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Tuesday, April 15, 2014

Purpose of Taxation

My own personal feelings on budgets as it relates to government is more nuanced than the traditional conservative (I hate government spending and taxes) versus liberal (I love - or at least support - government spending and taxes).

I generally lean slightly conservative when it comes to my own personal budget.  I've never been one to use a credit card much or to hold a large balance (I once did that, but I learned my lesson).   I spend within my means.   My means being my take home income.   My means would be nearly infinite of course if I had a printing press and could otherwise create "Garth bucks" and get people to accept those as currency.  But alas I don't have that power.  

States, like my home state of Indiana, are in similar boats.   Indiana is quite a bit larger than me though financially speaking and has a lower credit risk and it can issue its own bonds for funding in times where taxes may not be strong enough to support government spending, but long-term, State governments have to balance their books (either by statute, or out of necessity because they have limited credit availability).  Like me, Indiana can't create and issue its own "Indiana bucks."   Because of this, I generally prefer my State to be a bit conservative when it comes to its spending habits.   

Then there is the federal government.  The federal government is massive - it's a fifth of our entire economy (give or take).  It makes spending decisions, but almost always runs a deficit.  And it can do so into perpetuity.   Like States, it issues bonds, but unlike a State the US government has its own monopoly control of its currency that it itself issues, which has a significant demand on the market because it is accepted as currency - the most powerful currency on Earth.   Because of this monopoly control of its own currency, the Federal government does not need to "fund" its spending via taxation.   In fact, in general, the decision to spend federal funds is made independently from the decision to tax.   That may sound odd to people that think that our taxes go directly to 'fund' our federal spending, but that's the way it is.   The use of taxes to fund spending is an optical illusion that gets perpetuated in the media - liberal or otherwise.  

So what purpose does taxation at the federal level serve?  Well, largely it's to modulate private spending demand.   (I would argue a secondary but significant purpose is income redistribution to regulate economic inequality)  When taxes rise, resources are taken from me, Indiana, and other entities that have limited funding sources because we don't control our own currency.   Because of that, our spending demand shrinks.  Contrarily, when taxes fall, resources are given to me, you, and Indiana, and our demand to spend some or all of that money rises.  The fact that the government has changed the taxation level at the federal level need not have any bearing whatsoever on the federal decision to spend - it effects the private decision to spend greatly however, and in that way, regulates spending demand and inflation.   This is a fundamental difference between the US government compared to individuals and States (and even the European Union countries like Greece that also do not have control of their own individual currency).   

I feel like many of our political disagreements would be better served by understanding these nuances as it relates to taxation.  My fear is that the media and political extremists have made it virtually impossible to have an honest examination on the different role of taxes at different entity levels.   It's just all black and white to them.   Taxes are good or evil depending on the political persuasion, and that unfortunately does nobody any good at the end of the day. 

Sunday, February 23, 2014

History of Jobs Guarantee Program

The idea that a buffer stock of employed citizens be created by the government as a kind of 'employer of last resort' is not a new concept but I've been wondering exactly how old an idea it is.  I at the same time was reading exerts from my copy of Thomas Paine's "Rights of Man" 1791 for a completely unrelated reason, and came across this section which sketches an outline of what such a program might look like (at his time). I know of no other such outline (be they from a political persuasion as below or an economic persuasion) written earlier than this (consider this a challenge!): 

Many a youth comes up to London full of expectations, and little or no money,
and unless he gets employment he is already half undone; and boys
bred up in London without any means of livelihood, and, as it often
happens, of dissolute parents, are in a still worse condition, and servants
long out of place are not much better off. In short, a world of little
cases is continually arising, which busy or affluent life knows not of, to
open the first door to distress. Hunger is not among the postponable
wants, and a day, even a few hours, in such a condition, is often the
crisis of a life of ruin. These circumstances, which are the general
cause of the little thefts and pilferings that lead to greater, may be
prevented....

The plan then will be: First, to erect two or more buildings, or take
some already erected, capable of containing at least six thousand persons,
and to have in each of these places as many kinds of employment
as can be contrived, so that every person who shall come, may find
something which he or she can do. Secondly, to receive all who shall
come, without inquiry who or what they are. The only condition to be,
that for so much or so many hours work, each person shall receive so
many meals of wholesome food, and a warm lodging, at least as good
as a barrack. That a certain portion of what each person’s work shall be
worth shall be reserved, and given to him, or her, on their going away;
and that each person shall stay as long, or as short time, or come as often
as he chooses on these conditions.

If each person staid three months, it would assist by rotation twenty four
thousand persons annually, though the real number, at all times,
would be but six thousand. By establishing an asylum of this kind, such
persons, to whom temporary distresses occur, would have an opportunity
to recruit themselves, and be enabled to look out for better employment.
Allowing that their labor paid but one-half the expense of supporting
them, after reserving a portion of their earnings for themselves,
the sum of forty thousand pounds additional would defray all other
charges for even a greater number than six thousand.

Friday, December 6, 2013

Frosty The Snowman Exemplifies Exogenous Money

Frosty the Snowman was on TV tonight.  So of course I watched it.   One of my favorite lines in this Christmas classic is in the following clip:


Frosty's logic is as follows:
1. I see the thermometer rising and getting red
2. That causes me to get all hot and sweaty
3  The thermometer is my demise

Similarly, neoclassical misconception of how money works goes something like this:
1. I see the Fed adding reserves to the banking system
2. That causes the economy to lend and borrow
3. The Fed is the economy's demise (or savior)


Sunday, November 10, 2013

Obamacare: Biggest Issue is Monopoly Power

Obamacare:  I have no interest in the political rhetoric.   Yes, the website sucks now.  Yes, Obama either did not know or knowingly lied about the effect of millions of Americans losing their coverage.   Equally however, there are some obvious positives of the legislation which have little to do with the IT, and have much to do with millions more Americans that will now have access to care they never had access before.   At the end of the day, only time will tell if the policy is a success or failure.

My big concern is something that has been known since the beginning and that is, Obamacare does nothing to erode the existing monopolies of health insurance in many states.  The biggest issue with Obamacare in my view remains the fact that the so-called marketplace doesn't really create a true market.  The fact is, plans cannot be bought and sold across jurisdictional lines.  Obamacare may actually serve to simply consolidate monopoly or oligopoly power - which may in fact keep prices higher than they otherwise should be.   The ironic thing is that we probably would be better off if the government just created its own monopoly power and moved us to a single-payer system.   That way, the government could have more control over prices.  Under this private monopoly system though, that can't happen.  I, living in Marion, Co. Indiana cannot buy a plan from an insurer in Illinois that may offer cheap rates.   What choices do people like me in Indiana have:  not much of one.    "Would you like Anthem, Anthem, or Anthem?"

Wednesday, October 23, 2013

Crowding Out And Its Relation To Bullshit

A topic I've been hearing from some of my conservative friends is a refrain often found in mainstream macroeconomic textbooks - crowding out.  Crowding out is the theoretical idea that there is a fixed pot of gold from which to finance investment, so if the government all of a sudden wants to draw from that pool, it must mean it has to take funds from the private sector (because there's only so much gold to go around).

So a few things are wrong with this idea:
1. We are not on the gold standard anymore.

2. In our economy there are funds that are just lying around because no one is using them.

3. Even if the economy was better and the private sector were not hoarding cash and if they were instead fully utilizing all resources, there is no fixed 'pot of gold'.   The amount of funds in circulation are completely driven by demand.  So, if the government wants to spend more money, they don't 'take it' from the private sector.   They just spend the money and US bonds are issued - with no effect on the amount of resources whatsoever.

But people don't seem to get this.  Especially conservatives.

But as I've been trying to convince people for years, the reason that conservatives don't get it is because mainstream economists don't get it, and they keep teaching bullshit... like crowding out.  I keep teaching bullshit like crowding out too, because I'm virtually forced to - but I also try my best to say in a very professional way, "this is bullshit".

And then the brainiacs at the Congressional Budget Office say things like this (from 2009):

"ARRA's [Obama stimulus] long-run impact on the economy will stem primarily from the resulting increase in government debt. To the extent that people hold their wealth in government securities rather than in a form that can be used to finance private investment, the increased debt tends to reduce the stock of productive private capital."
I have bolded that last sentence for you.  What it is saying is that crowding out will happen, but what it also implies is that crowding out will happen only under certain assumptions: "To the extent that people hold their wealth in government securities rather than in a form...." implies that there is an either/or situation.   The CBO is making this assumption, which I just told you is false - and that every central banker will tell you, is false.   There is not either/or situation between bonds or savings that businesses can use.   Businesses don't finance their investment from some fixed pool of money.   

Can you imagine if a business went to a bank for a loan, made the business case for the loan (which was a good one), but then the bank says, "Oh I'm so sorry sir, but we've plum run out of money.  I mean, we had some, but unfortunately the government sold so many treasury bonds that we now have none left."   I mean - seriously?   Has this ever happened? No, it hasn't.  Do you know why it hasn't?  Because loans are not made from some fixed pot of gold. Loans are made based on risk and return and the business case, and that's it.   Banks never 'run out of money'.   That's what the Federal Reserve does - ensures that banks have the money they need to do business.  

Having said all this, is it possible that in some cases government spending influences business incentives to a degree that might cause less private investment.   Yes, probably.  But, that's not what the mainstream theory says.  The mainstream theory is crowding out occurs because there is a fixed pot of gold so banks won't have resources to make loans, and interest rates will rise so businesses won't want to borrow, and taxes will rise in the future so that the average Joe will hoard his cash that would otherwise go to US businesses.    All of that theory was born at a time when we actually did have a fixed pot of gold.   But today, all of that, is bullshit.

Thursday, October 17, 2013

The True US Debt Burden

In macroeconomics, it is often taught that that the US debt burden (ie., the metric we should gauge how concerned we should be about the national debt) is the amount of interest paid on said debt divided by the measure of GDP during the same time period.   This makes sense.   We can roll over the principal of our debt and we can just use some of our growing economy to 'pay for' the interest we owe and it's 100% sustainable forever with no real cost to anyone.   As long as the growth in the interest we have to pay to the bondholders does not exceed our economic growth (it would have to be decades for it to really matter that much), we are right as rain.

But then, many textbooks, including the one I use to teach my macro class go on to say the best 'rule of thumb' therefore is to try to keep a constant or shrinking debt to GDP ratio - not interest on the debt, just debt.  This I have a big problem with.

The problem with using that as a rule of thumb is that it is not very useful, mainly, because it assumes that interest rates paid on the debt remain constant.  But as we all know, interest rates are anything but constant and in fact real interest rates have drifted negative in the past few years in some cases to the point that the government actually can theoretically earn money by going in to debt.  Even if that is not the case right now, the fact remains that real interest rates have dropped dramatically (thanks to the Fed) in the past 6 years.   This means that any new government debt is dirt cheap.   IE., interest/GDP aka the debt burden cannot be nor should be approximated by using debt/GDP as a measure.   If what you care about is the debt burden, and as long as the government collects such information, why would you need another measure of approximation anyway?   I mean, unless you are trying to scare people:


The CBO, as an aside, believe the debt/GDP ratio will fall for the next decade or so before it starts rising again, but it's also important to note that the rise precludes any assumptions about the investments we are putting in to the economy today.   So, really, predicting this sort of thing a decade out is a fools errand anyway.

But, why scare people, when you can present reality:
The reality is we aren't paying anything more on interest to our debt really now than we were back pre-9-11.   IE., thanks to a recovering economy and falling interest rates, despite our increased debt values, the debt burden is actually falling and really has been since the 1990s if you take a longer-term view largely due to the tech boom, the end of the cold-war, etc., which despite the bust, still has aided our long-term economy to this day:


Say it with my tea-publicans:  the economy drives the debt burden, not the other way around.