Cry of the Sheeple

[Penumbra]

Balanced Budget Amendment anyone? Hell Fire, we have not even had a budget for the last few years.

The problem with the balanced budget amendment proposed by the GOP was that it was balanced on a yearly basis.

So spending would be volatile. If tax revenues drop by 20% in a recession year, government spending has to be cut 20% that year. (If at any time, defense spending, social security, medicare, and government agencies like the Department of Transportation had to face immediate 20% cuts things could not function.)

More serious balanced budgets are things like what Switzerland does. The budget has to be balanced over a business cycle rather than during a year. During periods of GDP growth, surpluses are required. During years of GDP shrinkage, minor deficits are allowed. This allows spending to be smoother even when revenue is volatile.

 

[Penumbra]

This is somewhat true over the short run with money borrowed from foreign sources. But unless we default on the loans (either directly or by
currency inflation), it's paid back, & there is no net injection of capital. (No wonder the Chinese complain about our profligate spending, eh?)

This exactly comports with the point I was making about government being (ideally) useful. But these services generally (a few isolated
exceptions) still result in no net injection of capital, since the capital is taken from the private sector. Typically, they just redistribute
what's available after covering overhead. Now this would be different if we plundered our vanquished foes instead of lavishing fortunes
upon them after lavishing bombs upon them.

To say that pulling away from providing non-essential gov services is an untestable theory. To do so
would have the advantage of freeing up capital in the private sector, which we desperately need.

Rev, basically every economist agrees. Imagine a thought experiment of simultaneously increasing taxes by $400 billion and cutting government spending by $800 billion. So people get taxed more and have less spending money, 20% of federal employees and contractors are fired, 20% of private defense employees are fired, 20% of soldiers are fired, 20% less money is given to people receiving social security, and 20% less payments are made as medicare. So all those people no longer have spending money. Procter and Gamble reports that their products aren't being bought as much. Wells Fargo reports that people are defaulting on their mortgages. The economy takes a hit.

This is why it's forecast that if the fiscal cliff occurs, GDP will shrink in 2013. And the fiscal cliff is a smaller version of this; it's not even a complete deficit fixer. It removes about half the deficit. It's like a simultaneous 8% federal spending cut and a return to Clinton-Era taxation.

But as I said, it's gotta happen eventually, or something like it. The current method that would potentially happen in early 2013 is highly disorganized because Congress put into place as something they would all want to avoid. Like, they'd have to cut 8% from defense but it's not specified which projects to cut, and the same thing for domestic programs. And taxes go up for everyone.

...

The capital injection is in the form of growing debt. For example, let's say I'm the CEO of PenumbraCorp. Interest rates on bonds are low and I want to get a better return on equity, so I issue bond debt. In the example it's a closed system, so I only issue debt to my employees. They agree to buy PenumbraCorp bonds. I use the money to expand the business and hire more people and make more revenue, and then issue more and more debt. The business keeps growing, but my debt/equity ratio is growing as well. I can't maintain it forever. The increase in leverage on my balance sheet is fueling extra growth, but it can't be used every year indefinitely. Eventually I have to go back to maintaining a steady debt/equity ratio, which means growth slows back down to normal.

With trade deficits, federal deficits, and increasingly foreign-owned debt, the U.S. economy is being propped up a few percentage points by government injections. This chunk of the economy is illusionary and eventually has to be let go.

Woo hoo! You are a fellow balanced budge type!

You definitely did not. But to recognize the costs calls into question the net amount of money injected.

It's my fault for ignoring areas where we agree. I take your reasonableness for granted, & am lazy in fully responding.

A balanced budget should occur over a business cycle, not on a yearly basis. As described in my previous post to Rick.

In a more nuanced manner, very small deficits could be allowed each year, as long as those deficits are a smaller percentage of GDP than the GDP growth. This would mean that the economy grows, and debt grows, but debt as a percentage of GDP does not grow.

A truly balanced budget would actually reduce debt as a percentage of GDP over time, rather than hold it steady. Minor annual deficits would hold it steady.

 

[Revoltingest]

Rev, basically every economist agrees.

I doubt that there is unanimity, but do we find truth in popularity?
And still, these vaunted economic scholars lack 2 things in the application of Keynesian thought:
1) Falsifiability
2) Governmental ability to restrain themselves from making deficit spending permanent.

Imagine a thought experiment of simultaneously increasing taxes by $400 billion and cutting government spending by $800 billion. So people get taxed more and have less spending money, 20% of federal employees and contractors are fired, 20% of private defense employees are fired, 20% of soldiers are fired, 20% less money is given to people receiving social security, and 20% less payments are made as medicare. So all those people no longer have spending money. Procter and Gamble reports that their products aren't being bought as much. Wells Fargo reports that people are defaulting on their mortgages. The economy takes a hit.

I concur with the point I infer from the above, which is that balancing the budget should be done in such a manner that destructive instability isn't created.
I even see merit in Keynes' theories....I just distrust their use by statist leaning economists.

This is why it's forecast that if the fiscal cliff occurs, GDP will shrink in 2013. And the fiscal cliff is a smaller version of this; it's not even a complete deficit fixer. It removes about half the deficit. It's like a simultaneous 8% federal spending cut and a return to Clinton-Era taxation.

I don't think Clinton era tax policy was the cause behind those headier times. (Many other variables & factors.)
Tax policy ought'a be designed from scratch with an eye upon positive incentives, rather than copying policies associated with better times.

But as I said, it's gotta happen eventually, or something like it. The current method that would potentially happen in early 2013 is highly disorganized because Congress put into place as something they would all want to avoid. Like, they'd have to cut 8% from defense but it's not specified which projects to cut, and the same thing for domestic programs. And taxes go up for everyone.
...
The capital injection is in the form of growing debt. For example, let's say I'm the CEO of PenumbraCorp. Interest rates on bonds are low and I want to get a better return on equity, so I issue bond debt. In the example it's a closed system, so I only issue debt to my employees. They agree to buy PenumbraCorp bonds. I use the money to expand the business and hire more people and make more revenue, and then issue more and more debt. The business keeps growing, but my debt/equity ratio is growing as well. I can't maintain it forever. The increase in leverage on my balance sheet is fueling extra growth, but it can't be used every year indefinitely. Eventually I have to go back to maintaining a steady debt/equity ratio, which means growth slows back down to normal.

Your point about PenumbraCorp is a fine one. But if we enlarge the closed system, the money you borrow, is that much less available to RevoltingCorp.
I'll agree that borrowing foreign money will inject capital in the short run. But in the long run, it will be paid back. A risk here is that if the money isn't
used with greater productivity than the interest rate, there will be a removal of capital from the country.

With trade deficits, federal deficits, and increasingly foreign-owned debt, the U.S. economy is being propped up a few percentage points by government injections. This chunk of the economy is illusionary and eventually has to be let go.
A balanced budget should occur over a business cycle, not on a yearly basis. As described in my previous post to Rick.
In a more nuanced manner, very small deficits could be allowed each year, as long as those deficits are a smaller percentage of GDP than the GDP growth. This would mean that the economy grows, and debt grows, but debt as a percentage of GDP does not grow.
A truly balanced budget would actually reduce debt as a percentage of GDP over time, rather than hold it steady. Minor annual deficits would hold it steady.

I agree in theory. I favor stricter limitations upon government though, because it will take every opportunity to spend like a drunken sailor.
Hmm....that might be unfair to both drunks & sailors.

Any chance you might run for office?

 

[Reverend Rick]

You know some times budgets get broken, but at least a budget heads us in the right direction.

We plan on over spending from the get go and then it gets even worse.

 

[Penumbra]

I doubt that there is unanimity, but do we find truth in popularity?
And still, these vaunted economic scholars lack 2 things in the application of Keynesian thought:
1) Falsifiability

We find truth in evidence-based papers and research.

As far as practical real-world effects can go, I can even point your to a conservative example: Reagan. How did Reagan end the recession he inherited? He put the economy on a credit card. A stimulus. He cut taxes without cutting spending. He boosted defense spending. From World War 2 through 1980, debt as a percentage of GDP in the U.S. had been decreasing through every presidency. Every one; both Republican and Democrat presidents, and usually a Democrat-controlled Congress. Bi-partisan debt reduction. But starting with Reagan's first term, debt as a percentage of GDP began increasing rather wildly. He added tons of new debt, and improved the economy.

But obviously we can't do that every time. Such an event should be coupled with eventual debt reduction if it occurs at all. But Bush I, Bush II, and Obama went on to continue huge debt increases. That first year under Reagan was a turning point for debt in America.

2) Governmental ability to restrain themselves from making deficit spending permanent.

^This is a point about whether deficit spending should occur, not a point about the effects it has in the year it is done.

I concur with the point I infer from the above, which is that balancing the budget should be done in such a manner that destructive instability isn't created.
I even see merit in Keynes' theories....I just distrust their use by statist leaning economists.

An appropriately worded Constitutional Amendment could help. Switzerland did it:
The Swiss Version of a Balanced Budget Amendment | Committee for a Responsible Federal Budget

Switzerland is fairly fiscally conservative as far as developed countries go. They manage the same quality of life as the democratic socialists countries in a more fiscally conservative framework.

I don't think Clinton era tax policy was the cause behind those headier times. (Many other variables & factors.)

It was not a cause of headier times. It was part of the cause of a budget surplus, though. Reasonable taxation coupled with reasonable spending and market adoption of internet technology resulted in a strong economy. Even when the bubble fully burst at the beginning of Bush's term (unrelated to anything he did), it wasn't an enormous recession, and the deficit wasn't too big.

But then Bush's unfunded tax cuts (cutting taxes, primarily for the wealthy, without changing spending), two wars, and an unfunded addition to Medicare created 8 years of deficits. And those deficits occurred even in a housing bubble! When that bubble popped, tax revenue fell and spending went up, because all the same spending was in place plus an additional burden of trying to keep folks in their homes. So with spending up, revenue down substantially, we've had large deficits under Obama. They actually started under Bush's last term and were continued through Obama.

Tax policy ought'a be designed from scratch with an eye upon positive incentives, rather than copying policies associated with better times.

I agree. But short-term fixes like changes in capital gains and dividend taxation, or the Buffett Rule, can pull in some additional revenue and reduce the deficit until some time when politicians can get together and do a better system (probably never). The old method works as a prime template for when there isn't a lot of time, and everything is hyper-partisan.

Over the long-term I'd much prefer a totally re-written and simplified tax code. No payroll tax, lower corporate tax, and less loopholes. A mix of consumption taxes with prebates, simple progressive income tax, and a low corporate tax, would be ideal, imo.

Your point about PenumbraCorp is a fine one. But if we enlarge the closed system, the money you borrow, is that much less available to RevoltingCorp.
I'll agree that borrowing foreign money will inject capital in the short run. But in the long run, it will be paid back. A risk here is that if the money isn't
used with greater productivity than the interest rate, there will be a removal of capital from the country.

I agree in theory. I favor stricter limitations upon government though, because it will take every opportunity to spend like a drunken sailor.
Hmm....that might be unfair to both drunks & sailors.

This doesn't take into account a few things.

1) The money supply expands and contracts (mostly expands). Banks can borrow money at low interest rates, then use that money to invest in higher-returning assets like bonds and loans. This can trickle through everything all the way down to consumers re-financing their mortgages to take equity out of their home and put it in the market to buy PenumbraCorp stock, PenumbraCorp debt, RevoltingCorp stock, and RevoltingCorp debt. I'm not saying this is a good thing. But the currency is not a fixed X amount of gold in a closed system that we just keep redistributing amongst ourselves. Instead, the federal balance sheet can pile on debt to keep running things and inject capital into the economy indirectly through deficit spending.

2) As you point out, borrowing foreign money does inject capital. In addition, people can change their net investment position. Our net investment position has been shrinking, meaning countries have been owning more and more of us and we've been owning less and less of them. As an example, let's say the government wants to issue more debt and funnel it into the economy in the form of deficit spending. They issue new bonds. For some reason I find them attractive, so I sell some of my foreign holdings (like I dunno, Nestle stock or something), and buy these bonds. My net worth is the same, because I traded assets for assets. But the government expanded its balance sheet and our country's net investment position receded slightly because I sold my Nestle stock. For years we had expanded our net investment position but now we're drawing from it like a battery. It's finite, though. We're withdrawing our global net investment position and injecting it to keep the economy running at the level it is at.

And that's what the government is doing. Leveraging and foreign capital infusion (both in terms of direct debt ownership and changes in the net investment position of U.S. people and institutions). Part of our economy is propped up by this. If it's paid back, then there's no net change in capital. (Like Switzerland's balanced budget; deficit spending during recessions and surpluses during booms). But the point is, debt is expanding at a rate faster than GDP growth. Debt as a percentage of GDP is going up. This has been happening since 1980 or so and it is not sustainable, and would have to eventually be balanced by removing the deficit (or almost all of the deficit). But removing the deficit damages the economy, because a portion of that economy was built by increasing the debt on the balance sheet. Fixing the deficit doesn't create new problems for the economy; it merely undoes the previous boost it gave the economy, and takes away the part of the economy that has only grown from an illusion due to the capital injections. It's like conservation of energy and mass in this case; just undoing the instability of the system and returning it to stability. People enjoyed when debt was piled on, because it artificially propped things up and made the economy grow faster than it otherwise would have. But we're not going to enjoy when debt is put under control, because that will undo the boost in the form of a recession. (And that's the ideal scenario where we actually do get the debt under control rather than just let it default eventually and turn into a cluster----).

That's pretty much what it comes down to and that's what the math of the economists is based on. For years, we've been boosting our economy by drawing from a variety of finite battery-like sources. Increases in federal debt as a percentage of GDP, a shift in the foreign ownership of that debt, reductions in net investment position, corporate outsourcing, and trade deficits. It manifests in deficit spending. But drawing from these sources to boost the economy means that part of the economic growth was an illusion. It was boosted by temporary things. When these finite batteries of capital run out, and the deficit is eventually fixed, then we undo this temporary boost we gave ourselves. It manifests in a recession because the part of the existing GDP that relies on these artificial boosts disappears.

Any chance you might run for office?

Nope. :beach:

 

[Reverend Rick]

I would vote for her Rev, she is smarter than the both of us put together.

 

[Revoltingest]

We find truth in evidence-based papers and research.

And what papers offer real world testing of economic theories applied to entire large countries?
This field differs from others where experimentation is easier, eg, pharmaceuticals.

As far as practical real-world effects can go, I can even point your to a conservative example: Reagan. How did Reagan end the recession he inherited? He put the economy on a credit card. A stimulus. He cut taxes without cutting spending. He boosted defense spending. From World War 2 through 1980, debt as a percentage of GDP in the U.S. had been decreasing through every presidency. Every one; both Republican and Democrat presidents, and usually a Democrat-controlled Congress. Bi-partisan debt reduction. But starting with Reagan's first term, debt as a percentage of GDP began increasing rather wildly. He added tons of new debt, and improved the economy.

If cutting taxes & boosting spending always works, then Bush & Obama would've succeeded in ending the recession.

But obviously we can't do that every time. Such an event should be coupled with eventual debt reduction if it occurs at all. But Bush I, Bush II, and Obama went on to continue huge debt increases. That first year under Reagan was a turning point for debt in America.

Clearly, it is a hit & miss strategy. The downside of deficit spending is that
if economic recovery isn't robust, then the debt will exacerbate the problem.

^This is a point about whether deficit spending should occur, not a point about the effects it has in the year it is done.

I question that it should be done. But I fear that it will be done, & that there will be
no limit because it's driven by politics rather than rigorous economic expertise.

An appropriately worded Constitutional Amendment could help. Switzerland did it:
The Swiss Version of a Balanced Budget Amendment | Committee for a Responsible Federal Budget
Switzerland is fairly fiscally conservative as far as developed countries go. They manage the same quality of life as the democratic socialists countries in a more fiscally conservative framework.

If it is to be done, that strikes me as how it should be done. But we are not the Swiss. They are an
orderly & uniform folk. We are....well....we can't be trusted with the power to spend more than we have.

It was not a cause of headier times. It was part of the cause of a budget surplus, though. Reasonable taxation coupled with reasonable spending and market adoption of internet technology resulted in a strong economy. Even when the bubble fully burst at the beginning of Bush's term (unrelated to anything he did), it wasn't an enormous recession, and the deficit wasn't too big.
But then Bush's unfunded tax cuts (cutting taxes, primarily for the wealthy, without changing spending), two wars, and an unfunded addition to Medicare created 8 years of deficits. And those deficits occurred even in a housing bubble! When that bubble popped, tax revenue fell and spending went up, because all the same spending was in place plus an additional burden of trying to keep folks in their homes. So with spending up, revenue down substantially, we've had large deficits under Obama. They actually started under Bush's last term and were continued through Obama.

Bush's tax cuts were dysfunctional. The reduction of marginal rates was small, so it would create little new incentive. Rates for small business types were particularly high when including the self-employment tax (@15%). Moreover, the cuts were offset by changes in IRS policy which resulted in a net revenue increase within a couple years. He failed to address the credit crunch we still suffer, which resulted in commercial loans being called in when there was no alternative financing. And the largest lenders in the entire world (gov owned & run Fannie & Freddie) won't bargain on principal or interest rates with drowning homeowners. Business regulation (as measured by volume in the CFR) increased every year under Bush. I fault Bush primarily for maintaining the status quo of financial instability which led up to the crash. The trigger was 9/11. That's when business began contracting.

I agree. But short-term fixes like changes in capital gains and dividend taxation, or the Buffett Rule, can pull in some additional revenue and reduce the deficit until some time when politicians can get together and do a better system (probably never). The old method works as a prime template for when there isn't a lot of time, and everything is hyper-partisan.
Over the long-term I'd much prefer a totally re-written and simplified tax code. No payroll tax, lower corporate tax, and less loopholes. A mix of consumption taxes with prebates, simple progressive income tax, and a low corporate tax, would be ideal, imo.

A dreamer you are!

This doesn't take into account a few things.
1) The money supply expands and contracts (mostly expands). Banks can borrow money at low interest rates, then use that money to invest in higher-returning assets like bonds and loans. This can trickle through everything all the way down to consumers re-financing their mortgages to take equity out of their home and put it in the market to buy PenumbraCorp stock, PenumbraCorp debt, RevoltingCorp stock, and RevoltingCorp debt. I'm not saying this is a good thing. But the currency is not a fixed X amount of gold in a closed system that we just keep redistributing amongst ourselves. Instead, the federal balance sheet can pile on debt to keep running things and inject capital into the economy indirectly through deficit spending.

The problem I see is when the money supply is expanded faster than the economy. This can reduce US debt to foreigners (by currency devaluation), but it raises the interest rates we must pay, so no real capital is raised in the long term. This strategy bets the farm on large short term benefit. In the long run, debt repayment is a damper, bracket creep raises taxes on workers, & inflation encourages high-leverage speculation.

2) As you point out, borrowing foreign money does inject capital. In addition, people can change their net investment position. Our net investment position has been shrinking, meaning countries have been owning more and more of us and we've been owning less and less of them. As an example, let's say the government wants to issue more debt and funnel it into the economy in the form of deficit spending. They issue new bonds. For some reason I find them attractive, so I sell some of my foreign holdings (like I dunno, Nestle stock or something), and buy these bonds. My net worth is the same, because I traded assets for assets. But the government expanded its balance sheet and our country's net investment position receded slightly because I sold my Nestle stock. For years we had expanded our net investment position but now we're drawing from it like a battery. It's finite, though. We're withdrawing our global net investment position and injecting it to keep the economy running at the level it is at.

It's symptomatic of our reduced competitiveness & spendthriftery. (I needed a neologism to replace "profligacy".....been using it too much lately.)

And that's what the government is doing. Leveraging and foreign capital infusion.....we actually do get the debt under control rather than just let it default eventually and turn into a cluster----).

No argument here.

That's pretty much what it comes down to and that's what the math of the economists is based on.

I might sound like a broken record, having brought this up before, but a friend was working on his PhD in economics, when he realized that he could use his fancy math skills to reach any conclusion he wants just by tweaking assumptions. He says that he realized that he really knew little about economics, & was just wallowing in math & theoretical models which he couldn't test, & had little predictive value. (Btw, he's an admitted socialist. We're an odd pair.) These same vaunted economic scholars also told us that unemployment would never rise above 8% under Obama. Only recently did it fall below 8%, & even then the numbers appear 'cooked' (CA figures were excluded for Sept).

For years, we've been boosting our economy by drawing from a variety of finite battery-like sources. Increases in federal debt as a percentage of GDP, a shift in the foreign ownership of that debt, reductions in net investment position, corporate outsourcing, and trade deficits. It manifests in deficit spending. But drawing from these sources to boost the economy means that part of the economic growth was an illusion. It was boosted by temporary things. When these finite batteries of capital run out, and the deficit is eventually fixed, then we undo this temporary boost we gave ourselves. It manifests in a recession because the part of the existing GDP that relies on these artificial boosts disappears.

Again, no argument.

Nope. :beach:

Of course, you're not suited. Which is exactly why I'd vote for you.

 

[Revoltingest]

I would vote for her Rev, she is smarter than the both of us put together.

Meeza verry smartly! Here meeza talking for nice'a lady with kabooma car....
[youtube]NBPXdhd5B8Y[/youtube]
Robot Chicken: Jar-Jar for Gecko Insurance - YouTube

 

[Penumbra]

And what papers offer real world testing of economic theories applied to entire large countries?
This field differs from others where experimentation is easier, eg, pharmaceuticals.

Economics never offers a pure control group. Fortunately studies can be done on policies over decades to paint strong arguments for or against a given policy.

If cutting taxes & boosting spending always works, then Bush & Obama would've succeeded in ending the recession.

That's not correct, because it doesn't address the magnitude.

Deficit spending, especially from foreign sources, is just an upward vector on whatever the base economy would otherwise have been. The actual size of that spending matters.

Also, the recession technically did end under Obama. Two years of GDP contraction in 2008 and 2009 were followed by three years of GDP growth in 2010, 2011, and 2012.

Clearly, it is a hit & miss strategy. The downside of deficit spending is that
if economic recovery isn't robust, then the debt will exacerbate the problem.

I question that it should be done. But I fear that it will be done, & that there will be
no limit because it's driven by politics rather than rigorous economic expertise.

If it is to be done, that strikes me as how it should be done. But we are not the Swiss. They are an
orderly & uniform folk. We are....well....we can't be trusted with the power to spend more than we have.

The last Swiss canton to give women the right to vote did so in 1991. They're not all rocket scientists over there, Rev.

Bush's tax cuts were dysfunctional. The reduction of marginal rates was small, so it would create little new incentive. Rates for small business types were particularly high when including the self-employment tax (@15%). Moreover, the cuts were offset by changes in IRS policy which resulted in a net revenue increase within a couple years. He failed to address the credit crunch we still suffer, which resulted in commercial loans being called in when there was no alternative financing. And the largest lenders in the entire world (gov owned & run Fannie & Freddie) won't bargain on principal or interest rates with drowning homeowners. Business regulation (as measured by volume in the CFR) increased every year under Bush. I fault Bush primarily for maintaining the status quo of financial instability which led up to the crash. The trigger was 9/11. That's when business began contracting.

There have been studies of what increasing the payroll tax does (early 1900's, post-Depression), and what increasing the tax on the highest earners does. Generally, a "stimulus" that relieves the tax rates of highest-income earners isn't shown to be as effective as relieving the tax rates of middle class workers. Bush's big cut of stock capital gains rates and stock dividend rates primarily only affected very high income people.

In other words, if everyone in the country has an extra $2k that they would otherwise have spent on taxes to spend on other stuff instead, then it is better for the economy than giving billionaires and centi-millionaires those cuts.

-Cutting dividend taxation for centi-millionaires? Not that helpful.
-Cutting payroll taxes for entry level programmers out of college with negative net worths trying to start a life yet swamped by taxes? Rather helpful.

A dreamer you are!

The problem I see is when the money supply is expanded faster than the economy. This can reduce US debt to foreigners (by currency devaluation), but it raises the interest rates we must pay, so no real capital is raised in the long term. This strategy bets the farm on large short term benefit. In the long run, debt repayment is a damper, bracket creep raises taxes on workers, & inflation encourages high-leverage speculation.

It's symptomatic of our reduced competitiveness & spendthriftery. (I needed a neologism to replace "profligacy".....been using it too much lately.)

No argument here.

I might sound like a broken record, having brought this up before, but a friend was working on his PhD in economics, when he realized that he could use his fancy math skills to reach any conclusion he wants just by tweaking assumptions. He says that he realized that he really knew little about economics, & was just wallowing in math & theoretical models which he couldn't test, & had little predictive value. (Btw, he's an admitted socialist. We're an odd pair.) These same vaunted economic scholars also told us that unemployment would never rise above 8% under Obama. Only recently did it fall below 8%, & even then the numbers appear 'cooked' (CA figures were excluded for Sept).

Again, no argument.

Of course, you're not suited. Which is exactly why I'd vote for you.

The majority of these models are not that complex. Some economic situations certainly are, but the core of these posts is not. Let's say we set aside the monetary expansion for now (which is the complex part), and focus on the injection of foreign capital. It's not something we have to do a doctoral thesis on; we can just follow the cash flows.

There are two main ways to have a national deficit fueled by foreign capital injections.

A) Let's say the government wants to do some deficit spending. I'm a Chinese investor, so I buy $10,000 worth of Treasury bills. The government uses this $10k to cut taxes to 5 Americans by $2k each year, and they spend this money on random stuff. This is a stimulus; the economy essentially pulled money from outside of the system into the system, which boosts it, but it comes at the cost of debt on the balance sheet and a reduction in the net investment position of $10k.

B) Now, let's say the government wants to do more deficit spending. I'm an American that owns $10,000 worth of Nestle stock, which is not American. I sell this stock and buy $10,000 worth of Treasury bills. The government uses this $10k to cut taxes to 5 Americans by $2k each year, and they spend this money on random stuff. This scenario is functionally similar to the previous one, because capital that was previously stored like a battery outside of the system was pulled back into it this year to boost the system. The cost is that debt is on the balance sheet and there's a reduction in the net investment position of $10k.

A combination of these scenarios (which are functionally the same) has been occurring for a while now. Since Reagan's presidency, actually. Reducing the deficit will stop this, which means stopping foreign capital injections into our system, which is why economists agree nearly across the board that major deficit reduction slows or undoes economic growth when it occurs. But we've got to do it because it leads to financial collapse otherwise.

 

[Mr Spinkles]

Perhaps this is just my bias showing .... but it seems to me conservatives do this all the time: (i) make an argument; (ii) when you present evidence against their argument, they decide the world is too complicated for evidence to be meaningful. And thus, by that logic, the original argument they put forward before they were confronted with your evidence was based on .... what? A guess?

You can't have it both ways, Revoltingest. Either it is possible to conclude things based on the evidence, OR your own position is baseless. Which is it?

 

[Revoltingest]

Perhaps this is just my bias showing .... but it seems to me conservatives do this all the time: (i) make an argument; (ii) when you present evidence against their argument, they decide the world is too complicated for evidence to be meaningful. And thus, by that logic, the original argument they put forward before they were confronted with your evidence was based on .... what? A guess?
You can't have it both ways, Revoltingest. Either it is possible to conclude things based on the evidence, OR your own position is baseless. Which is it?

Yes....it's your bias. But since we all have one, it's no big deal.
I accept some real evidence, but I don't buy opinion gussied up as fact.
I've seen even the sainted Krugman say bogus unsupported things.
Without experimental confirmation of economic models, they're just speculation.
Btw, you might note that I don't offer much evidence for my preferred economics.
I like free markets only because primarily because I like that kind of environment.
I extrapolate from my own experience because that is what I have to go on.
I don't argue that my preferences are right, correct or true.
Is that baseless?
If so, it's a more honest baselessness than those who claim science without employing the method.

 

[Shermana]

You have to love a system where 51% vote to be supported by the other 49% ingenious!

Maybe if the 1% didn't hoard all their money and ship jobs to China, there'd actually be jobs available for people to support themselves with.

And, my friend, you should know by now that many of those 49% are pensioniers who paid into the system.

 

[Revoltingest]

Economics never offers a pure control group. Fortunately studies can be done on policies over decades to paint strong arguments for or against a given policy.

And yet, experts will reach opposite conclusions, eg, the effect of trade restrictions on recover from the 1929 crash.

That's not correct, because it doesn't address the magnitude.

I don't buy it. The Krugman types always say that failure of deficit spending is due to insufficient spending.
It isn't falsifiable, & it can always be said. It's more of a mantra than economic analysis.

Deficit spending, especially from foreign sources, is just an upward vector on whatever the base economy would otherwise have been. The actual size of that spending matters.

The issue isn't whether the spending helps the economy during the spending. It's about the net long term effect. If the spending isn't as productive as the interest rate, then we suffer a net loss of wealth.

Also, the recession technically did end under Obama. Two years of GDP contraction in 2008 and 2009 were followed by three years of GDP growth in 2010, 2011, and 2012.

Whether the recession ended or not hinges on technical aspects defining "recession".
But if inflation (currency devaluation) is factored in, do we even have growth?
Looking at our stagnant economy, it's fair to call it a "recession" in spirit.....& in MI, a stark reality.
I watched my net worth plunge from millions to less than zero since 2001, & especially after the 2008 crash (which started in Nov 2007).
Will things ever recover? If the fed keeps the money supply dry, not for a very long time....& perhaps never for me.

There have been studies of what increasing the payroll tax does (early 1900's, post-Depression), and what increasing the tax on the highest earners does. Generally, a "stimulus" that relieves the tax rates of highest-income earners isn't shown to be as effective as relieving the tax rates of middle class workers. Bush's big cut of stock capital gains rates and stock dividend rates primarily only affected very high income people.
In other words, if everyone in the country has an extra $2k that they would otherwise have spent on taxes to spend on other stuff instead, then it is better for the economy than giving billionaires and centi-millionaires those cuts.
-Cutting dividend taxation for centi-millionaires? Not that helpful.
-Cutting payroll taxes for entry level programmers out of college with negative net worths trying to start a life yet swamped by taxes? Rather helpful.

I don't argue against that strategy. But I'd prefer that tax savings be due to lower marginal rates, which is an incentive to improve earnings.

The majority of these models are not that complex. Some economic situations certainly are, but the core of these posts is not. Let's say we set aside the monetary expansion for now (which is the complex part), and focus on the injection of foreign capital. It's not something we have to do a doctoral thesis on; we can just follow the cash flows.
There are two main ways to have a national deficit fueled by foreign capital injections.
A) Let's say the government wants to do some deficit spending. I'm a Chinese investor, so I buy $10,000 worth of Treasury bills. The government uses this $10k to cut taxes to 5 Americans by $2k each year, and they spend this money on random stuff. This is a stimulus; the economy essentially pulled money from outside of the system into the system, which boosts it, but it comes at the cost of debt on the balance sheet and a reduction in the net investment position of $10k.
B) Now, let's say the government wants to do more deficit spending. I'm an American that owns $10,000 worth of Nestle stock, which is not American. I sell this stock and buy $10,000 worth of Treasury bills. The government uses this $10k to cut taxes to 5 Americans by $2k each year, and they spend this money on random stuff. This scenario is functionally similar to the previous one, because capital that was previously stored like a battery outside of the system was pulled back into it this year to boost the system. The cost is that debt is on the balance sheet and there's a reduction in the net investment position of $10k.
A combination of these scenarios (which are functionally the same) has been occurring for a while now. Since Reagan's presidency, actually. Reducing the deficit will stop this, which means stopping foreign capital injections into our system, which is why economists agree nearly across the board that major deficit reduction slows or undoes economic growth when it occurs. But we've got to do it because it leads to financial collapse otherwise.

To borrow money which is used less productively than the cost of the underlying interest rate will also cause financial collapse.
The problem is that neither of our statements is quantified, so they're just competing approaches. Given the propensity of
politicians to succumb to gambler's syndrome (ie trying to cure failure by doing that which led to failure), I'll vote for the more
conservative approach of austerity & balanced budgets. I expect some short term pain, but with less risk of a long term disaster.

 

[Dirty Penguin]

Maybe if the 1% didn't hoard all their money and ship jobs to China, there'd actually be jobs available for people to support themselves with.

I agree to an extent. I have when people say (there's no jobs) or (companies aren't hiring)...........You'll never open the paper to the employment section to be greeted with a sign that says...."NO JOBS"...There are millions of job openings in the US. Maybe out the 12.3 unemployed people (According to The BLS and not Romney's BS of 23 Million)...many of them aren't qualified for the various advertised positions. Maybe many are skilled and qualified in other areas and maybe we just don't have enough qualified people entering the workforce capable of getting hired for these various positions. I think people are going to have to be re-educated and/or re-trained for the current demand..

Three million open jobs in U.S., but who's qualified? - CBS News

According to a 60 Minute special from this past Sunday we currently have 3 million job openings and employees are a ready to hire people. Of the 3 million..500,000 are manufacturing jobs. Employers are ready to hire but can't find enough qualified people.

 

[Shadow Wolf]

You'll never open the paper to the employment section to be greeted with a sign that says...."NO JOBS"...

Today's paper where I live has three miscellaneous jobs, a position for a CNA, delivering newspapers (which I have done and it is hardly a profitable job after gas, maintenance, and repairs), and a restaurant that is always running a hiring ad in the paper (because it is a nasty place to work for and is notorious for scheduling people twice during the same day so they can get their hours). Everything else requires a CDL or some sort of medical degree or certification. Usually there are some jobs that require experience and your own tools, and usually some "jobs" where you pay someone for materials to build things and then sell them.
Of course you can usually find a few jobs in an online database, but that is after sorting out the military jobs, scams, jobs you lack qualifications for, and assuming you have a computer and a reliable internet connection to begin with.
And after all that, there are some people who are not good at the interview process, myself included, which makes it even harder to find a job when you aren't good at talking about yourself.

 

[Dirty Penguin]

Today's paper where I live has three miscellaneous jobs, a position for a CNA, delivering newspapers (which I have done and it is hardly a profitable job after gas, maintenance, and repairs), and a restaurant that is always running a hiring ad in the paper (because it is a nasty place to work for and is notorious for scheduling people twice during the same day so they can get their hours). Everything else requires a CDL or some sort of medical degree or certification. Usually there are some jobs that require experience and your own tools, and usually some "jobs" where you pay someone for materials to build things and then sell them.

I agree that there are just some jobs that aren't for a particular person. I'm a Network Administrator for a local school system. I also instruct student in the Computer Repair Club we run. Personally this is the type of work I've wanted to do when I received my first computer way back in the day...

Since I work for a school system my take on things may be a little different than others. I think education is the key. For many looking for work...re-education may be the key. Some may have to change careers because the one they had may not be available to them anymore.

Of course you can usually find a few jobs in an online database, but that is after sorting out the military jobs, scams, jobs you lack qualifications for, and assuming you have a computer and a reliable internet connection to begin with.

This is true. Some Libraries extend computer use for job search and resume writing/updating. Some libraries have job training and job clubs.

And after all that, there are some people who are not good at the interview process, myself included, which makes it even harder to find a job when you aren't good at talking about yourself.

I agree. For many that experience this there is assistance. There are lots of places out there that will assist a person in these areas.


I'm not saying any of these things are easy or black and white. If you have a family to take care of it can and is even more difficult to get the proper training etc. to get a job.

 

[Shermana]

I agree to an extent. I have when people say (there's no jobs) or (companies aren't hiring)...........You'll never open the paper to the employment section to be greeted with a sign that says...."NO JOBS"...There are millions of job openings in the US. Maybe out the 12.3 unemployed people (According to The BLS and not Romney's BS of 23 Million)...many of them aren't qualified for the various advertised positions. Maybe many are skilled and qualified in other areas and maybe we just don't have enough qualified people entering the workforce capable of getting hired for these various positions. I think people are going to have to be re-educated and/or re-trained for the current demand..

Three million open jobs in U.S., but who's qualified? - CBS News

According to a 60 Minute special from this past Sunday we currently have 3 million job openings and employees are a ready to hire people. Of the 3 million..500,000 are manufacturing jobs. Employers are ready to hire but can't find enough qualified people.

I most certainly agree that there are SOME jobs available, where I live, which is a fairly upper class town, it's like 300 applicants for every opening.

I believe another major problem is the rash of "Too Picky Employers", which is equally part of the problem, and demonstrates that bosses and employers are not exactly cooperating, expecting the "perfect candidate" who will accept the dirt wages they have to offer will just be around the corner. (While losing big profits due to the unfufilled position in hopes of saving the few bucks from not having to train or pay adequately).

The "Skills" Gap Is Actually The "Employers Too Picky" Gap | The Billfold

http://careers.yourmoney.ca/2012/03/employers-too-picky.html

http://www.hrreporter.com/blog/hr-policies-practices/archive/2011/09/20/are-recruiters-and-employers-too-picky

http://theonlinecitizen.com/2012/10/sme-employers-are-too-picky-and-over-reliant-on-cheap-labour/

 

[Penumbra]

And yet, experts will reach opposite conclusions, eg, the effect of trade restrictions on recover from the 1929 crash.

Some issues are more complex than others.

Certain issues basically require Chaos Theory. Other issues are as simple as algebra and therefore have overwhelming agreement.

I don't buy it. The Krugman types always say that failure of deficit spending is due to insufficient spending.
It isn't falsifiable, & it can always be said. It's more of a mantra than economic analysis.

But it wasn't a failure as far as the outcome I described; economic growth above the baseline. GDP went up. So there's no failure to defend in that regard.

Imagine an example where you're making $75k per year for ten years, and you save up a lot of money during that time. Then a bad economy hits and you get a pay decrease to $50k, but you have $60k in expenses. So to make ends meet, you start withdrawing from your savings, or you start using credit card debt. And you make ends meet, but with long-term consequences.

Falsifiability comes directly from following the logic due to the extreme simplicity of the situation and a following of the cash flow, rather than the need for a control group.

That's what American has been doing since Reagan. Taking capital from previously stored areas like the once-positive net investment position, or loading up debt on the balance sheet.

When foreign capital gets injected into the economy, it's as simple as following the cash flows, at least when talking about rough calculations for the system as a whole. It provides an upward vector for that year but then gets added in red ink onto the balance sheet for the next generation.

The issue isn't whether the spending helps the economy during the spending. It's about the net long term effect.

I don't think you completely followed the examples I provided or the point I was making because if you were then this statement about long term effects would have not been made. I already said the deficits have to be fixed.

The point is, we're going to have to have a temporary downward vector on the economy to do that, because some of the existing economy is deficit-fueled.

If the spending isn't as productive as the interest rate, then we suffer a net loss of wealth.

Over the long term, true.

Over the short term, in the year it occurs, it boosts the economy regardless of whether it's as productive as the interest rate or not.

Whether the recession ended or not hinges on technical aspects defining "recession".
But if inflation (currency devaluation) is factored in, do we even have growth?

According to the World Bank, yes, the U.S. economy grew over the last couple years in static year-2000 dollars.

Looking at our stagnant economy, it's fair to call it a "recession" in spirit.....& in MI, a stark reality.

This is moving the goal posts and not related to the overall argument. Foreign capital injected into the system doesn't get dispersed homogeneously throughout it.

Although I guess it's worth asking what you think the economic status of Michigan and your real estate holdings would be like right now if GM had an uncontrolled bankruptcy.

I watched my net worth plunge from millions to less than zero since 2001, & especially after the 2008 crash (which started in Nov 2007).
Will things ever recover? If the fed keeps the money supply dry, not for a very long time....& perhaps never for me.

That's unfortunate, because the median household net worth for the people in the top 50% of the wealth bracket went up during that period. Especially in your peer group in the top 10%. So your results are not the mean or median.

The conditions for yourself are not necessarily a proxy for average, and quantitatively, they are demonstrably not so.

I don't argue against that strategy. But I'd prefer that tax savings be due to lower marginal rates, which is an incentive to improve earnings.

Lower marginal rates for who?

IMO the payroll tax is one of the most destructive taxes.

To borrow money which is used less productively than the cost of the underlying interest rate will also cause financial collapse.
The problem is that neither of our statements is quantified, so they're just competing approaches. Given the propensity of
politicians to succumb to gambler's syndrome (ie trying to cure failure by doing that which led to failure), I'll vote for the more
conservative approach of austerity & balanced budgets. I expect some short term pain, but with less risk of a long term disaster.

The funny thing is that I view yours as a wildly radical approach and mine as the fiscally conservative approach.

If conservative simply means lower taxes and lower spending, then you're more conservative. Alternatively, if conservative means going with steady and proven approaches of the past, then I'm conservative.

It's the GOP that has been leading into the odd new things for the last 30 years, advocating the lowest top tax rates since right prior to the Great Depression, without similar spending cuts, and pushing America to be an outlier of developed countries in terms of our fiscal policy.

Back in the 50's, 60's, and 70's, we had better budgets and higher top tax rates. I'm old school, and not a fan of this newfangled stuff due to the demonstrable problems.

.....

So at this stage it's probably worth summarizing the direction of the last few posts because your talk of short term vs. long term applications tells me that you were not following my argument in the way it was intended.

1) My earlier posts were saying that the country is not becoming more socialistic over the long term, and we're not socialistic in our peer group of developed countries. Over the last several decades, top tax rates have decreased to the lowest levels since prior to the Great Depression, and the top 1% have grown enormously in wealth compared to other economic groups.

2) The later discussion got into the problem of deficits. Since Reagan and after, the country has been piling on debt due to having big deficits almost every year. A large chunk of the deficits are from foreign money, which means foreign injections into the system each year. That mildly boosts the economy each year it occurs but leads to a long-term fiscal failure if it isn't stopped, so the budget has to be balanced, or nearly so. Balancing the budget removes that capital injection, which is why we get sources like the CBO projecting recession conditions when even half of the deficit is removed. But we've got to remove the deficit and bite the bullet to have a sustainable national balance sheet.