this theory is true it
suggests that the relationship between deviations of unemployment and inflation are
nonlinear, and the statistical fit we get between increases in inflation and unemployment
comes primarily from the extremes, not from small deviations.
This natural range theory is much more inclusive than the natural rate theory. It
accepts, as Bill did, that current standard economic theories are relevant outside the
natural range. Given the current US economy's structural characteristics, below 3 to
4 percent total unemployment, aggregate demand creates inflationary pressure, and
causes inflation. Above 8 to 9 percent unemployment, cutting aggregate demand will
eliminate inflation and, depending on institutional characteristics of the economy, it
may actually create deflationary pressures. But it also is consistent with Bill's view
that within the 4 to 8 percent range, the standard relationship breaks down, and one
must look elsewhere for ways to fight inflation.
Unlike the standard Phillips curve, or the natural rate theory, a natural range theory
is consistent with both the 1970s and the 1990s experiences of the economy. The
1970s inflation was caused by major nominal upward price shocks, combined with
wage- and price-setting institutions conducive to inflation, both of which became
built into expectations of inflation. The 1990s' and early 2000s' lack of inflation, in
spite of expanding aggregate demand, was due to (1) nominal downward price shocks,
(2) wage- and price-setting institutions experiencing significant international
competition, and (3) the building of the above structural characteristics into
expectations of declining inflation.
Dealing with the inflation problem
Bill's view does not mean that inflation cannot be a problem; it simply means that,
within the 4 to 8 percent range, inflation is a separable problem from unemployment.
xiv Full Employment and Price Stability
Within that range, inflation is best dealt with by means other than contractionary
monetary and fiscal policy. Contractionary policies to fight inflation simply add to
the misery index without significantly reducing inflation. Running contractionary
aggregate demand policy to fight inflation is the modern equivalent to the practice of
bloodletting to cure diseases; it piles one misery onto another, without doing any
significant good.
Unemployment, for Bill, was an immoral way of holding down inflation. Given
our institutions, the burden of that unemployment was borne unequally by the poor
and the less well-off, which meant that not only was it inefficient, it was also unfair.
Thus, even if he were wrong in his assessment that reducing unemployment to less
than 4 percent would not generate accelerating inflation, he said he would still advocate
doing so. His answer to those who said that the result would be that government
would be forced to change policy and induce a recession was: no; fighting inflation
by keeping the poor and less well off unemployed should violate society's collective
normative judgment. He followed Beveridge in believing that it is society's job to
create more positions than job seekers, so that firms do the primary searching for
workers, not workers for jobs.
The appropriate policy, if an inflation were started, would be to change the
institutions of the economy so that the lower unemployment rate is consistent with no
inflation. You do not accept a normatively unacceptable rate of unemployment as an
equilibrium.
The free market solution to inflation
It is here where my free market solution to inflation, later renamed MAP (the market
anti-inflation plan) by Abba Lerner and myself, came in. Bill saw MAP as the
institutional change needed to guarantee that a true full employment – roughly 2 to
3 percent unemployment -could be reached in a way that was institutionally compatible
with a non-inflationary economy. And it could do so in a way that was fully consistent
with existing institutions.
To see why, consider the following questions: assuming there were property rights
on value-added prices, what would the price of raising price be, and what implication
for the economy's natural rate would a positive price of raising price have? The answers
are simple: by definition, assuming there were no inflationary pressures, the price of
raising price would be zero. If there were a positive price of raising price, then MAP
would be eliminating inflation pressure; the higher the price of raising price, the more
inflationary pressure it would be eliminating.
To emphasize that the purpose of this program was to allow real growth, rather
than to stop inflation, in his recent work Vickrey had started to call the rights to
change prices 'growth warrants.' Here is how the growth warrants were allocated: all
firms are allowed warrants equal to their level of value added at the initial starting
period. Each year firms receive additional warrants equal to the average increase in
productivity in the economy. Thus, all firms are allowed nominal raises in input prices
consistent with a non-inflationary economy – that is, increases in growth warrants
equal to the average total factor input productivity.
When firms hire additional workers, or invest more, they receive additional growth
warrants equal to the value of those inputs in their previous use. This means that firms
Full Employment and Price Stability xV
uereasing their inputs would receive additional growth warrants, and firms decreasing
meinputs without lowering their value-added price would be forced to buy additional
then tnts. This would create inflows of capital to growing firms from firms who were
anopolizing – increasing their value added per input. That is why the plan can also
be seen as a tax on monopolization.
A positive price of growth warrants would encourage hiring and price cuts. The
MAP plan is a type of synthetic competition that modifies our current institutional
structure so that it acts as if it is more competitive than it actually is.
There are many technical and practical issues that need to be answered before these
plans can become reality. Concern about these issues kept many economists who
supported the plan in principle from supporting it in practice. However, no serious
attempt was made to deal with these issues. Bill felt that all of these practical and
technical issues had answers – not perfect answers, but answers - and that a major
effort should be undertaken to resolve them. It never was undertaken because,
politically, such a major institutional change was not on the cards.
The higher the price of these growth warrants, the higher the cost in administrative
expenses and misallocated resources. But the higher the price of these growth warrants,
the lower the achievable unemployment rate. Thus, the imposition of this plan would
present government with a new tradeoff – the systemic gain in aggregate efficiency
against the administrative costs of the plan.
The plan has one other major advantage: it will allow a much more precise use of
monetary policy. This follows since the price of growth warrants would give us a
direct measure of the inflationary pressures in the economy. We would no longer need
to operate monetary policy blind; instead we could set a monetary rule based on the
price of these growth warrants.
Bill was much more of a visionary than I, and much more willing to argue that
MAP was ready for prime time. I do not know whether MAP actually is workable in
practice, or whether the politics of inflation control could ever change sufficiently so
that it could be tried; however, I will argue that it should be explored in much greater
detail than it has been. I will also say that there are large potential gains from it, and it
was precisely the type of actual policy that Bill could see working in practice that
other economists could not.
Functional finance and Vickrey's view of deficits
The second macro policy issue on which Bill differed from the mainstream profession's
view was on the issue of budget deficits. In the 1990s there was much talk (by both
Democrats and Republicans) about how bad deficits were, and very few economists
objected to that talk. Bill did object. Since there remained substantial unemployment
during those years that deficit spending could reduce, Bill felt that economists should
point out that much of the political rhetoric on deficits was at best confused, and often
just plain wrong.
Bill's approach to budget deficits can best be described as the functional finance
approach. The functional finance approach sees deficits as neither inherently good
hor bad. They should be judged, as should all macro actions, in relation to 'the results
of these actions on the economy and not to any established traditional doctrine about
what is sound and unsound' (Abba Lerner, Social Research, 1943, p. 39). Like most
xvi Full Employment and Price Stability
true functional finance supporters, Bill had an almost visceral reaction to fear of deficits
based upon some of the false arguments against deficits that are generally mnd
Those arguments do not hold water logically, and Bill wanted the world to know the
they did not hold water.
In the early 2000s the political views on deficits have changed, with Republicans
urging large budget deficits, and Democrats urging who knows what. I suspect that
Bill would have had mixed views of these debates. As he states in his paper 'Budget-
Smudget. Why Balance What, How, and When?' (reprinted in this volume), the affect
of the budget on achieving full employment would be the most important to him,
followed by issues of progressivity, growth, efficiency and equity. On full employment
grounds, he would have supported the Republican deficit proposals, but on
progressivity grounds, I suspect he would not have. He would have favored a
significantly different mix of taxes, such as those suggested in his An Updated Agenda
for Progressive Taxation' (reprinted in this volume). Wherever he actually would have
come out on that policy, his views would have been known, and he would be taking
strong stands. That is why I am pleased that Mat Forstater, Pavlina Tcherneva and the
Center for Full Employment and Price Stability organized this book of Bill's writings.
It is what Bill would have wanted.
David Colander
0 件のコメント:
コメントを投稿