Governments are Not Households

[l82start]

MMR isn't a monetary system. It is a description of a monetary system than I and many others here agree with you in believing is ultimately fatally flawed. Understanding it isn't endorsing it!

 
poor use of terms on my part... i called MMR a description in one sentence and referred to "it" as "the system" in the next "oops"  
instead if "it" i think should have said "fiat"

[Pointedstick]

I think in the end you need to understand something before you can really critique it. I've found that understanding MMR has sharpened my arguments against government, not blunted them. Understanding that the number called the "national debt" is essentially just an accounting detail in no way downplays the real problems in our economy of excessive taxation; excessive redistribution; a declining workforce; entrenched big businesses that use the government's power to cement their market position through patents, occupational licensure laws, and other forms of regulatory capture; an ever-growing semi-permanent group of unemployed with deteriorating skills; and a wide gulf between a smaller number of super-productive people and a larger number of less productive or unproductive people.

[melveyr]

Melvyr

Basically if you understand MMR/MMT, you look at the unemployment line and conclude that we are overtaxed relative to the size of our government.

You must admit that the type of tax has just as much effect as the amount of tax. Leaving unrealized capital gains untaxed has totally different effects from reducing payroll taxes. Giving $10k to someone who immediately spends it on treasury bonds is totally  different to giving it to someone who immediately spends it starting up a hotdog stall or whatever.

Yes, we ultimately need to get people to spend more (in the real economy). Tax cuts that induce people to spend more money are going to have a larger affect than tax cuts that don't. Historically tax cuts for the poor have a more stimulative effect than the rich because the poor have a higher marginal propensity to consume.

[stone]

Melveyr, my thought is that that exact same point can be extrapolated to the point that mass unemployment can be avoided perfectly well by simply having the "correct" type of taxes within a balanced budget. Or put another way, endless deficit spending is simply a way to enable the "wrong" type of tax regime.

[MediumTex]

Melvyr

Basically if you understand MMR/MMT, you look at the unemployment line and conclude that we are overtaxed relative to the size of our government.

You must admit that the type of tax has just as much effect as the amount of tax. Leaving unrealized capital gains untaxed has totally different effects from reducing payroll taxes. Giving $10k to someone who immediately spends it on treasury bonds is totally  different to giving it to someone who immediately spends it starting up a hotdog stall or whatever.

Yes, we ultimately need to get people to spend more (in the real economy). Tax cuts that induce people to spend more money are going to have a larger affect than tax cuts that don't. Historically tax cuts for the poor have a more stimulative effect than the rich because the poor have a higher marginal propensity to consume.

melveyr,

How does this perspective fit into the oft-cited "broken window fallacy"?

[melveyr]

Melvyr You must admit that the type of tax has just as much effect as the amount of tax. Leaving unrealized capital gains untaxed has totally different effects from reducing payroll taxes. Giving $10k to someone who immediately spends it on treasury bonds is totally  different to giving it to someone who immediately spends it starting up a hotdog stall or whatever.

Yes, we ultimately need to get people to spend more (in the real economy). Tax cuts that induce people to spend more money are going to have a larger affect than tax cuts that don't. Historically tax cuts for the poor have a more stimulative effect than the rich because the poor have a higher marginal propensity to consume.

melveyr,

How does this perspective fit into the oft-cited "broken window fallacy"?

Bastiat's argument only works when the economy is at full employment. (By breaking the window, real goods and services were diverted from productive use and used just to repair the damage.)

However, we  have lots of good and services that are idle right now, not being utilized. Invoked spending that utilized these goods and services would not be a "free lunch" but would merely allow us to consume the lunch that already exists rather than letting it rot. BTW I am not trying to justify breaking windows, but some people use the argument to make claims that the economy cannot be stimulated by any method. Ironically, they begin by assuming it is fully stimulated.

[stone]

Perhaps "get people to spend more" should be replaced by "allow them to spend more if they so wish". Cutting taxes hardly amounts to breaking people's windows does it?

[moda0306]

MT,

Personally, I hate the broken window theory.  The idea that we should destroy wealth to keep money circulating bothers the hell out of me, even if it does kee our financial contracts in better shape at times.Opportunity cost is definitely a valid point, but I think there are times when our economy is simply "under capacity," were the lack of consumption of item X does not increase consumption of some other item.  This is when government can come in, consume at least somewhat useful items (even if we disagree whether government is good at designing freeways, border fences, and parks maybe acknowledging that they're probably going to do this for a long time is a good idea, and we might as well have them do it while the economy is under capacity).

If simply lowering taxes on the rich would result in consumption at/near full capacity, that would be one thing, but our balance sheets and productive capacty overhang tend to lend the solution to having consumption reward current investment instead of trying to push on a string by thinking up ever-creative supply-side solutions.

In normal times, I definitely agree that government consumption can come the cost of the private sector doing similar.  However, when we're in a severe recession, this is simply not the case.  Demand will simply severely lag productive capacity, until the supply-side adjusts to meet that demand, and we suffer through long periods of high unemployment and lack of productivity as a result.  However, I'd never be one to say that we simply destroy wealth for no other reasonthan to replace it.

[MediumTex]

MT,

Personally, I hate the broken window theory.  The idea that we should destroy wealth to keep money circulating bothers the hell out of me, even if it does kee our financial contracts in better shape at times.Opportunity cost is definitely a valid point, but I think there are times when our economy is simply "under capacity," were the lack of consumption of item X does not increase consumption of some other item.  This is when government can come in, consume at least somewhat useful items (even if we disagree whether government is good at designing freeways, border fences, and parks maybe acknowledging that they're probably going to do this for a long time is a good idea, and we might as well have them do it while the economy is under capacity).

If simply lowering taxes on the rich would result in consumption at/near full capacity, that would be one thing, but our balance sheets and productive capacty overhang tend to lend the solution to having consumption reward current investment instead of trying to push on a string by thinking up ever-creative supply-side solutions.

In normal times, I definitely agree that government consumption can come the cost of the private sector doing similar.  However, when we're in a severe recession, this is simply not the case.  Demand will simply severely lag productive capacity, until the supply-side adjusts to meet that demand, and we suffer through long periods of high unemployment and lack of productivity as a result.  However, I'd never be one to say that we simply destroy wealth for no other reasonthan to replace it.

One very simple thing we could do to stimulate the economy would be to forgive all student loan debt.  Think about how stimulative that would be.

It would be like an ex-post facto intellectual capital cap ex program.

[moda0306]

MT,

Some would say that there's a moral hazard built into doing something like that, however, we know the government only acts when LOTS of people need certain help, not just one, so I doubt any individual player in the economy would go into debt with the hope that the gov't would forgive theirs.

That said, I think a home & student loan forgiveness program that doesn't build moral hazards into the plan is a lot more efficient than foreclosure (with homes) and impoverished students unable to go through bankruptcy, because student loans are exempt.

I actually really like the Obama plan to make student loan payments only a certain percentage of income, and that they'll dissappear after so much time.  I think it's an efficient way to avoid impoverishment of studet loan holders, but without causing unproductive moral hazards.

[Pointedstick]

If I take off my libertarian hat and put on my less-cynical-moderate-independent-fiscal-conservative-social-liberal hat, I would say that a student loan forgiveness program would be a great idea, however, the moral hazard aspect is significant. I'm one of the schlubs who worked hard to pay off his own as well as his wife's, for example. The indebted students need some kind of skin in the game. Simply magicking away their loans seems unfair to others, so I would propose maybe something like a dramatic boosting of the amount that Americorps forgives. Right now it's like a maximum of $5,000; it should be more in the realm of $100,000 for people willing to work for a semi-extended period (let's face it, a lot of the massively indebted students are mostly unemployable anyway).

Or maybe a program that forgives loans in exchange for learning traditionally blue-collar skills that are in high demand, like plumbing, welding, electrical work, tool & die manufacture, things of that nature that the economy actually has a need for but people increasingly look down on so nobody learns the trades. Or perhaps a federal match for student loan payments.

Back in the real world of course, there's a 0% chance of any of that getting done so people shouldn't make such foolish decisions about how they fund their college educations. From my experience as a foolish person who made all the wrong decisions, I can tell you just how preventable it really is if you're willing to actually wake up and THINK for a few minutes before you let the college whirlwind suck you up.

[craigr]

I have a crazy idea:

Why not eliminate the corporate income tax entirely and let people that actually know how to spend money to grow businesses keep more of it themselves? If they want to "stimulate" the economy, they can just give their employees a big fat raise. Or if they wanted to hire people and grow the company they could do that.

But please, don't give any more to the government to be pissed away on dumb ideas, crony investments, and more welfare to buy votes.

[D1984]

I have a crazy idea:

Why not eliminate the corporate income tax entirely and let people that actually know how to spend money to grow businesses keep more of it themselves? If they want to "stimulate" the economy, they can just give their employees a big fat raise. Or if they wanted to hire people and grow the company they could do that.

But please, don't give any more to the government to be pissed away on dumb ideas, crony investments, and more welfare to buy votes.

Well, you're right on one count at least...that really is a crazy idea 

But seriously, I don't know how much good that would do in a demand-side recession like we are currently in. Corporations already have trillions on their balance sheets (and can borrow at record-low rates if their credit is good) so it's not like they aren't hiring because they are starved for capital. Plus, it seems that many have already done some "tax elimination" of their own (Double Irish With a Dutch Sandwich, anyone?) and while that probably hasn't hurt employment it that hasn't necessarly translated to full employment either.

Eliminating the employer-paid portion of the FICA tax would probably do more to stimulate hiring than eliminating the corporate income tax. I would say maybe even give companies a dollar-for-dollar (non-refundable) credit for wage costs for hiring someone except for the fact that that borders on wage subsidies and could very well end up acting as a subsidy for hiring someone when a company was going to do it anyway. A broad-based demand-side tax cut program like extending the payroll tax cut into next year would be a decent idea, as would increasing the standard deduction and personal exemption to where it was (adjusted for GDP growth and inflation) in the 50s.

As far as student loans are concerned, why not either make them fully dischargeable in bankruptcy (for the non-Federally insured ones) or at least reducible to some reasonably payable amount (i.e. a Chapter 13 repayment plan) for the Federally insured ones. At the very least such loans (IMO any loans) should not be payable by garnishment or seizure of assets (just copy South Carolina's garnishment law and Delaware or Florida's asset protection laws word for word and put them in the US Code...why should employers be forced by the guns of government to be unpaid collection agents for lenders?). If investors made foolishly risky loans (like to students getting liberal arts degrees in underwater basket weaving or the like) thinking the government was going to cover their butts by either paying them off if the loan defaulted and/or making the borrower into an empeoned debt slave then said investors should (in a real free market) lose their shirts...it would teach them not to make such dumb loans next time.

[craigr]

But seriously, I don't know how much good that would do in a demand-side recession like we are currently in.

People are debating how best to spend money that doesn't exist. But the people they are entrusting to spend the money (government stimulus) have shown zero talent for doing it well. So why allow them to keep doing it?  ???

We should stop listening to economists and start listening to business owners. I do. And the ones I talk to reflect almost exactly the sentiments of Steve Wynn:

http://finance.yahoo.com/blogs/breakout ... 59421.html

[D1984]

People are debating how best to spend money that doesn't exist. But the people they are entrusting to spend the money (government stimulus) have shown zero talent for doing it well. So why allow them to keep doing it?

I'm kind of at a loss here to understand what you're saying. How exactly is cutting payroll taxes and/or increasing the standard deduction "entrusting the gvoernment to spend the money as stimulus"? Seems to me like it's allowing people to keep more of their own money and spend it on what they (not the government) choose.

We should stop listening to economists and start listening to business owners. I do. And the ones I talk to reflect almost exactly the sentiments of Steve Wynn:

http://finance.yahoo.com/blogs/breakout ... 59421.html

Nop offense intended to Mr. Wynn but I'm not sure over someone with over $2 billion in net worth and an international casino empire qualifies as an "owner or operator of a small business." While I don't personally think letting the "fiscal cliff" hit (all having tax rates go back to pre-2001 levels as of the first of next year) is a good idea with the economy as depressed as it is (it would essentially be austerity at the worst possible time) it would technicaly resolve the uncertainity" over tax rates mentioned in your linked article.

Also, the NFIB's own survey seems to indicate "poor sales", "weak sales", and "lack of demand" aas the biggest problems facing businesses, making them less confident, and keeping them from hiring.

http://www.calculatedriskblog.com/2012/ ... index.html

I just wonder how if taxes are the main thing keeping businesses from creating jobs, then how exactly did they manage to create jobs in the 1940s, 1950s, 1960s, some of the 1970s, much of the 1980s, and from 1993 to 2000 when tax rates were higher (sometimes MUCH higher) than they are now?

[craigr]

People are debating how best to spend money that doesn't exist. But the people they are entrusting to spend the money (government stimulus) have shown zero talent for doing it well. So why allow them to keep doing it?

I'm kind of at a loss here to understand what you're saying. How exactly is cutting payroll taxes and/or increasing the standard deduction "entrusting the gvoernment to spend the money as stimulus"? Seems to me like it's allowing people to keep more of their own money and spend it on what they (not the government) choose.

Entitlement spending is through the roof. Stimulus spending was largely flushed down the toilet on a raft of bad projects. You can't make people spend money when they are already up to their eyeballs in debt. And, government spending goes towards bad ideas. In some cases the spending went almost directly to fund R&D/factory development in countries like China. A total waste, and in the future damaging to the economy as we have given seed stage capital basically to future competitors!

Also, the NFIB's own survey seems to indicate "poor sales", "weak sales", and "lack of demand" aas the biggest problems facing businesses, making them less confident, and keeping them from hiring.

But artificially creating demand, when those business owners know full well it could end, is not inspiring confidence either. Neither is the idea of dumping additional costs on burdens on them for employee expenses. The situation is not breeding any kind of certainty.

I just wonder how if taxes are the main thing keeping businesses from creating jobs, then how exactly did they manage to create jobs in the 1940s, 1950s, 1960s, some of the 1970s, much of the 1980s, and from 1993 to 2000 when tax rates were higher (sometimes MUCH higher) than they are now?

What was the size of the regulatory frameworks back then to operate a business? You can have lower stated taxes, but still have massive compliance costs to contend with that are just as bad, if not worse. A lot of business costs are not in overt taxes they pay. For instance, an employee's actual costs are about 1/3rd or more what their salary is. That isn't necessarily all taxes (though a portion is the other 1/2 of social security). Those costs are simply complying with a host of regulations, paperwork, etc. And that's with my relatively old information when I maintained a payroll of employees. It can't be anything but much worse at this point.

[moda0306]

Eureka!!

We've finally agreed that the problem is demand!

Regarding the stimulus, 1/3 of it was tax cuts, 1/3 of it was aid to state and local governments who were still cutting costs, and another 1/3 was actual additional discretionary stimulus.  Even if that last third was 100% bs, that still leaves 2/3 of it in the form of tax cuts and making sure state/local governments keep functioning as normal.

The idea behind deficit spending is that it actually repairs private sector balance sheets as it creates "artificial" demand in the mean time.  Further, how "artificial" is spending money on expanding infrastructure before a future expansion of private enterprise, as opposed to waiting until we have to try to grow infrastructure when our economy's already at full capacity.  Seems like good planning to me.

I simply can't see how the conservative response of slashing spending, artificially rewarding savings with artificially high interest rates, and switching to a consumption tax are supposed to be offset by some tax cuts in terms of keeping demand up.  

[craigr]

That said, if people are up to their eyeballs in debt (which they are), how will a customer afford to buy a new product?

The policies effectively punish savers (who have money to spend) and reward those with no money to spend (those in debt). The policy is upside down. Then you have economists complaining that people with massive debt were not spending their stimulus money, but using it to pay down debt. How is that surprising?

In the future, when the book "The Rise and Fall of the United States" is written, there will be a very large chapter dedicated to Keynes and his disciples. The policies are very bad and run counter to the values that even built the country. They support the expansion of large government and waste at every level. People can argue the balance sheet arguments all they want, but the end result, the *end result*, is always going to be a much larger government presence and that's a huge drag on any economy.

[craigr]

So if people are up to their eyeballs in debt, how will such customers buy a new product?  And why would a business expand, knowing there is no demand?

How did they get so much debt? What policies allowed so many people that should not have massive debt to service to get it? Let's talk root cause.

[moda0306]

They got into debt buying things that entrepreneurs produced, loaned to them by players in the free market for the most part, so let's not forget who benefitted from other aspects of these dopes going into debt.  Without that debt, not nearly as many of those entrepreneurs and investors would have made the buck they did.

[craigr]

They got into debt buying things that entrepreneurs produced, loaned to them by players in the free market for the most part, so let's not forget who benefitted from other aspects of these dopes going into debt.  Without that debt, not nearly as many of those entrepreneurs and investors would have made the buck they did.

But it was not free market at all. No free market institution would make $250,000 loans to people with $20K a year salaries. Only institutions that knew they wouldn't have any accountability for the outcome would do that. Further, only institutions that also were getting access to that cheap credit themselves could afford to do it.

So it's a paradox of sorts. Cheap credit makes credit bubbles possible. But the only way to fix broken credit bubbles is…more debt and credit? It's a bad policy and the last four years has shown it to be so.

We should not blame the effects of these policies (low demand, etc.). It's like blaming nausea for the problems of a dope addict. Instead we should do root cause analysis: It's the heroin they are shooting up to keep the high going that is the problem.

[moda0306]

There were billions in mortgages with horrible financial backing held by the private sector with absolutely no government backing.  To assert that it was just a story of the government trying to help poor people get loans are fooling themselves.  The private sector borrowing & loan-transferring mechanism failed big time.

[craigr]

There were billions in mortgages with horrible financial backing held by the private sector with absolutely no government backing.  To assert that it was just a story of the government trying to help poor people get loans are fooling themselves.  The private sector borrowing & loan-transferring mechanism failed big time.

But didn't these mortgage originators know that they had Freddie/Fannie to sell off the worst mortgages to? Yep. That's exactly what they did in many cases. They weren't stupid and Fannie/Freddie got pummeled as they should have.

Unfortunately, the idea of a ready and willing buyer also means that legitimate buyers were bid against by those that probably shouldn't have had a loan. So goes the bubble. Bidding against the guy with $20K in income, or perhaps no documented income at all, with a government guaranteed loan. What a mess.

And again, how did these mortgage lenders get access to the cheap credit? What was the root cause?

[moda0306]

Speaking of the "ever expanding role of government," as someone younger than most here, and who was 19 when we invaded Iraq, I can say I'm extremely grateful we don't have the draft, like we (and the confederates) did almost 150 years ago... When blacks were being returned to slaveowner a in the South as their property, and women had no real property rights.

To talk about the "oppressive expanding role" of government is probably laughable to some people on the more unfortunate side of US governments past simply because we have to pay FICA taxes, buy health insurance, and abide by some pesky federal business regulations.  I wonder how much the 50,000 Vietnam war draftees who died would pay in taxes to get their lives back.

Ok... A bit melodramatic, but I think there's a point to be made there about the so-called expanding role of government.

[moda0306]

Lenders had access to willing depositors in banks as well as bond funds.

Did they really know Fannie & Freddie would buy the loans at higher than market value?  Also, weren't government loans a HUGE role in the expansion of homeownership after the depression?  Why didn't that also result in a massive housing bubble? Could it be as a result of well-regulated lending of the post-depression era?