The Way the World Works

[edsanville]

Has anyone else here read the book "The Way the World Works" by Jude Wanniski?  I read it earlier this year, and I found it to be pretty fascinating.  Especially when he talks about a broader definition of what "capital" is.  That part really struck a chord with me.

[stone]

Looking at  wikipeadia http://en.wikipedia.org/wiki/Jude_Wanniski , it makes it seem as though he was truely concerned about trying to improve the World. He hoped supply side economics would eradicate poverty etc etc. It is bizare that he was a gold standard proponent and yet a key player in developing Reaganomics. I had always thought of Reaganomics, with Arthur Laffer at the helm, as essentially being MMT but with weapon manufacturing as the Job Guarentee. Arthur Laffer claimed that cutting taxes would reduce the deficit due to the "Laffer curve" supply side voodoo. The deficits grew massively in response to the top end tax cuts but the Reagonomics posse were unabashed and just went more overt MMT with "deficits don't matter".

I suppose Alan Greenspan has also written about the wonders of the gold standard. I guess they are all hoping to bend the debt expansion MMT world to their will and milk it whilst it lasts whilst at the same time being convinced that it will blow up at some point.

[edsanville]

The book is definitely worth a read.  If I understand the Laffer Curve correctly, it has a point at some point between 0% and 100% taxes, where the government will maximize its revenue.  We know that the government will collect nothing if taxes are at either extreme, (since at 100% taxation, nobody would work above the table anyway).  In the first part of the book, he makes the case that the Laffer Curve basically expresses "the people's" preference for how much money they desire to give to the state to fund its activities.  He says that this maximum taxation level can change depending on the place and time... for example during the seige of Stalingrad the taxation rate was essentially close to 100% because the people were willing to give the state essentially every bit of their labor and capital to prevent the Nazis from conquering the city.

I found the Laffer Curve stuff to be interesting, although I think expressing it as a mathematical curve is way too simplistic because it omits the heterogeneous structure of production and government expenditure.  Theoretically, two governments could spend and tax the same amount, but have radically different results because they spent the money (or wasted it) differently.  So I think there is definitely something to the Laffer Curve stuff, but in a qualitative way rather than a quantitative way, (I lean Austrian myself...  with the view that there's not much in economics than can truly be quantified with any kind of precision).

I actually didn't know he was a big gold-standard guy from reading this book.  It seemed more descriptive than prescriptive, which was kind of refreshing.

Looking at  wikipeadia http://en.wikipedia.org/wiki/Jude_Wanniski , it makes it seem as though he was truely concerned about trying to improve the World. He hoped supply side economics would eradicate poverty etc etc. It is bizare that he was a gold standard proponent and yet a key player in developing Reaganomics. I had always thought of Reaganomics, with Arthur Laffer at the helm, as essentially being MMT but with weapon manufacturing as the Job Guarentee. Arthur Laffer claimed that cutting taxes would reduce the deficit due to the "Laffer curve" supply side voodoo. The deficits grew massively in response to the top end tax cuts but the Reagonomics posse were unabashed and just went more overt MMT with "deficits don't matter".

I suppose Alan Greenspan has also written about the wonders of the gold standard. I guess they are all hoping to bend the debt expansion MMT world to their will and milk it whilst it lasts whilst at the same time being convinced that it will blow up at some point.

[stone]

Edsanville, as you say I think he describes the big problem with the Laffer curve as a policy tool. You never know what shape the curve has and the shape will be very different for different types of taxation and different levels of public perception of the government. IMO it just gets touted as a spurious justification for tax cuts that obviously have nothing to do with it. History shows that Reagan's tax cuts DIDN'T cut the deficit despite all the supposed Laffer curve predictions.
In the UK our Duke of Westminster is the richest citizen. He gets his money as a land owner. Is any potential taxation of his land holdings going to reduce his "output" ? Anyway to my mind it is a really bad mistake to view the point of taxation as maximising revenue. To my mind the point of taxation is to mop up after government spending. The government should spend an amount that we choose as being  appropriate and then mop that spending up with taxation in a way that distorts the economy as little as possible. Trying to "maximize revenue" seems to boil down to trying to nurture damaging asset bubbles.

[edsanville]

I fully agree that it's absurd to try to maximize government revenue just for the sake of maximizing government revenue.  I think he was trying to make a more abstract point in that book, that government revenue could possibly act as a barometer of the "preferred" tax rate of the populace in some sense.  I'm not sure if there's truth to the concept, but it was new to me once I figured out what he was saying.  I agree that the idea shouldn't be a quantitative guide toward the "correct" level of taxation, whatever that means.

I'm not a huge fan of Art Laffer or Ronald Reagan, but the Laffer Curve was apparently discovered centuries ago by an Arab economist whose name I forgot.  Maybe the biggest problem I had with the book is that he doesn't talk very much about HOW the government spends its money.  Also, he seems to use the word "money" interchangeably with "purchasing power,"  although he does clarify that there's a difference between the two.  He also clarifies that he always means money in the sense of purchasing power throughout the book.

There's no doubt that the deficit grew during the Reagan administration, but the only question the Laffer Curve would address was whether or not total government revenue grew or shrank after the Reagan tax cuts.  Maybe the deficits grew as a result of spending that outpaced the revenue gains?  The book does have dozens of charts with taxation information for many countries at different time periods.  He uses those charts as evidence in favor of a stimulative effect of lower taxation, (for countries whose tax rates were higher than the curve's maximum).  If you assume the Laffer Curve is a valid idea, then it's also possible that a country could be too far to the left of the curve (taxes are too low). 

In reality I think it would depend heavily on what the government was spending that money on.  There's a big qualitative difference between say invading some faraway country, and providing better books for the public education system.  He didn't seem to address this at all.

On the political front, I know Wanniski was a proponent of the "Two Santas" theory of politics:  that the fiscal conservatives could never win elections against big-spending politicians on a "cut spending" platform... they needed to focus on the "cut taxes" aspect, instead.  I guess it's a bit like how a store will advertize low prices, but won't brag about how they use "only the cheapest materials and labor!"

Edsanville, as you say I think he describes the big problem with the Laffer curve as a policy tool. You never know what shape the curve has and the shape will be very different for different types of taxation and different levels of public perception of the government. IMO it just gets touted as a spurious justification for tax cuts that obviously have nothing to do with it. History shows that Reagan's tax cuts DIDN'T cut the deficit despite all the supposed Laffer curve predictions.
In the UK our Duke of Westminster is the richest citizen. He gets his money as a land owner. Is any potential taxation of his land holdings going to reduce his "output" ? Anyway to my mind it is a really bad mistake to view the point of taxation as maximising revenue. To my mind the point of taxation is to mop up after government spending. The government should spend an amount that we choose as being  appropriate and then mop that spending up with taxation in a way that distorts the economy as little as possible. Trying to "maximize revenue" seems to boil down to trying to nurture damaging asset bubbles.

[stone]

Edansville, I think you hit the nail on the head when you said what matters is HOW the government spends. Personally I also think it matters  greatly what type of taxes the government takes. I think macroeconomics people (whether left or right wing) often have a very misguided notion that ignoring the different types of spending and different types taxation doesn't make a nonsense of it all. Having a sales tax will have a massively different effect from an asset tax. A citizens dividend will have a massively different effect from spending on bank bailouts. I think they try and have it both ways. The Reaganomics people appealed to the logic of lower taxes from labour and inovation and then applied that to taxes that were from gains from asset ownership. Left wing MMT people such as Bill Mitchel are just the same.

[edsanville]

I agree, which is one reason I never liked those charts of "tax rates over time" that get posted to the web every so often.  As if taxes were just a single number.

Edansville, I think you hit the nail on the head when you said what matters is HOW the government spends. Personally I also think it matters  greatly what type of taxes the government takes. I think macroeconomics people (whether left or right wing) often have a very misguided notion that ignoring the different types of spending and different types taxation doesn't make a nonsense of it all. Having a sales tax will have a massively different effect from an asset tax. A citizens dividend will have a massively different effect from spending on bank bailouts. I think they try and have it both ways. The Reaganomics people appealed to the logic of lower taxes from labour and inovation and then applied that to taxes that were from gains from asset ownership. Left wing MMT people such as Bill Mitchel are just the same.

[Lone Wolf]

Arthur Laffer claimed that cutting taxes would reduce the deficit due to the "Laffer curve" supply side voodoo.

Actually, the Laffer Curve is about how tax policy impacts revenue, not deficits.  It says nothing about the "spending" side (which is where US deficits have come from.)

The Laffer Curve simply says that at some point increasing taxes nets you little to no new revenue and can, in fact, net you less revenue than a tax cut.  For example, a 100% tax rate would net you very little as there would be very little economic activity.  A 75% tax rate would generate more revenue.  A 50% tax rate might generate more revenue still.  (The degree to which cuts are "self-funding" depends on the shape of your curve.)

On the other hand, if you have a 1% tax rate, an increase to a 2% tax rate will probably earn you much more revenue.  Cutting from 1% to 0.5% is very unlikely to be "self-funding".  Again, this is all a function of the shape of your curve.

The Bush tax cuts are an interesting case study.  Revenues declined in the early 2000s (due to the post dot-com recession and lower tax rates) but came screaming back in the mid-to-late 2000s, blowing far past the pre-tax cut numbers.  Revenues crashed again after the financial crisis.  While it's hard to extract a definitive answer, the data seems to indicate that we're on a position in the "curve" where tax cuts only partially pay for themselves.

It goes to show that deficits are more a function of overspending than revenue.  Revenues today are about 25% higher now than they were in 1998... yet we're now running something like a $1.3 trillion deficit versus 1998's (supposed) surplus!  That all comes from our incredible levels of spending.

[stone]

Lone Wolf, it all seems to me to look like the variation in revenue is due to capital gains tax and trying to "increase revenue" by Laffer curve-esque machinations is just an excuse for bubble blowing. Tax cuts for the rich will nurture bubbles and a big bubble will give you lots of capital gains tax as people bail out. Personally I think it is moronic for a government to try and maximize tax revenue in that way. Tax is better seen as a way to mop up government spending IMO. The government should spend as much as it is elected to do and then subsequently mop up that spending with taxes.

[moda0306]

Bringing in a bit of MMT, I'll make a few points:

1) I think the fact that our trade deficit has gone so out of wack has caused deficit spending to have only a fraction of the effect it normally would have... aka, we have to deficit spend much more with a negative trade deficit to get the proper amount of private sector savings and full employment.

2) Once we've spent money on real things we want the gov't to do and "reasonable" safety nets, I think the rest should be in the form of tax cuts (Warren Mosler style), as then the money goes to things that the people paying the taxes would most value... problem is, this will often end up in a form that barely increases the velocity of money... a huge contributor to economic recovery... which comes to...

3) Deficits in the form of stimulus to the poor/middle class, instead of tax cuts, will almost certainly increase the velocity of money, and much more so than tax cuts to the wealthy, going straight to grocery stores, repair bills, child care, etc.  Whatever you feel about this morally, there is not only benefit to be had by the recipients, but by cash-strapped businesses that desire demand, not tax cuts or low-interest loans.  

All in all though, the velocity of money simply keeps business' doors open another day.  A true repair of the private sector balance sheets (without creating moral hazards) is what will deliver a more stable, sustainable recovery.  I don't see how that will happen without a combination of lower taxes, and spending on infrastructure that loosens bottlenecks, education of kids and parents alike, and some sort of fast track "bankruptcy" program for certain owers of student loans and mortgages that don't stand a chance of paying those things back.  This bankruptcy infrastructure exists for LLC's... we need to work that into all loans to restore accountability into the system.

[Lone Wolf]

Lone Wolf, it all seems to me to look like the variation in revenue is due to capital gains tax and trying to "increase revenue" by Laffer curve-esque machinations is just an excuse for bubble blowing. Tax cuts for the rich will nurture bubbles and a big bubble will give you lots of capital gains tax as people bail out.

I am not sure that I understand how low overall tax rates are supposed to be the cause bubbles?    Early in the 20th century, tax rates were a tiny fraction of what they are today but in those days they had nowhere near the ability to blow asset bubbles that we do today.  (Those poor schlubs had not yet discovered artificially low interest rates!)

Are you perhaps talking strictly about low capital gains tax rates versus income?  Because the top income bracket includes a lot more doctors, lawyers and small business owners than it does ultra-rich speculators.

[Gumby]

Actually, the Laffer Curve is about how tax policy impacts revenue, not deficits.

The Laffer Curve simply says that at some point increasing taxes nets you little to no new revenue and can, in fact, net you less revenue than a tax cut.

It goes to show that deficits are more a function of overspending than revenue.  Revenues today are about 25% higher now than they were in 1998... yet we're now running something like a $1.3 trillion deficit versus 1998's (supposed) surplus!  That all comes from our incredible levels of spending.

When you have a fiat currency, how can there even be federal "revenue"? Government fiat money necessarily means that federal spending need not be based on revenue. It makes no difference if the government collects more money than it spends, or spends more money than it collects. The government's spending power is never constrained and the funds to pay taxes and buy government securities come from government spending.

[moda0306]

Gumby,

Let's assume for the sake of not making this another MMT thread that Lone Wolf thinks that taxation simply reduces the will to create value for payment, and that the absence of that tax will unleash productive potential, thereby inducing a recovery, and due to the increase in velocity of money, will result in even higher tax-load, but on a much higher level of healthy, free economic activity, and therefore less of a burden.

[stone]

Lone Wolf, I agree that back in the day bubbles became self limiting sooner. People got nervous when banks without a Fed behind them made reckless loans. Back then if everyone put their money into some asset bubble, a depression quickly followed with the consequent bankcruptcies ridding the system of those pesky savings. Now things are sanitized. Mass bank collapses are no longer allowed to occur. That leaves responsibility with the government to use taxation to do the clearing up that in a Jacksonian type (lack of) system would be done by mass bankcruptcies. Ofcourse taxation is not used to do that clearing up and that leaves us where we are IMO. Remember that government spending is also pumping money in at one end. I'm only saying that it needs to be mopped up adequately at the other end by taxation on asset values.

[moda0306]

stone,

Pumping money in at one end only to take it out at the other should be done for a real reason in my opinion, because otherwise you're simply hampering free activity.

I would say that certain social safety nets, infrastructure, modest military, and education are all real good reasons, but some vague interest in preventing bubbles from forming via redistribution beyond those real reasons is excessive IMO.

[Lone Wolf]

When you have a fiat currency, how can there even be federal "revenue"? Government fiat money necessarily means that federal spending need not be based on revenue.

This is really just the "vanilla" definition of "government revenue".  In this case, I'm talking about the amount of money that the government collects in taxes.

I also dislike the term, although for reasons unrelated to MMT (as I am not an MMT'er.)

Lone Wolf, I agree that back in the day bubbles became self limiting sooner. People got nervous when banks without a Fed behind them made reckless loans.  Back then if everyone put their money into some asset bubble, a depression quickly followed with the consequent bankcruptcies ridding the system of those pesky savings.

Savings aren't the demon here -- they're what enable capital investment.  Everything we have today we owe to someone saying, "Hey, rather than consuming these resources wastefully, how about I build myself a labor-saving gizmo \ system \ business that allows me to create more value down the line."

Note that in a free market (with privatized profits and privatized losses) the "pesky savings" don't disappear equally when a bubble bursts.  Those whose "pesky savings" were placed in profitable lines of business survive.  Those whose "pesky savings" were placed into foolish speculation get wiped out... leaving the wise savers with the opportunity to control even more capital!  This is a virtuous cycle.

The trouble is that if you have privatized profits and socialized losses, maximal risk-taking is rewarded while the "pesky savings" of those who did the right thing get devalued.  I think this is the genesis of the problems you're noting.

[Gumby]

I also dislike the term, although for reasons unrelated to MMT (as I am not an MMT'er.)

What would you call "government revenue" instead? "Tax collection"? I'm not trying to start a conversation about MMT. Rather, I'm just trying to understand what purpose you think taxes serve for a fiat government. Why do you think we are taxed on a Federal level?

[stone]

Lone Wolf, I think you've got it backwards. Capital investment causes saving as an inevitable consequence. If people are working building factories then they aren't making candy so there is less consumption because the consumption goods (eg candy) simply haven't been made. If you try and do it the opposit way around then the "investment" you end up with is unsold inventory that perishes and goes to waste. That unsold inventory does count as "investment" under the accounting identity that savings equals investment in a closed economy with no government deficit. I can't follow your reasoning that people leaving already produced inventory to go to waste somehow creates anything. Similarly it seems an unmitigated waste having people unemployed (a consequence of the layoffs that result from unsold inventory).

[Lone Wolf]

I can't follow your reasoning that people leaving already produced inventory to go to waste somehow creates anything.

This isn't my "reasoning".  This is your interpretation of why savings are bad.  I look at it differently -- I say that savings enables capital investment.

Imagine that I am in the business of making widgets by hand.  It's subsistence-level work, earning me $5 per day, all of which I spend to feed my family and pay my rent.  I'd like to buy a widget-making gizmo for $50.  This new gizmo will allow me to earn $6 per day.  An expensive capital investment, but one that'll pay for itself fairly quickly.

To make this capital investment, I must either possess:

• $50 in savings
• A lender (like my good buddy stone) who is better with money and has built up enough savings to lend me $50

If neither stone nor myself have managed to save up $50, I have no choice but to continue as I am until someone who does have savings comes along to see the brilliance of my business plan.  Whatever happens, though, savings must come first.

[MediumTex]

If neither stone nor myself have managed to save up $50, I have no choice but to continue as I am until someone who does have savings comes along to see the brilliance of my business plan.  Whatever happens, though, savings must come first.

If your buddy who is a bureaucrat is able to print you up $50 in new money, how would that fit into things?

Is that savings too, or is it something else?

[Gumby]

If neither stone nor myself have managed to save up $50, I have no choice but to continue as I am until someone who does have savings comes along to see the brilliance of my business plan.  Whatever happens, though, savings must come first.

And where do the initial savings come from? (Hint... not from a private loan.)

[stone]

Lone Wolf, I think "deadly fraud number five" in http://moslereconomics.com/wp-content/p ... s/7DIF.pdf explains what I'm trying to say much better than I could.

Basically if you go to the bank and ask them for a loan to buy a widget maker, them making that loan is entirely independent of whether I or anyone else previously failed to consume anything. Loans create deposits. The bank doesn't need deposits to make a loan. It wouldn't be a bank if it did. M1 would be the same as M0 if it did.

Making the widget maker in the first place entailed some loss of production of consumption goods OR  extra labour. Once the widget maker has been made, no saving is needed to buy it.

Lets imagine that we have run the banksters out of town with pitchforks. Even then the machine seller could come to an agreement with you that you would take his machine and pay him back from the profits you made thanks to his nifty machine. 

[Lone Wolf]

If your buddy who is a bureaucrat is able to print you up $50 in new money, how would that fit into things?

Is that savings too, or is it something else?

I'm putting that right into the "something else" bucket.

stone is an honest guy, a man of the land who made his $50 personally hunting down emus deep in the wilds of Australia and carving them up into lean, high-protein emu steaks.  After he was done feeding his own family of 12, he had enough steaks left over to sell to others for $50.  He created $50 of production for others without a corresponding $50 of consumption.  Thus, he has saved $50.  He's instead entrusting that $50 to me for my capital investment so that I can grow my business.

If our bureaucrat (we'll call him Inky McJets) gives me $50 off of his home printing press, that's money that isn't backed by any form of production.  Real savings haven't gotten any bigger -- just the stock of currency in circulation.

[stone]

Lone Wolf, I think you are imagining a world very different from our own. Your imaginary world is a world without banks and a world where in the absence of banks people with stuff they needed to sell wouldn't offer credit.

[moda0306]

LW,

If our currency going from $XX,XXX to $50 more hasn't made anyone richer, than maybe having any currency at all hasn't either... it's all just fiat confetti.  Neither the first billion nor the next $100 have any value until we start taxing it with a military and IRS and courts... but even then it's only given value because of a promise that a negative will be done to you if you don't abide.

I think a fiat currency is similar to a freeway system with standards of etiquette enforced by that same gov't.  One could argue that gov't can't create wealth (and in many ways they are right), but gov't can make SOME things move more efficiently, according to some.

One of those things is mediums of exchange and mediums of transportation... according to others and myself.  You may disagree.

I think what a currency AND freeway can be looked at as a government leveraging its legitimate (in the eyes of the "public") use of force to create a very efficient medium within which people can engage in much greater free commerce than they other wise could have.  Is the concrete and steel that the government uses any more wealth in their hands than in the private sector?  No, but the police enforcing rules of the road sure make it much easier to get where we want to in an otherwise free manor in ways that the private sector would have probably bumbled together.

Likewise, currency by fiat is simply printed paper, but because the significance of currency is to function as a medium of exchange, not necessarily to be useful in and of itself, one common currency made from paper probably serves that purpose well.

The key is to simply have enough of it, just as we try to have enough freeways for the traffic they hold.  Without traffic the freeways would have no value, but without the freeways, the traffic would get stuck in rocks, mud, etc, or relying on some sort of mish-mash of private roads with tolls, different rules, etc... likewise, without productive activity, currency would have no value, but without a growing common currency, our productive activities will have to eventually be enacted via bartaring, which is terribly inefficient.