Saturday, January 1, 2011

Inflation Taxation Summation

Following up on the previous post...

Reading an old Billy Blog post... or as Billy would call it, a Billy Blog blog... Anyway, Billy writes:

Modern monetary theorists consider monetary policy to be a poor tool for counter-stabilisation. It is indirect, blunt and relies on uncertain distributional behaviour. It works with a lag if at all and imposes penalties on regions and cohorts that may not be contributing to the price pressures (for example, when Sydney property prices were booming all of regional Australia which was not was forced to bear the higher interest rates).

Idunno why they call it counter-stabilization policy. I thought stabilization was the goal. Maybe things are now so bad that we don't want to stabilize at this low level... But try to focus, Art. The topic here is monetary policy and inflation.

Billy says there are "distributional" problems with monetary policy. It "imposes penalties on regions and cohorts that may not be contributing to the price pressures." Yes. Monetary policy treats the whole economy the same way. Everybody in Australia gets the high interest rates, even if Sydney is the only spot that needs them.

This is precisely the problem that is solved by taking anti-inflation responsibility away from monetary policy and giving it to tax policy. Under my plan, new homeowners (in Sydney, or anywhere new homeowners have high debt-to-income ratios) face higher taxes. To reduce their taxes, they make extra mortgage payments. As a side-effect, their spending is reduced by the amount of those extra payments.

What spending is reduced? Maybe the New Homeowners Society of Sydney cancels the regular Saturday morning coffee klatch. So then maybe the coffee-shop cancels plans to hire extra help. And what with the reduced coffee-shop traffic, maybe a tire-shop doesn't get the funding it needs to open in Sydney.

But other parts of Australia are not affected by the changes in Sydney. That is the idea.

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