Subject: Vickery, deficits & unemployment (was: Does the deficit really matter?) Date: Fri, 30 Jan 1998 07:15:27 GMT From: oldnasty@mindspring.com (Grinch) Reply-To: oldnasty@mindspring.com Organization: Happy Skeptics of America Newsgroups: alt.politics.economics, sci.econ References: 1 , 2 , 3 , 4 , 5 , 6 wfhummel@concentric.net (William F. Hummel) wrote: >A balanced budget in times of full employment is generally no >problem, but it is totally unnecessary. Many governments both >here and abroad have made the mistake of trying to achieve a >balanced budget when the proper course was to increase deficit >spending. These words, written in 1993, by nobel laureate >William Vickrey say it better than I can: > >"We are not going to get out of the economic doldrums as long as >we continue to be obsessed with the unreasoned ideological goal >of reducing the so-called deficit. The "deficit" is not an >economic sin but an economic necessity. Its most important >function is to be the means whereby purchasing power not spent on >consumption, nor recycled into income by the private creation of >net capital, is recycled into purchasing power by government >borrowing and spending. Purchasing power not so recycled becomes >non-purchase, non-sales, non-production, and unemployment." The words above really are best read when put into their fuller context, which is quite interesting. Vickery got the Nobel for his work in microeconomics (on pricing, auction strategies, and the micro effects of taxation) which was brilliant and sometimes decades ahead of its time. But a lot of his ideas on macroeconomics are hard to describe. Iconoclastic? Eccentric? The selection quoted above is from a short paper of Vickery's that is on the Web at http://www.rain.org/~jjgelles/vickrey.htm and elsewhere. It's a very much shortened and "simplified for public handout" version of the ideas in his Presidential Address to the American Economic Association, January 1993. In this he stated he was "aghast" at the willingness of the economics profession to accept employment at any level less than full employment. A common enough thought. But his ideas for remedying the situation were really something special: * Define full employment as being an unemployment rate of between 1% and 2%, "with anyone who chooses to able to find a job at a living wage within 48 hours". * Achieve full employment by attaining a 10% annual growth rate of US GDP. * Attain 10% annual growth by "accelerating" the budget deficit by 9% of GDP (which in 1993 would have taken the total to about 13% of GDP -- or about $1 trillion in today's economy). * Increase the budget deficit this much by slashing taxes (making Ronald Reagan's supply-siders seem like a bunch of pikers) with the first taxes cut being employment taxes, by up to 70%, "if this can be done in face of the outcries that it would jeopardize the fiscal soundness of the Social Security System, which ultimately depends not on any nominal social security amount, but on the willingness of future Congresses to make any financial arrangements needed to provide promised benefits, whether through payroll taxes or otherwise." * Deal with the problem of inflation by adopting a permanent system of "direct inflation control". Vickery accepted that the NAIRU is about 5%, and that driving unemployment down to 1.5% permanently would result in permanent ever-accelerating inflation (hyperinflation). He also accepted that price stability (or at least a stable, predictable rate of inflation) is needed to attain the full productive use of resources needed for full employment. Thus, some method of controlling prices was essential to his goal. But he also accepted that wartime-like "command and control" administered prices if applied permanently would be "probably unworkable and certainly undesirable." So Vickery came up with an innovative idea: to create a market in which businesses would be required to buy the right to raise prices. The government would issue warrants giving businesses the right to charge price increases. The warrants would be issued in an amount that achieved the government's desired overall change in price level. Without sufficient warrants, a business's prices would be frozen. Companies could bid on the warrants at the original government auction, and then sell or trade them among each other. In this manner the overall price level could be administratively set by the government, but with sufficient flexibility allowed to prevent what Vickery called the "absurdities" that result from direct price controls. There might be some technical issues to confront in managing such a scheme, but nothing to trouble about -- "administration would seem to pose no insurmountable problems", was Vickery's opinion. [How about this for an economics student's term-paper assignment: Explore the practical implications of implementing William Vickery's "Marketable Gross Markup Warrants" as part of his proposed Market-Based Inflation Control Plan] * In a few years, after full employment is attained, reduce annual GDP growth to a sustainable 2% to 4% range. Such a large, fast drop in the growth rate would of course result in sharply reduced private-sector investment and excess savings -- but the government can make up for this shortfall by further increasing its own spending (and deficits) during this transition period. In the long run, after 2% to 4% growth is attained, the government will maintain budget deficits permanently at a "proportionate" ratio to GDP. "The consequences of the higher national debt will be minor relative to those of continuing current unemployment .... There may be some details to work out, but I am confident that the basic concept is sound and workable". There you have it: A man with a plan. And the larger context of: "the deficit is a necessity". Vickery's AEA Presidential Address, "Today's Task for Economists", is published in the American Economic Review, March 1993, and in _Public Economics, Selected Papers by William Vickery_, edited by Arnott, Arrow, Atkinson and Dreze, Cambridge University Press. Alas, it's not available over the Web. Regards