Is Monetarism/Neoliberalism bad? Not at all!

Neoliberalism and its mainstream macroeconomic theory Monetarism are not bad theories like these old-fashioned Socialist and the other Left-wingers condemn at all! These theories teach very important socioeconomic lessons for all the individuals to live as long as the monetary economy where individuals use fiat-money for their intermediary of exchange in their daily life thrives to exist. 

Those who are against Neoliberalism tend to blame these theories as the severe survivalist Capitalist political theories leading the majority individuals to deprivation. However, it is the same nonsense as blaming Marxism and the other socialist theories for the disastrous mistakes of the United Soviet Socialist Republic (USSR). Both Marxism and Neoliberalism contain the non-negligible elements to study the political affairs and the human history. 

- The monetary policy channel instead of the fiscal policy

Focusing on Monetarism as he major base macroeconomic policy of Neoliberalism, the key element of this theory is analysing the nature of the fiat-money flowing into economy as the intermediary of exchange. In the long run, the money value is neutral to the other substances distributed in the world. By contrast, it regards that the change in the money supply volume affects the economic activities and productivity level in the short-medium run. 

Monetarism regards highly of the value of the fiat-money supplied by the central bank which should be supported by its credibility and its market demand. Therefore, it is sensitive to adjust the money supply level to the aggregate production level of this economy in order to avoid the value depreciation. 

It encourages the private sector based economy functioned by the spontaneous order of individual economic agents voluntarily deciding the aggregate production volume according to their needs and wants on spot. It discourages the excess reliance on the fiscal policy cutting tax and increasing the government expenditure while incurring national debts leaving their responsibility of repayment with the inevitably increasing future taxation and cutting the future government expenditure in the long run. Instead, it tackles with the temporary economic downturn by temporary pumping the extra money supply filling the temporary emerging negative output gap. 

- High-Powered Money as the antidote against the deflationary recession

In order to enable the fiat-money to stimulate economy, the velocity power of this money supply which is its value and credibility in both domestic and international market, is required. When individual economic agents appreciate its value and credibility, they find its extra supply as valuable and trustable to use as their intermediary of exchange in both domestic and international market. They may either spend for their exchange or save in their banks using the extra money from their saving account as the extra investment resource for increasing their profit. This is called High-Powered Money theory. 

According to Monetarism, the deflation inducing the recession, the negative output gap, is caused by an error of scaling the optimum market aggregate production level or a false information delivered to economic agents. Thus, the deflationary recession is caused by the stuck money circulation which means the money supply level is not balanced with the aggregate productivity level. In this scenario, the money supply as the High-Powered Money can be increased to directly inject it to economy to equalise it to match with the aggregate productivity level. 

- Killing inflation is more important!

On the other hand, Monetarism regards of Stagflation (the output stagnation + the price inflation) as the excess money supply unmatching with the aggregate productivity level.  Then, the decreasing output caused by Stagflation is considered as the long-term phenomenon which should be solved by cutting the cots including wages of the production even if it means to discourage their business activity level at least for a short run.

The reason to sacrifice the output to suppress the inflation is to maintain the money value as useful to be implemented as the High-Powered Money. Even to protect the employment by maintaining the wage distribution, the real value of their wage/income is consequently reduced when the price inflation, the money value depreciation, is perpetuated. Monetarism is actually a humanitarian political theory against depreciating their income/wage level to avoid consequently treating these employees as the quasi-slave labour. 

Monetarism antagonises the perpetuated inflation even for diverting the negative output gap is bad for economy overall. Even though the extra money supply is injected into the real good and service market to push the output level up, the value depreciation negatively affects the capital market. 

Most of the capital asset value is based on the base money so that the money value depreciation implies the capital asset value depreciation in the international financial market. Almost all the firms producing goods and services are invested by banks and shareholders through the capital market.

In addition, firms in the good and service market also face the import cost up under Stagflation as the excess money supply perpetuating Stagflation. Because all the regions of this world are interdependent on each other so that the relative value decline of the fiat-money used in one regional economy causes the purchasing power depreciation of this regional economy. 

- Monetarist, Consequentialist Ethical Philosophy

Overall, Monetarism supports the gradual and natural economic recovery encouraged by private individuals and firms under the stable market economy propped up by the balanced money supply adjusted to the aggregate productivity level. This ethical policy is what Neoliberalism shares with and aspires to achieve so that Monetarism is the core macroeconomic policy of Neoliberalism.

Monetarism and Neoliberalism are often regarded with a bitter cold attitude towards those suffering from economic downturns by these antagonists. However, it is really a prejudice to accuse them as such because these theories take account of the majority individual citizens such as their about preventing their real income depreciation caused by the monetary value depreciation.

Monetarism and Neoliberalism may be categorised into the Consequentialist ethical philosophy which attempts to maximise the overall net benefits by maximising the sum of the gross benefits while minimising the sum of the various cots as a total at the end. Monetarism criticises the big government policy directly caring their citizens by incurring a massive debt and the non-stoppable inflation depreciating their income and the market value of financial assets in the international market. Monetarism counts on the rationality of each individual's free will and the spontaneous order based on these free wills to recover their economy with the minimum assistance by the small government. 

It does not mean that both Monetarism and Neoliberalism neglect the public support with government assistances. They simply suggest the minimum required assistances. Furthermore, the High-Powered Money of Monetarism maintains the real value of the assistances provided by government and the procurement power of this government gathering the resources for their provision. This is why the European countries implementing Social Democratic socioeconomic policies adopt Monetarism for their core macroeconomic policy.

- Monetarism in Europe

The weight on each different macroeconomic theory which Neoliberalists adopt to follow depends on each Neoliberalist. Some of them mildly adopt Keynesian theory meanwhile the devote Neoliberalists base their thoughts and plans purely on Monetarism. As a matter of fact, the European Central Bank (ECB) and the central banks of Scandinavian countries, whose countries are famous for their Social Democratic socioeconomic policy, follow the monetarist macroeconomic policies especially for their tight prudent money supply policy. This proves that Monetarism is worth referring to not only the economic Right-wing but also the relatively more centralist counterparts. 

Social Democracy is actually the friendly version of Liberal Democracy (Capitalism) (※) and not technically Socialism. Therefore, it makes sense that these Social Democratic European countries are happy to install Monetarism as the principle macroeconomic theory of handling their market economy. Their socially minded intervention is not stimulated by the proactive positive macroeconomic intervention by a central government expenditure or the extravagant money supply from a liberal central bank which Keynesian economic theory often uses. 

    ※ Liberal Democracy and Liberalism by means of this comparison are treated as the synonym of Capitalism, the market economy, because Neoliberalism is mentioned to explain in this essay. Liberal Democracy is therefore the synonym of Neoliberalism here. Then, Social Democracy is the derivation of Neoliberalism rather than Socialism. 

The level of tax and expenditure rarely changes flexibly unlike those adopting Keynesian theory as their core principle macroeconomic policy. Their costs for the socially minded public intervention of these European countries are covered by the tax revenue from the progressive taxation levied on individuals and firms their steadily growing market economy. These European countries especially since 1997 (The European Monetary Union conducted by the ECB was introduced then) have been actually reluctant to artificially stimulate their economy.

It is because their macroeconomic tradition, especially of Germanic and Nordic, puts high priority on prudence over expansion. Their Social Democracy sustains the diverse income distribution allowing the slow but steady human capital development. Therefore, Monetarism matches with their prudent attitude towards economy to slowly but steadily raising their economy backed up by the human capital development requiring the steady continuous public investment in the long run.

- Conclusion: Monetarism and Neoliberalism are good!

In conclusion, having re-evaluated Monetarism and its ethics basing Neoliberalism, it is actually an ethically good functional socioeconomic political philosophy. Their characteristic is simply different and unique from the other political economic theories.  Their quality depends on how, where, and when it is implemented in real.

    To my admiring economists, Irving Fisher and Milton Friedman

Mr. Rishi Sunak will well remain in the history of Macroeconomics for his Hawkishness

It is a surprise to see such a Hawkish Chancellor of Exchequer after a decade of the Dovish regime in the world economic policy.  Mr. Rishi Sunak is certainly brave while being a little bit reckless.  It is certainly brave to reveal such a tough Hawkish characteristic . He puts emphasis on his prudent attitude toward balancing the budget. Even under the still anticipated downturn with a still remaining strong anxiety, he is willing to increase the overall taxation (generally slowing down economy) to balance the budget.  He claimed that, failure of balancing the budget eventually results in the rise of both the price inflation and the interest rate for bonds and mortgages is certainly alarming for economy.  

Regarding the usage of the term Hawk and Dove, it does not refer to diplomatic and military policies.  This term is uniquely used in macroeconomic policies related to neither diplomacy nor military.  In terms of macroeconomics, Hawk is tough and prudent whilst Dove is tolerant and loose.  It sounds similar to diplomatic and military policies but the implemented channels and the targets for setting these policies are different and unique in economics. Both have advantages and disadvantages.

Hawks are intolerant towards the enemies of the macroeconomic environmental stability such as the high price inflation (devaluing the income value and disturbs financial planning) and the rumour of distrust from investors and foreign exporters&importers.   They put emphasis on eliminating the root causes of the instability by tightening controls over balanced budgets and setting the central interest rate relatively high enough (plotting to consequently lower the high interest rate and stabilise the real income value). 

Doves are on the other hand tolerant for using loose policies to save individuals and their economic environment from the hardships (such as unemployment and lack of rescuing resources) even with some expected negative side effects.  They frequently claim for need of the looseness because the overall benefit covers the cost incurred by the negative side effect, and it should take place temporarily at least.   

Both are equally good as well as bad because both have disadvantages indeed. Hawks are remarkably unpopular during the unexpected economic downturn because Hawkish austerity is possible to be tough also on majority individuals suffering from the downturn, and then is likely to delay the recovery from the downturn.  Doves are blamed for their speculative projections often underestimating the cost of their policies so it is likely to misjudge of the timing of both imposing and cancelling their loose policies, and then their tolerance contains the high contingent risk of losing the administrative capability. 

Focusing on what Mr. Rishi Sunak is attempts to put into practice, he manages his policies by handing the fiscal policy-channels such as increasing tax rates to increase the inland revenue to reduce the national debt and various bond interest rates. He promises to consequently protect British citizens' income from either the high mortgage interest rate, the high price inflation, and lack of foreign investments with this policy implementation.  

The fiscal policy-channels are able to tune the different tax rate for various targeted segments of economic. Nonetheless, the fiscal policy always contains the mis-selection of the target sectors to increase the tax rate causing the systemic risk collapsing economy caused by penalising the certain sector's performance interrelated to many of the others. This Sunakian fiscal policy is expected to effectively handled to hopefully induce the positive aftermath.    

Mr. Sunak's policy is neither misguided nor irrational.  There are many worthy qualities accountable for encouraging the sustainable robust British economy. Especially, this seems to function for keeping the value of Great British Pound Sterling and secure the trust in the capital market and the foreign trades. Furthermore, his policy takes account of ordinary majority British citizens for securing their future real income value.  At the same time, the biggest concern is to determine whether or not this is the right moment to be tough as Hawk meanwhile the popularity of the looseness is still enthusiastically supported by the mass.

Having analysed these aforementioned aspects, Mr. Rishi Sunak's Hawkishness is neither absolutely good nor absolutely bad; but it is yet controversial.  Only the future might be able to provide the convincing appropriate judgement over his policy-aftermath.

Sequel of Econometric Experiment of Laffer Curve

* Please could you read this previous post before reading this one:
Econometric Experiment of Laffer Curve

The previous post shows the optimum tax rate maximising the tax revenue. The optimum tax rate is 16.55%.

This entry tries to investigate that there can be some sort of cost when tax is increased. So, in order to find out the optimum tax rate which maximises the net gain of the tax revenue instead of the gross gain shown previously. The national dept % GDP (The public deficit) is denoted as the cost of high taxation. The GLS estimate below is the regression of the national dept % GDP on the tax rate and the lags of this explanatory variable.

The tax rate levied in 3 years ago is highly correlated. The estimate is also detected as consistent.

So, the higher tax rate causes the higher loss in 3 years later. This can be because that, when the government is too used to rely on the high tax revenue, then it may cause the decline in the private sector activities. Also, when the volume of the reliance on the government expenditure does not seem to be robust. Furthermore, when this volume of the reliable becomes bigger, the volatility of the reliance also become bigger. All in all, the prediction cost becomes bigger when the size of the public sector economy becomes bigger.

In order to find out the optimum tax rate which maximises the profit from the taxation i.e. the tax revenue minus the tax cost = the deficit in 3 years ago. As shown below, both functions are differentiated by means of the tax rate. At the tax rate where the differentiated tax revenue equals the differentiated deficit, the net gain from the taxation is maximised.

Owing to the result, when the tax rate is 10.5%, the net gain is maximised. This tax rate 10.5% is lower than 16.55%, the tax revenue maximising the gross gain shown in the previous post.

Econometric Experiment of Laffer Curve

g1

Laffer curve is the theory indicating that there should be an optimum level of tax rate which maximises the tax revenue. It claims that the tax rate should be neither lower or higher than this optimum tax rate to maximise the tax revenue. Therefore, in terms of what Laffer Curve theory indicates, the correlation between the tax revenue and the tax rate is the up-facing parabolic equation shown by the graph above. (Y denotes the tax revenue, and X denotes the rate of the tax on income and profit (From OECD, 2004-2011)) The countries whose data is missing for 2011, it refers to the data in 2010.

Then, in order to find out the optimum tax rate, this formula is factorised as follows.

f1

g2

Therefore, the optimum tax rate is denoted as Beta divided by bracket two times Alpha. This value shows the average across all countries and times.

These countries might have a different rate of the optimum tax rate due to their geographic characteristics and political situations. So, the deviation of their own optimum level from the average rate is denoted, where the sum of ±D is zero, as follows:

g3

In order to create the formula suitable for the regression analysis, the formula involving ±D is expanded as follows:

f2

In order to simplify and avoid the multicolliearity problem, both the left side and the right side of this equation is divided by X. At this time, both sides of the equation involves the variable X, there is a worry about the simultaneous equation problem. So, in order to verify that the simultaneous equation problem is avoided at 95% confidence level, the Generalised Least Squares (GLS) model is used to assess this equation in order to use its Hausman test (The test assessing whether the analysis is consistent or inconsistent). The other reason to use the GLS model is that the sum of the dummy variables has to be zero because the barometer "Beta divided by bracket two times Alpha" is supposed to be shown as the average of all these countries across all the years.


f3

f4

GLS Result

The GLS model in this software can only regress on the time dummy variables of the fixed effects (I.e. The random effect of the time dummies cannot be used). The dummy variables of the time effect are excluded from this model because the Wald Omit Test showed that the time dummies are not significant (See below).


The Breusch-Pagan test (p-value 0.025 < 0.05 ) indicates that, at the 5% significance level, the unit specific effects (The Random Effect) exist. So, the optimum tax revenue for some countries can be significantly different from the average optimum tax revenue. The Hausman test (p-value 0.94 > 0.05 ) indicates that, the estimates are consistent. This claims that the previously mentioned simultaneous equation problem is avoided, and there is no concern about any other inconsistency problem such as the serial correlation.


The following process is to transforming the equation for the GLS back to the original parabolic equation, and then factorise it to find out the optimum tax rate.

Result


Tax Rate minus the optimum rate (16.55)

The ranking of the optimisation

Land tax is both fair and progressive

Income tax is progressive i.e. an effective tax collecting method if we consider about the marginal propensity to consume and save.

But, it has a high risk to disturb "equity" (synonym of fairness).
It discourages the wealth accumulation by hard working and penalises those who bring an income and/or a talent into that economic region.

The most effective tax is on "land"! Land is a common good and its externality such as pollution and over-population is high contiguous to the others.

Furthermore, land based tax is effective to control the business cycle more than income tax.

Income earners may earn their income in a particular region and spend and invest it in outside this region. Therefore, the effect of income tax is contigent to areas which are not accountable to controlling a business cycle of a particular region.

In addition, the means of production of income is a combination their working effort and a reward from investment. Income tax simply means to penalise working effort and investment. Therefore, income tax has a risk to stagnate the economic productivity.

By contrast, if some one uses a land, it simply means s/he utilises the value of this land. People can utilise to live in a household on it, earn income in the firm on it, and invest into a property on it. These activities also contain working effort and beneficiality of investment. However, unlike income tax, people utilise land to do these activities. These activities can cause pollution, over-population, and business cycle overhear or slump. Furthermore, the means of land tax is hardly contiguous because it directly burdens taxes on the land where the economic activity is derived from. All in all, the land tax accounts on the "equity" of utlising and costing it. Thus, it fulfils the condition of "equity" i.e. fairness.

In addition, land tax can be not only fair but also progressive. High income earners are more able to buy and keep the land with a high value and/or high costs than the rest. Then, land tax is able to tax in proportion to the marginal propensity to saving (In terms of the absolute income hypothesis, consumption of permanent items such as households and lands and investment are considered as a part of saving).












P.S.
I support abolition of taxes on consumption such as sales tax and VAT.

As long as the price elasticity of demand is low, it is a fair indirect taxation because individuals pay as they use.
It is regressive but fairer than the inflation tax (High inflation)

Nonetheless, tax on consumption stagnates economic active level because it harms not only on consumers but also producers. If the price elastiicity of demand is high, then the penalty on producers is much higher than on consumers. Therefore, it is NOT FAIR because it pernalises those who increase the sum of utility among individuals!

Tax on consumption is highly contiguous to those who are not accountable to pay the tax. As we know this tax is not able to control over business cycle and burdens those from outside the economic regions where this taxation exists. Therefore, it disturbs the business cycle and causes moral hazard of taxation (Those who are not responsible for the tax also pay tax!).

Corporations which have a high volume of export gain a high volume of tax rebate. This fact discourages small businesses, creates a barrier for new firms to get into the market, and reduces the internal aggregate demand.

The UK coalition gov't eventually need to either increase the national debt beyond Maastrict treaty's restriction or increase the tax again

Well, I partially agree with your comment, my friend. But, speaking of the tax plan, it seems to be a "discrete" fiscal plan rather than a "permanent". During recession or recovering periods, they offer a temporary tax cut, but it sounds like going up again.

The coalition will have a dlilema about it. In terms of my prediction, as long as Britain sticks to Maastricht treaty, her economy hardly recovers.

Although I disagreed with Labour and Gordon Brown, the national debt should have been incured more before the recovery was ensured (without increasing tax which Labour and Gordon Brown insisted on 'cos of the restriction on incuring debt by Maastricht treaty) rather than introducing a temporary tax cut which concerns with the problem of Ricardian-equivalence (People already know the tax will rise in the near future so an effect of temporary tax cut won't work as much as the policy expects).

The first 10,000 quid you earn free of tax itself is fine. But, it does not seem to be effective enough when the total recovery from the recession caused by what the former gov't party Labour created!

I do usually not agree with incuring an extra national debt for a temporary recession, but the currently going recession shall be called the "depression" caused by the artificial economic boom plotted by Labour. The coalition gov't eventually need to either increase the national debt beyond Maastrict treaty's restriction or increase the tax again...

I do not put this comment to contradict you, but this is my worry about British politics for the moment, and I wish some gentlemen like you may listen to it...

abolish consumption tax

This doccument proposes that consumption tax is relatively inefficient for the tax collection method and harmonising business cycles so then offers to abolish the consumption tax in Japanese case.

Speaking of consumption tax in general, which includes the turn-over tax introduced former West Germany, sales tax used in Japan, and the Value-Added Tax (VAT) which is used the European Union (EU) member states, this kind of indirect tax system tends to be inefficient to gather a stable amount of tax revenue. The reason is that the demand of comodity itself is quite fluctuant so that the revenue changes overtime inevitably. The tax on consumption, especially the sales tax, symply increases the price of necessities so than individuals' utility goes down. This causes to the moral hazard which denotes that although economy is supposed to create the individuals' well-being the consumption tax discourages the well-being of those. Even the turn-over tax and the VAT, which are regarded as less regressive than the sales tax, not only to cause the moral hazard but also is still regressive. These two kinds of consumption tax cause the disturbance to account how the value in accumulated and to judge if some goods or services need to be taxed more than others.

Furthermore, the accountancy can be easily biased by firms selling consumptions. The sales tax is the most notorious because it does not clarifies whether one comodity is on the final good or the intermediate good. The turn over tax encourages the merging firms and creates more monopolised market so then results in inefficient market pricing. The VAT which is popular and has a good reputation among the world is high controversial. The VAT is successful to prevent encouraging merging and less regressive than the previously mentioned two types of consuption tax. However, the VAT merely taxes on consumptions with the number of sales among intermediate market. Therefore, the VAT does not precisely judge whether consumptions are necessities or luxuries and need or need not to be taxed.

On the other hand, in terms of the macroeconomics perspective, consumption tax tend to stagnate the aggregate demand level. The consumption level correlated to the income level is quite hetero-scedastic, which implies the variance varies across different level of variables. The consumption level of individuals with the higher income is varied where as those with the lower income level spend most of their income for their consumption. This clarifies that the average level of merginal propensity to consume does not change across the income level. Therefore, the tax on the consumption reduces the level of disposable income of individuals with the lower income level meanwhile those with the higher income level may substitute their expensive consumptions or their saving income into inexpensive consumptions.


Neoclasscal economists may claim indirect taxation in general including consumption tax is less likely to disturb equity than direct taxation as this is relatively burdened by means of the right to spend. Neoclassical economists tend to put priority on equity of individuals' income, therefore encouraging saving, and the right to spend (the other word is "pay as spend") rather than the ability to pay. This is agreed as long as the indirect tax is not the consumption tax because this essay is going to explain about the necessity of introducing the emission tax due to reduce the negative externality. However, the consumption tax increases the negative externality unlike other forms of indirect taxation. Furthermore, although the majority of neoclassical economists support small government with little bureaucracy the consumption tax which they support, as a matter of fact consumption tax requires a high government expenditure on the sophsticated bureaucratic system to account the tax collection and increases the cost due to the risk of assymetric shick of aggregate demand level among regions.




Focusing on the microeconomic aspect, consumption tax distorts equity despite the supporters of consumption tax put priority on equity. In particular, a nation exporting a large number of commodities produced in monopolistic or oligopolistic firms has to transfer the revenue from the consumption tax burdened on these commodities back to these firms in order to avoid the tax export. In this situation, these firms gain an extra amount of revenue from this tax revenue transfer as much as they export more than or as much as they sell domestically. This results in transfering revenues from medium and small firms exporting little to those exporting a lot. On top of it, a nation having a huge tourist industry openned up to the global market has a large proportion of tax exportation or needs a bureaucracy to enable foreign customers to refound their consumption tax. As a consumption tax becomes a huge proportion and/or complicated like the VAT, it eventually requires much more complicated bureaucracy to account the process of consumption tax and the right amount of tax refound. If the refound does not take place, it might simply create the distortion of equity across nations because foreign comers bear an extra duty which may not contribute for their public service. All in all, consumption tax tends to exploit the revenues from medium or small sized firms and encourage a monopoly and distortion of equity among firms as long as these two factors are notable. In particular, Japanese major car making entreprises and IT corporations are notorious to take an extra revenue from the tax transfer because of their enourmous scale of exportation level.

From the macroeconomics point of view, the consumption tax disharmonises the business cycle among regions in a nation. Unlike direct taxes, indirect taxes cannot vary their level of taxation across different regions. Indirect taxes are collected by refering tp the total revenue of each individual firm and extremely difficult to settle a bureaucracy varying the different level of indirect taxes across regions depending on their own business cycle. If an indirect tax is inelastic, for example the tax on habit formings, this has little influence on the business cycle. The indirect taxes burdened on roads used across different regions, and petrol and electricity used for transportations going across regions have to be equall across regions. However, consumption tax is an elastic indirect tax, its level of tax burden does not have to be same across regions unlike taxes on roads, petrol, and electricity, although it is extremely diffcult to vary the level, and has an influence on the local business cycles.