Armstrong article: why stagflation caused by taxation?

[DRumsfeld2000]

Fed Balance Sheet hits $4 trillion

"The Federal Reserve’s balance sheet expanded to a record $4 trillion in the week ended December 18th. The Fed balance sheet has expanded thanks to QE buying $85 billion a month in Treasurys and mortgage related assets since last January. The Fed’s balance sheet has expanded from $891 billion in 2007 without creating inflation. This is only one side of the coin. The other is the fiscal side that is controlled by Congress.

The Fed now holds $1.5 trillion in mortgage-related assets and $2.2 trillion in Treasurys. The central bank also holds $326 billion in other assets. The junk bonds from mortgages the banks dumped on the Fed will eventually become a drag. But like any program, once implemented, it is hard to stop.

The inflation will not come from the monetization by the Fed, but rather the rise in interest rates will send the deficit upward sharply and here is where the appetite for US debt will begin to decline. This is where rates will be forced higher. We are likely to see inflation in prices in the years ahead, but this will be driven by a rise in taxation and those we will end up with stagflation. GDP growth jumped sharply, but this was largely caused by building inventories for Christmas.

The real crisis is the Fed has boxed itself in. It cannot reduce its balance sheet without worrying it will cause a recession. The Fed has disarmed itself with QE and maintaining rate far too low to help the banks. This is a crisis waiting to happen."

I can understand taxation causing deflation, but stagflation I do not get. Is he suggesting that the increase in perhaps a sales tax would lead to a rise in salaries and then you get into a price spiral of some sort?

[shiny!]

Re: Armstrong article: why stagflation caused by taxation?

I believe in a typical inflation, both prices and wages go up. In stagflation, the value of the dollar goes down and prices go up, but wages stagnate. He might be talking about rises in corporate taxation causing companies to raise prices of their goods to offset the hit from higher taxes.

[don]

Re: Armstrong article: why stagflation caused by taxation?

Paul M. Sweezy on Stagflation

“The real task of an underconsumption theory is to demonstrate that capitalism has an inherent tendency to expand the capacity to produce consumption goods more rapidly than the demand for consumption goods.” Such a tendency may be manifested in two forms. Where an increase in capacity leads to overproduction and then curtailment of production, “the tendency in question manifests itself in a crisis.” In a second case, however, capacity is not expanded “because it is realized that the additional capacity would be redundant relative to the demand for the commodities it could produce. In this case, the tendency does not manifest itself in a crisis, but rather in stagnation of production”

“Monopoly capitalist economy tends toward stagnation—in the same sense that it always used to be assumed that a competitive capitalist economy tends toward full employment.”

The General Theory in a New Age of Crisis

In the retardation in economic growth which became apparent in the early 1970s, Sweezy has found confirmation that, sooner or later, the inherent tendency of monopoly capitalism toward stagnation exerts itself. The period of the 1970s and 1980s has thus been an opportunity to restate his theory in a context in which the effect of the tendency rather than that of the counteracting forces is manifest. Since this period has also been one marked by his collaboration with Harry Magdoff (who before the onset of McCarthyism had, among other things, served as the head of the current business analysis section of the U.S. Department of Commerce), it has meant that there has been a strong empirical element in Sweezy’s work in this period.73

More than a restatement of the theory, however, has occurred. Significantly, in his explanations as to why the tendency to stagnation was latent and inoperative for so long a period, the centrality of waste as a category has faded from the analysis—as has any consideration of the concept of potential surplus. Waste, despite its thematic prominence, had never been the sole “counteracting force” identified in Monopoly Capital; new industries and wars (and their aftermath) had remained part of the analysis. Thus, a wave of “automobilization” in the context of postwar consumer liquidity, as well as the enormous increase in arms spending, were identified by Baran and Sweezy as important explanations of the postwar boom.74 Similarly, Sweezy and Huberman emphasized in Monthly Review the importance of the postwar reconstruction boom of Western Europe and the stimulus of growing trade within the Common Market; within a year of the publication of Monopoly Capital, their list of factors explaining the boom included military spending, deficit finance, tax subsidies and the growth of consumer debt (but not “waste” as such).75

To this list has been added the civilian spinoff from military technology and, especially, U.S. postwar economic hegemony (with its particular implications for the growth of world trade and capital). The specific combination of these factors, Sweezy argues, was sufficient to produce a unique stimulus to investment; it meant a major investment boom in key industries and rapid growth of capacity in all the leading capitalist economies (as well as some third world countries).

The war, indeed, “altered the givens of the world economic situation” a unique set of events had provided powerful counteracting forces. Yet, “every one of the forces which powered the long postwar expansion was, and was bound to be, self-limiting.”76 And so, with the exhaustion of the special conditions, there followed increased levels of unemployment, excess capacity (on a world scale) and lagging investment—stagnation both realized and operative.77

The displacement of waste was not the only change to Sweezy’s general theory of stagnation in the 1970s and 1980s. Monopoly Capital had focused upon characteristics reflecting the unique postwar position of U.S. corporations relatively secure from capitalist competitors of other countries; and, as U.S. international economic hegemony declined, so too did monopoly slip from the center of the analysis.

In Sweezy’s Four Lectures on Marxism (1981), the focus was upon the inherent tendency of capitalism toward overaccumulation, that tendency for productive power to grow “more rapidly than is warranted by society’s consuming power.” In this context, the significance attributed to monopoly was that it “intensified” the contradictions of the accumulation process—both by enhancing the ability to accumulate and by choking off outlets for investment. More stress, similarly, was placed upon the significance of “maturity” in the explanation of why counteracting forces (such as, in particular, the effect of new industries) tend to become weaker.78 In a very real sense, Sweezy returned in this period to earlier formulations of his theory.

The Kalecki/Steindl link between monopoly at the micro-level and stagnation at the macro-level, however, has remained integral to his argument: “the more monopolistic the economy, the stronger the tendency to stagnation.”79 Stagnation, Sweezy argues, is a “consequence of the specific form of overaccumulation of capital which characterizes capitalism in its monopoly phase.” Any attempt at analysis of developed capitalism, accordingly, must recognize the importance of monopolistic elements. Precisely because of its failure to incorporate this micro-element, Sweezy has argued that Keynesian theory could not explain the emergence of “stagflation” in the 1970s.80

In the course of interpreting and analyzing current developments from the perspective of his general theory, Sweezy (in conjunction with Magdoff) has made Monthly Review during this period a unique medium in which to trace the changing fortunes of U.S. capitalism. Two such developments have been of particular interest. In the “embryo of an adequate theory of inflation under conditions of monopoly capitalism,” Sweezy and Magdoff argued in 1974 that the power of giant corporations to control prices and wages intensified the tendency toward stagnation; at the same time, however, it meant that attempts to stimulate the economy generated inflation.81 Having ignored “the monopolistic structure of the economy,” however, (bastard) Keynesian technicians accordingly were confounded in their efforts to stimulate a stagnating economy because “much of the increase in monetary demand was dissipated in inflationary price increases rather than in expanded output.”82

In addition to stagflation, the theoretical issue which Sweezy has explored most in recent years is the growth of financial speculation. After years of noting the growth of debt (both private and public), he has increasingly called attention to the coexistence of a stagnant production sector and a prosperous and expanding financial sector. In 1983 Sweezy and Magdoff emphasized that a growing part of money capital was not directly transformed into productive capital, but instead was used to purchase financial instruments. There was no necessity, however, that this money would find its way, directly or indirectly, into real capital formation. “It may just as well remain in the form of money capital circulating around in the financial sector, fueling the growth of financial markets which increasingly take on a life of their own.”83

Following two years in which financial transactions proliferated and new financial instruments (options on futures, etc.) multiplied, Magdoff and Sweezy suggested that “the financial sphere has the potential to become an autonomous subsystem of the economy as a whole, with an enormous capacity for self-expansion.” In that growing divergence between a stagnant economy and a financial explosion, however, they noted in 1985 that one definite possibility was “a bust of classic dimensions.” Indeed, the most remarkable thing was that it had not yet occurred.84

But, why has this been happening? Sweezy and Magdoff have recently argued that behind the financial explosion has been a growing concentration of wealth and income. There has been:

a swelling of the pool of fresh savings seeking profitable investment outlets. However, since the demands on this pool for investment in the production of real goods and services have been declining, more and more of it has been flowing into purely financial channels, giving rise to a vast expansion of the financial superstructure of the economy and an unparalleled explosion of speculative activity of all kinds.85

The explanation is entirely consistent with Sweezy’s general theory of stagnation. (As well, it can be related to the discussions by Kalecki and Steindl of “rentiers’” and “outside” savings, respectively.86) In this respect, it may confirm Sweezy’s oft-repeated view that understanding stagnation as the “normal” state of a developed capitalist economy is a far more fruitful assumption than the full employment assumption which underlies neoclassical economics.

Whether that is sufficient for Sweezy is another matter; he has become increasingly dissatisfied with the adequacy of our understanding of the relation between the spheres of finance and production: “In economics, we need a theory which integrates finance and production, the circuits of capital of a financial and a real productive character much more effectively than our traditional theories do.”87

Paul Sweezy continues to analyze the characteristics of a mature capitalist economy—a work begun more than a half century ago. The dean of radical economics remains an eager student of history, tracing the new forms of the stagnationist tendencies of monopoly capitalism. In all this, he retains the enthusiasm of his youth. Even his earlier pessimism about workers in developed capitalist economies has been tempered with the passage of the Golden Age: if “the global system has now entered a crisis phase that gives every sign of being irreversible, it is hard to avoid the conclusion that we are entering a new chapter in the history of the metropolitan working classes.”88

• Hillard, “Harry Magdoff and Paul Sweezy,” 397.
• Baran and Sweezy, Monopoly Capital, 244-5and Chapter 8, “On the History of Monopoly Capitalism” in general.
• “The Common Market,” Monthly Review (January 1962): 391; “End of the Boom?” Monthly Review (April 1967): 4.
• “Why Stagnation?” Monthly Review (June 1982), reprinted in Harry Magdoff and Paul Sweezy, Stagnation and the Financial Explosion (New York: Monthly Review, 1987), 35–6.
• For a discussion of world excess capacity in the steel industry as “a harbinger of events to come,” see Paul M. Sweezy and Harry Magdoff, “Steel and Stagnation, “ Monthly Review (November 1977).
• Paul M. Sweezy, Four Lectures on Marxism (New York: Monthly Review, 1981) 39, 42–3.
• Sweezy, “Crisis of American Capitalism,”3.
• Paul M. Sweezy, “The Economic Crisis in the United States,” Monthly Review (December 1981): 4, 8.
• “Keynesian Chickens Come Home to Roost,” Monthly Review (April 1974) reprinted in Harry Magdoff and Paul M. Sweezy, The End of Prosperity: The American Economy in the 1970s (New York: Monthly Review, 1977), 21–2.
• Sweezy, “Crisis of American Capitalism,”6; see also “Inflation without End?” Monthly Review (November 1979): 9.
• Harry Magdoff and Paul Sweezy, “Production and Finance,” Monthly Review (May 1983) reprinted in Magdoff and Sweezy, Stagnation and the Financial Explosion, 96–7.
• “The Financial Explosion,” Monthly Review (December 1985) reprinted in Magdoff and Paul Sweezy, Stagnation and the Financial Explosion, 147, 149–150.
• Harry Magdoff and Paul Sweezy, “Capitalism and the Distribution of Income and Wealth,” Monthly Review (October 1987): 13–4.
• See also Kalecki, Theory of Economic Dynamics, 159; Steindl, Maturity and Stagnation, 113–121.
• Sweezy, “Interview,” 19.
• Sweezy, Four Lectures on Marxism, 86n.

[GRG55]

Re: Armstrong article: why stagflation caused by taxation?

Paul M. Sweezy on Stagflation

“The real task of an underconsumption theory is to demonstrate that capitalism has an inherent tendency to expand the capacity to produce consumption goods more rapidly than the demand for consumption goods.” Such a tendency may be manifested in two forms. Where an increase in capacity leads to overproduction and then curtailment of production, “the tendency in question manifests itself in a crisis.” In a second case, however, capacity is not expanded “because it is realized that the additional capacity would be redundant relative to the demand for the commodities it could produce. In this case, the tendency does not manifest itself in a crisis, but rather in stagnation of production”

“Monopoly capitalist economy tends toward stagnation—in the same sense that it always used to be assumed that a competitive capitalist economy tends toward full employment.”

...

There is no reason to produce anything unless there is consumption of that same good or service.

Over time most goods and services are commoditized. Over capacity brings down prices and expands the market by making that good or service available to more consumers.

Once the demand is saturated, or worse it starts to decline (can we spell "obsolete"?), capacity to produce that good becomes a liability for all but the low cost producer. Through the 3 decades of the FIRE economy, more and more that low cost producer was somewhere other than the USA. Removing high cost capacity is a LOT more difficult than creating it. Shareholder expectations, political distortions, labour regulations and just plain lousy management all contribute to chronic global overcapacity.

Layered on top of this is the credit mechanism to increase demand "artificially". For decades ever more credit, ever cheaper credit and ever more easily acquired credit (lending standards) has driven demand to levels that compensated for and supported production capacity. It also brought down the cost of adding more capacity. The global auto manufacturing industry is a poster child of this, on both counts.

China is doing all of these at rates that are exponential to anything we have seen in history, anywhere. Such is the much vaunted "Chinese miracle".

The last "rabbits out of the hat" to maintain demand and the credit system (the banks), and therefore avoid a wholesale contraction in production and jobs, are:
- Bailouts for select industries (GM and Chrysler, for example);
- Credit extensions for the over indebted, including mortgage holders and sovereign governments;
- ZIRP
- QE

All that seems left untried is direct "helicopter money" showered on grateful citizens...

[jk]

Re: Armstrong article: why stagflation caused by taxation?

The last "rabbits out of the hat" to maintain demand and the credit system (the banks), and therefore avoid a wholesale contraction in production and jobs, are:
- Bailouts for select industries (GM and Chrysler, for example);
- Credit extensions for the over indebted, including mortgage holders and sovereign governments;
- ZIRP
- QE

All that seems left untried is direct "helicopter money" showered on grateful citizens...

if the fed stops paying 25bps on excess reserves, i think a lot of money would flow into circulation.
if the fed CHARGED 25bps on excess reserves i KNOW a lot of money would flow into circulation.

[GRG55]

Re: Armstrong article: why stagflation caused by taxation?

if the fed stops paying 25bps on excess reserves, i think a lot of money would flow into circulation.
if the fed CHARGED 25bps on excess reserves i KNOW a lot of money would flow into circulation.

Isn't that more or less like pulling the sacks of Fed printed money out of an "airport warehouse" and loading them on the whirly-bird?

[jk]

Re: Armstrong article: why stagflation caused by taxation?

Isn't that more or less like pulling the sacks of Fed printed money out of an "airport warehouse" and loading them on the whirly-bird?

yep. pretty much. but the money would flow first to the deserving rich, while a helicopter drop might spread some to the hoi polloi, unless they restricted the flight plan to greenwich, ct.

[lektrode]

Re: Armstrong article: why stagflation caused by taxation?

yep. pretty much. but the money would flow first to the deserving rich, while a helicopter drop might spread some to the hoi polloi, unless they restricted the flight plan to greenwich, ct.

and there i went thinkin it was already 'restricted'...

to the beltway and the 9/11 flightpath areas...

[gwynedd1]

Re: Armstrong article: why stagflation caused by taxation?

What a waste of brain cells on something that a simple SS withholding holiday could have solved.

[vinoveri]

Re: Armstrong article: why stagflation caused by taxation?

Isn't that more or less like pulling the sacks of Fed printed money out of an "airport warehouse" and loading them on the whirly-bird?

your analogous solution is better imo: we avoid the middle men, the banks, who get to lend the hot fiat money at interest - man it must be "great" to be a banker. Just give the $s to everyone and we'll see some aggregate demand - but of course we'll see it ramp faster with the fractional reserve system ...