States are not like the Federal Government (part 2)

... yet....

If the tea party crazies AKA Austrian crazies have their way, maybe each individual will be able to make their own currency.  I hereby decree that Garth head hairs are legal tender.   BAM - I'm rich.

Deal with it.

Introducing the Mankiw Tax

I have done extensive research on the subject utilizing myriad assumptions that tend to align with my political ideology, and have come to the conclusion that our world suffers a 'social cost' due to the distorting and one-sided 'education' that Mankiw provides via his textbooks and his blog.

I have run the calculations in a complicated 'real world' simulator (ie. a fake world) and have determined the degree of the negative externality.  I have calculated that if the federal government were to institute a pigouvian tax on all Mankiw texts purchased, by approximately $40.23 per issue, the externality problem should be solved.

During the vetting of my research, some claimed that instituting such a pigouvian tax would unduly hurt the educational institutions and students that purchase Mankiw texts.   But as any economist knows, where you levy the tax has no affect on tax burden - it will likely impose a cost on both the consumers of Mankiw texts as well as Mankiw himself depending on elasticities.   But that's the point of trying to change behavior - the price mechanism is the best way of reducing use of Mankiw textbooks.  The entire cost will not be born by the consumers in any case.   I mean, after all, the economics textbook market is perfectly competitive because that's what my real model tells me, in addition to what relevant elasticities are.   My real model is based on sound knowledge that I gained from my principles economics course that I took at Harvard... I never did learn that teacher's name....

To the Moon, Alice.

Our bridges and roads are crumbling, but Gingrich wants the moon.
The unemployment rate is bumbling, but Gingrich wants the moon.
Our education systems is stumbling, but Gingrich wants the moon.
China's factories are humbling, but Gingrich wants the moon.
Our politics keep fumbling, but Gingrich wants the moon.

The US CANNOT Go Bankrupt

I have my disagreements with modern monetary theorists, but one thing I've always agreed and believed is that the US can never really go bankrupt and will not default - it is not Greece.

Listening to Mitch Daniels' Republican response to the State of the Union and talking to friends though, you'd think our "grave" situation is just a day away from our government taking our country into ruin and bankruptcy.

It's just not so folks.  For those of you that want a bit more of a lesson, go here.

But generally,
Companies can go bankrupt, and many do every day.

States, while technically not able to go bankrupt, can 'ruin' their economies very quickly by over-borrowing as they are forced to borrow from private markets much of the time at increasing costs to cover risk.

But countries like the US that 100% controls it's money supply, can NOT go bankrupt and runs no risk of default.  Even politically, if politicians were to force a default, the Fed would undoubtedly work with the Treasury to make sure it didn't happen.   Markets believe that to be the case, and so do I.

Corrections to over-spending means either the country increases taxes (politics), borrows more (with minimal risk to higher interest rates given the way the rest of the world views US currency as a safe haven), or inflates its currency by issuing new money (via Treasury and Fed) that pays for the increase in the spending.

In the first case, if taxes rise (or other spending falls), the debt "problem" can be solved but at significant cost to the economy.  I don't view the second case, and neither do markets, as an issue.  If the country inflates its currency, it may do so but only if the private market allows it to do so.   And, ceteris paribus, there is no reason to suspect that pumping new money into bank reserves would increase loans, as we in fact know that loans happen in reverse.  IE., banks don't make loans based on reserves.  Though the stock of reserves can fluctuate based on loans made.   Loans are made based on present business conditions, credit worthiness etc.   If that doesn't change, loans don't change, and if loans don't change, inflation doesn't change (much).

Look at the world today.  The Fed has pumped million upon millions of dollars into bank reserves....and we have low inflation still today.  Why, because that money just sits there.

Greece meanwhile, having forsaken its own central bank in favor of a united Euro, has lost its connection between its treasury and Fed.  Hence the reason why Greece is different than the US.

Hence the reason why the US is not like Greece.

All this being said, there are still legitimate reasons to want to reduce government spending, not the least of which concern issues I have brought up before regarding moral hazard and inefficiencies and unfairness created via special interests.  Nevertheless, the fact remains the argument on 'bankruptcy' is unfounded.

Hence the reason why the Republican response represents fear-mongering and nothing more.

Cut the government - Let's start with the legislative branch

Very admirable, and long over-due.  But one hopes that this isn't political maneuvering and cutting for cutting's sake, but rather a start to a serious move toward re-organizing the federal government.

Such reorganization can never occur without completely dismantling and re-birthing the legislative branch.  Until that time, corporatism, our limited 2-party system mechanisms of legislation, ridiculous House and Senate 'rules' ... will continue to usher in the further decline of our country.  

Of course, as I've mentioned before, since Obama has to get the legislative branch's 'approval' first, such steps are unlikely to ever happen, and certainly not in my lifetime.

States are not like the Federal Government

I think something that is often missed in the political debate of liberal versus conservative is that States are not the same as the federal government.  State-level liberals don't see this so they may sometimes see red if a more conservative Governor wants to reduce certain spending or maintain a balanced budget (many states are required to balance at least part of their budget but not all).  Federal-level conservatives, meanwhile, get upset when their more liberal colleagues don't see the deficit as the most pressing issue.   

States (and local government) are not the same as the federal government.  Both have some ability to borrow, though arguably the smaller the government institution the less able you are to borrow for riskier or longer projects (cities for example don't have the same ability as states which don't have the same power as the US government - at least not without having to pay a good amount of interest on debt).   Another constraint on State borrowing is of course politics.  Both can of course tax and spend.  But, the one thing (and it's a big thing) that State and local government can't (or at least don't) do that the feds can is print and control their own money supply  (not that states/cities don't try). When you control the purse strings, deficits are less of an issue.  It's an alternative to outright borrowing from some other sector.  It's also a practice that is largely still shadowy to the average citizen so it can be done without the same political obstacles.

Contrarily, for states that have limited ability to borrow (politically or otherwise), having a sound financial situation is often prudent since it is not like they can start adding instant dollars to their accounts like the feds can.  This is particularly true during times of economic downturn or economic risk combined with a federal government that is politically more motivated to reduce it's deficit (ie. not aid the states).  A risk averse state in this situation will have little choice but to tighten its purse strings, or else risk turning into an Illinois or California.  

Policy Thought in Support of the 99%

The focus of the self-termed 99% (or at least the 1% on the streets that say they represent the rest of us) has been income inequality, and there is little doubt that income inequalities have grown over the last few decades.  However, the remedies put forth by some, when they do offer up remedies, are usually focused on traditional taxation: tax the rich and give to the poor - it seems our prescriptions to problems haven't much changed from the days of Robin Hood.

There are other options which are seldom if ever discussed.  One thought that comes to mind is specific to charitable donations.  Every year, particularly around this time of year, billions of dollars of private charitable donations are provided: often to the those in the lower and mid-lower rungs of the 99%.  Individuals alone contribute to over $200B every year in charitable giving, often matched by corporate contributions.

Our federal government provides a healthy deduction on many kinds of charitable giving, but some research shows that we as a society would get a bigger bang for our buck if the subsidy were a match (similar to the above stated corporate match).  And in fact, even a modest match might encourage private citizens, often those wealthy enough to do so, to give more.

So, instead of a deduction, and perhaps as a political solution to get around arguments of class warfare etc., the federal government could instead encourage the private market to ramp up what they already do every year.  The government could honor, with all the full force and faith that our government can provide, a match on every dollar of contribution made to certain charities that benefit the poor or down-trodden.  This helps the poor like a tax cut would, albeit through a charity organization; it helps the rich by increasing satisfaction to a cause they already celebrate; it helps government by partially deflecting arguments of class warfare - after all the government is simply mirroring the actions of the private market and the 'revenue' isn't coming from increasing taxes on the rich.

The revenue could at least partially come from eliminating the need for a charitable deduction (money that ordinarily would go back in the rich guy's pocket) and replacing 100% that program with a matching program (where the money would go to the poor guy's pocket - but a poor guy of the rich guy's choosing!).  Personally, I'd be in favor of putting new dollars into this kind of a project for at least a time, since there is no sign at this point that government spending is causing any serious inflation - though I understand that might be political suicide.

There could be issues politically with setting up a federal matching program, not the least of which would be deciding what charities could be supported in this manner.  There would, for example, need to be a minimum threshold by which the private citizenry would have to contribute to a particular cause for the match to kick-in.  IE., if one crazy nut donates to the 'poor satanist's society' or some such thing, the government would not match that obviously.  But, I suspect since the government already has a list of 501c3 non-profits that many corporation feel comfortable in allowing their employees to associate with, this picking and choosing may not be too difficult.

All this is not to suggest that I disagree that certain persons should be paying their fair share of taxes (and they aren't).  But it is a suggestion given our political reality and given the pressing immediate need for a solution.

UPDATE: further research shows that this kind of idea is already on the table.  Must admit, I haven't heard much about it though.  Also, the match discussed in the article seems rather week.  I'd suggest a much more substantial match.  It appears that I'm not alone in that.  Anyone else?