Another Dimension

By Thornton “Tip” Parker

As NEP readers know, the economy consists of  private, government, and foreign sectors.  Financial flows among the sectors always add up to zero; that is, one sector’s deficits must be offset by surpluses in either or both of the others.

If the private sector imports more than it exports, ignoring investment flows, it will run a financial deficit while the foreign sector runs a surplus and the economy will then slow down as money in the private sector becomes scarce.  Unless the trade deficit is reduced, the only way to keep the economy running is for the government to run large deficits, as is it is doing now.  While few people understand the sectoral view of the economy, many are aware of problems that this one-dimensional view does not explain.       The causes of many of those problems can be explained if the private sector is divided into two layers.  The top layer includes the most affluent few (the 1% for simplicity) while the vast majority of those less well off (the 99%) are in the second layer.  The foreign sector may have layers worth considering also, but let’s ignore them now.

Financial flows among the two private sector layers and the other sectors must add to zero.  When the 1% run surpluses and increase their savings, the foreign sector, the government sector, or the lower layer must run deficits.  The top layer has the same effect of removing money from the second layer as the foreign sector.  Those on the top layer see nothing wrong with the continuing, cream-like rise of money to the top.  They see it as success.  But lost savings and income stagnation is producing wide-spread discontent in the second layer that simply increasing federal deficits will not mitigate.

I believe that MMT will be unsatisfying to most people as long as it concentrates on the administrivia of how the Treasury, Fed, and banks work.  It would offer much more if its analyses were expanded to show how top layer surpluses have the same effect as the general public foreign surpluses.

Many people and politicians could understand this quickly.  Bernie and Trump, in his more coherent moments, have hit on it, and it is a horse that MMT could ride.  It could open the door to a wide range of actions to restore society and the economy by improving the balance of flows between the two layers, including:

• Breaking up the big banks. Bank interest, service charges, and penalties have become like a major tax on the 99% because there is so little competition.  As an opening gambit, propose that any bank with more than 5% of the industry’s total assets must be divided in half.
• Limiting scope of investment banks. Make them revert to partnerships and remove from their members the protections afforded to corporations.
• Strengthening anti-trust. If we believe that competitive markets limit rent seeking, make markets more competitive in communications, food, airlines, health care, insurance, and other industries where consumers have few alternatives.
• Using taxes constructively. The federal government does not have to collet taxes to pay its bills, but it can use them to channel resources from the top to the second layer.  This can include a Tycoon and Silver Spoon tax on large inheritances; a Freeloader tax on companies that get incentives from local governments and then fail to meet their commitments; a Gaming tax on short term financial trading that is inversely proportional to holding periods, and an Excess Earnings tax on executive compensations that are more than (x times) the lowest incomes in a company.
• Simplifying corporate income taxes. Make companies think twice before moving operations to other countries (or keeping them there) by having them use one set of books and report the same income to stockholders and the IRS..  Earnings from outside the country would be taxed as they are reported to stockholders and taxes paid to other countries could be deductions but not credits for their income taxes.  This would eliminate thousands of over-paid, unproductive jobs while reducing incentives to move to other countries.

Many other actions can be proposed that may be better than these in addition to a jobs guarantee program.  But my basic point is that now, MMT primarily says that federal spending should be increased to improve the lives of most people.  It does not say why the increased spending will not quickly float up to those at the top.  It says that taxes are like brakes to limit inflation as inflation is presently measured.  But it does not recognize that growing stock values and incomes in finance, real estate and other rent seeking industries are forms of inflation.

It is more than a coincidence that federal deficits and inequality have grown simultaneously.  The upward flow within the private sector links them.  For the democracy to remain a healthy, ways must be found to limit the upward flow and redirect it toward the vast majority of the country’s population.  MMT could become a more powerful tool for bringing this about by expanding analyses of the sectoral financial flows to show the flows between layers within the private sector.  It may also show more about the causes of business cycles and how to break what appears to be a trend toward ever larger federal deficits.