Re: CJE 2001 critical review of trade theory and policy

["John O'Donnell" <jackodonnell@xxxxxxx>]

Leigh Harkness wrote:
>
> John wrote:
>
> > No, I have simply recognized the need for a monetary policy
> > to prevent deflation as well as inflation. With the
> > deflationary impetus of the proposed change in the form of
> > taxes that something is the reason for the chapter "Sharing
> > Nature" has the title it has.
>
> Your proposal was not a deflationary one.

You do seem to be excessively reluctant to actually look at
the proposal. The model explanation begins at:
http://www.geocities.com/jackodonnell.geo/c04r4a.html and
the entire analysis begins at
http://www.geocities.com/jackodonnell.geo/c00r4.html

> You were proposing a reduction in
> wage costs and prices.  But this was not done by reducing the money supply.

No, it is done independent from the money supply. The need
to adjust the money supply was addressed as a consequence of
the inevitable reduction in prices to accomplish the also
inevitable increase in production accompanied by an equally
inevitable increase in the level of employment. The
description of the why's and wherefore's is detailed in the
analysis.

> The proposal I understood you were making had the effect of of increasing
> the real money supply and demand.

No. It is to change the form of taxes from those that
resolve to variable costs of production to fixed costs of
production. There is no need to suppose all these extraneous
assumptions you seem to insist upon. The task is simple.
Just follow the rules presented and either accept the
conclusion or demonstrate an error. Here again is the
extremely simple task that demonstrates that this process
would increase production and thereby increase the level of
employment to cause that increase in production:

QUOTE
First create an arbitrary normal demand curve. Then create a
normal cost of production curve with fixed and variable
costs of production with falling costs to the point of
diminishing returns and a rising cost beyond that point.
Then find the most profitable production point on the demand
curve.

With me so far?

Then when you've done this simple task find the variable
costs of production at the most profitable production point
and change a substantial portion of this cost to fixed cost
of production and find the new point of maximum profit that
falls on the same demand curve. That is, change only the
distribution of costs between variable costs and fixed costs
just as would occur if nominal wages collected by employers
as taxes and never seen by employees as actual wages were
collected as property taxes from the employer as I described
in the original post.

If you can manage to do that and honestly report the result
as an increase in the level of production you may even
accept the conclusion that such a change would increase
employment to produce the greater amount of product that is
sold more profitably at the lower price needed to obtain the
increased demand.
UNQUOTE

> John continues:
>
> > Yes, that is the reason I put forward the analysis that
> > demonstrates that it is the form of taxes and not the amount
> > that has most to do with macro economic performance. In
> > doing so, I have also demonstrated that the amount can be
> > optimized to cause the greatest rate of growth in capital.
>
> I had an assignment a couple of years ago checking the impact of tax reform
> on a country.  That country was under pressure from the WTO to remove taxes
> on imports and introduce a GST/VAT type general consumption tax on all
> consumer goods and services.  To assess the proposed tax reform proposal, I
> decided to model the whole economy and assess the impact of tax changes on
> the whole economy.  What I found was that shifting the tax from imports to
> local products raised the price of domestic products and lowered the price
> of imports.  The net effect was that incomes and employment declined in that
> economy.

Well, if you did the analysis correctly then there would
ultimately be no significant change if the GST/VAT simply
replaces the import taxes. If there were a change in the net
effect that changed the consumer price of imported goods
relative to domestically produced goods then there would be
an effect.

The issue I have presented is that any transaction tax will
effectively resolve to a variable cost of production and
thereby raise the purchase price. A tax on the property
value of the production facility will lead to a lowering of
consumer prices because it removes some of the variable cost
of production and replaces them with fixed cost of
production. It isn't difficult to perform the simple tasks I
presented that demonstrate the effect. EXAMINE THE PROPOSAL!

> However, that economy had a fixed exchange rate.  The proposed changes to
> the tax system changed relative prices, so that the tax changes effectively
> appreciated the currency.

The effect of price changes on the value of money would be
zero IF THE MONETARY POLICY WERE ESTABLISHED TO MAINTAIN THE
VALUE OF THE CURRENCY. If the facade of attempting to affect
AS or AD by monetary policy continues the effect of monetary
policy on employment, production, prices, etc. will be as
uncertain as is demonstrated by the uncertain outcome
whenever the policy is implemented. Remember the black swan
-- it would only takes one to demonstrate that not all swans
are white. Likewise, it only takes one failure of the
assumption that monetary policy can cause economic
improvement to demonstrate that it is NOT a causal factor.
How much money creation [i.e. -- lowering of the interbank
interest rate] must Japan implement to accomplish an
increase in employment?

> If the country devalued the currency to restore relative prices, the tax
> system would not have reduced employment.  Similarly, if the country had a
> floating exchange rate or another form of variable exchange rate, the tax
> system would not have reduced employment.
>
> How can you propose that changing the tax system is going to effect
> employment. in an economy with a variable exchange rate system?

EXAMINE THE PROPOSITION AND YOU TELL ME HOW IT DOESN'T
HAPPEN!

> In response to my question:
> > > So:
> > > 1.    why doesn't the floating exchange rate system ensure that the
> > > exchange rate (the relative price domestic products and imports) is
> > > appropriate to generate full employment; and
>
> John writes:
>
> > Because the value of a currency does NOT have a causal
> > relationship to employment.
>
> By exchange rate I do not mean the "value of currency".  I mean the relative
> price of imports and domestic products.  If the exchange rate makes imports
> cheaper than local products, then I expect people to buy imports and not the
> local product.  Similarly, if the exchange rate makes domestic products
> cheaper than imports, then I expect people to buy the cheaper local product
> and not the import.

Aside from punishing domestic purchasers border taxes simply
displace unemployment of the favored producers with
unemployment of those not so favored. It also has NOTHING
WHATEVER TO DO WITH MY PROPOSAL! Trying to obfuscate the
simple issue of changing taxes that resolve to variable
costs of production to taxes that resolve to fixed costs of
production DOES CAUSE an increase in production with its
inevitable requirement for greater employment. Do whatever
else you will, that simple change in and of itself does
improve the level of employment.

> In response to my question:
>
> > > 2.    why, despite the vast amount of money that our banks create each
> > > year, it is never enough to generate sufficient demand to provide full
> > > employment?
>
> John says:
>
> > It is not the amount of money [i.e. -- dQ/dM = 0] that
> > affects demand, it is the distribution [i.e. -- Keynes
> > "propensity to consume"] of the purchasing power that
> > establishes the point of market stability, as temporary as
> > that stability may be.
>
> But this money that is being created is widely distributed.  It goes on
> consumption.  Probably more should be invested.  Yet it is never enough to
> provide the demand necessary to provide full employment.  This does not only
> happen in the USA and Australia.  It is a widespread phenominia many
> economies since the 1970's.

You're stuck in the nonsense of conventional economic
beliefs of your "school of thought" and not examining the
proposal. You may believe that monetary policy can be
manipulated to cause employment but that is just belief, not
fact. Look at the black swan and forget the erroneous
nonsense written in your bible.

> John
>
> You write:
>
> > to reduce the nominal
> > level of wages while concurrently increasing the standard of
> > living by providing a government stipend to all.
>
> I could never sensibly advise any government to do what you are proposing.
> I have advised and implemented the opposite, moving government employees
> engaged in enterprises from a fixed wage or stipend to a profit sharing
> arrangement.  That has been very successful in stimulating productive
> employment, increasing incomes and employment.

I suggest you learn to read. Nowhere have I said anything
concerning moving people from profit sharing to wages. The
proposal's effect on employment comes from the effect the
proposal has on the nominal wages of those who are paid
wages; it has nothing whatever to do with those paid profit
shares. However, for most [all?] of the states in the US,
profit sharing or piece work without at least a minimum wage
are illegal forms of compensation.

Do the simple task described above and then say where it
errs and maybe you'll stop giving bad advise, but I suspect
it will be too much for someone so inculcated with the
economic biblical beliefs to face reality.

--
			-- jbod

		Tax Privilege, Not People
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