[kenberg]

luke warm, on 2010-November-07, 09:05, said:

me too, since (from the link), "His publications are ranked among the most influential of the over 22,000 economists registered with RePEc."... ranked by whom enters into this, i guess... one would suppose the ranking is by those 22,000, some of whom, i'm sure (or i hope), understand these things

Yes, and Harvard does not, for the most part, hire idiots. (I can't speak for Havard.)

But then Krugman has a Nobel Prize.

Ah yes, and so does Obama.


What's a guy to do? Creds flying everywhere. It is simply not possible that everyone who has impressive credentials is correct. But credentials or not, right or not, I don't much care for his argument. I think Einstein once said something like "An explanation should be made as simple as possible but not more so".

[phil_20686]

A few disparate points:

Everyone assumes that if you raise taxes you will get paid less, but it is not clear at all that this is the case. In a mobile job market it is more the case that a job requiring certain skills commands a certain salary, and you have to pay that salary regardless of the taxes, so taxes make each worker more expensive to the company, rather than resulting in people getting paid less. You can see this very clearly in things like post doctoral positions where it is common to move country. The salaries appear to vary widely, but once you take the local taxes into consideration they become quite similar. Obviously, not all workers are mobile, but the highly skilled tend to be. I know a lot of lawyers who have gone to offices in the USA (from England) and most offices here seem to have a number of foreigners working at them.


The argument about rich people not spending efficiently is entirely spurious. The point is that rich people dont need to *spend* their money, they can *invest* it instead. Even if a rich person cares nothing about investing, they will keep their money in a bank who will invest it on their behalf. This is known as "capitalisation" - i.e. its generally a good thing if the citizens of your country accumulate wealth for investing, as then when new opportunities arise there are many people who have the potential to take advantage of it. Could go back to a farming analogy again: it takes peasant farmers a long time to save up for their first tractor, but then they make a lot more profit and can buy the second one quicker. Of course, quickest of all is if there happens to be a rich person who will lend them money to buy a tractor. Now the rich guy gets a share of the profits but the farmer is still better off than before, and the economy as a whole does better because the land is farmed more productively for longer.


The argument that taxes inhibit growth is compelling. Essentially all growth comes from some kinda trade. I trade my specialised labour for someone elses etc. I undertake these trades if I think they are "profitable" where I have some way (not purely economic in general) of working out the "profit" in such a trade. All taxes will make some marginal trades go from "profitable" to "unprofitable". Of course, there are ways in which governments can enhance growth by, for example, infrastructure spending. But, it is unclear that in the absence of government spending these things would not happen anyway. All of Britain's railway network was originally built by private investors, and it has been in steady decline since the government nationalised it.


Gregory mankiw has an interesting blog. He is america's second most cited economist after becker who also have an interesting blog. For those of you wondering why milton is not americas most cited economist, people didn't care nearly as much about citations in the good old days of academia, so citation counting strongly favours more recent economists (in the old days economists tended to publish fewer but better papers).


http://gregmankiw.blogspot.com/
http://www.becker-posner-blog.com/

[PassedOut]

phil_20686, on 2010-November-07, 17:08, said:

The argument about rich people not spending efficiently is entirely spurious. The point is that rich people dont need to *spend* their money, they can *invest* it instead.

The velocity is lower compared to spending by folks with lower income. So the argument is not entirely spurious.

phil_20686, on 2010-November-07, 17:08, said:

The argument that taxes inhibit growth is compelling.

My intuition tells me that also. But the argument would be even more compelling if the actual data didn't contradict it.

And it's clear that if taxes get too low, economic growth will be inhibited as well. Government investments in infrastructure, education, safety, and health all promote economic growth, and those investment depend upon taxes.

[helene_t]

Dunno why one would expect taxes to inhibit growth. If the government sucks up money that would otherwise be spent on consumption, and spend them on investment in infrastructure and education, I would expect it to stimulate growth. Of course there are obvious arguments for the opposite, I just don't see why one would necessarily expect the nett effect to be growth inhibition.

[phil_20686]

helene_t, on 2010-November-08, 01:00, said:

Dunno why one would expect taxes to inhibit growth. If the government sucks up money that would otherwise be spent on consumption, and spend them on investment in infrastructure and education, I would expect it to stimulate growth. Of course there are obvious arguments for the opposite, I just don't see why one would necessarily expect the nett effect to be growth inhibition.

Government's typically spend very little of their budget on economically useful investments. E.g., only a few % of britians transport budget is spend on investment, the rest is a government subsidy. Most of the NHS budget is spent on retirees. One does not mean to say that these do not have value, they just don't have "economics" value. Decisions about how much to tax are always based on more than economic merit.

Also, left to their own devices the private sector will normally do a significant amount of investment. However, once government makes it their job to invest in infrastructure private investment will dry up. At least, that is what has happened historically. It may be the case that the vast increase in the price of land, particularly in britian, has made infrastructure investment impractically expensive for private investors.

[PassedOut]

phil_20686, on 2010-November-08, 03:38, said:

Government's typically spend very little of their budget on economically useful investments. E.g., only a few % of britians transport budget is spend on investment, the rest is a government subsidy. Most of the NHS budget is spent on retirees. One does not mean to say that these do not have value, they just don't have "economics" value. Decisions about how much to tax are always based on more than economic merit.

Government subsidies to people who actually spend the money is certainly economically useful. Businesses use that money just as effectively as if it came from doctors or teachers. And in cases where the government performs a necessary function more efficiently than does the private sector, one cannot properly say that the government's doing so impedes growth.

[phil_20686]

PassedOut, on 2010-November-08, 07:59, said:

Government subsidies to people who actually spend the money is certainly economically useful. Businesses use that money just as effectively as if it came from doctors or teachers. And in cases where the government performs a necessary function more efficiently than does the private sector, one cannot properly say that the government's doing so impedes growth.

government subsidies for useful activities are normally close to neutral - they just change who pays.

Things like education are useful obviously, but tend to make up a small proportion of government spending. In england the government budget is about 640bn, 190bn for social security, 100bn for the NHS 40bn for defence, 60bn for education etc.

It is clear that, for example, national defence is not particularly useful for growth, but is nevertheless necessary. All government spending is capital extracted from the economy, and the financial industry tends to make sure that capital never lies idle for long, so all government spending tends to be an alternative to private investment. Thus good government spending tends to be neutral, in that it just changes where the investment goes. Bad government spending is wasteful. Nevertheless there are a lot of things that only governments can do, and it would be facetious to say that one should maek taxation policy purely on the grounds of stimulating growth. I am not in favour of disantling the NHS!

[awm]

PassedOut, on 2010-November-07, 17:41, said:

My intuition tells me that also. But the argument would be even more compelling if the actual data didn't contradict it.

Yes... a lot of famous economists have said that cutting taxes stimulates GDP growth. But the data simply doesn't support it. Sure, there could be other things going on that explain the seemingly positive correlation between a high top income tax rate and high GDP growth... but the correlation is pretty consistent over the last 60 years.

If we look at the way the economy is functioning right now, there are actually a number of corporations making record profits (oil companies come to mind). Many of these companies are building up huge cash reserves -- apparently there's over a trillion dollars of this kind of cash built up. But these companies are not hiring... they're just sitting on their profits. Do we really think that if we gave these companies a big tax cut, such that they'd make even more billions in profits on top of the billions they already make, that they would suddenly start hiring people? I doubt it. Perhaps it would be better for the government to raise corporate tax rates (perhaps also instituting a big deduction for companies with large numbers of domestic employees), forcing these companies to choose between using their profits to hire more people, or giving a big chunk of their profits to the government so that the government can use it to hire more people.

As for investing, it's certainly true that wealthy people often have investments. But there are a few reasons this doesn't necessarily stimulate the economy. One is that they can easily invest in overseas companies or commodities (which presumably stimulates other countries' economies but not ours). Another is that they often do have money sitting in savings accounts and the like, and that banks do have to maintain some percentage in capital, meaning that only part of their money is actually invested. Another is that the some investments help the economy more than others... investing in real businesses over the long term helps these companies to obtain capital, hire, and therefore grow the economy... but the type of trading that hedge funds do (very short term investments taking advantage of market fluctuations) does less to stimulate the economy... and this type of investment is pretty popular these days.

[phil_20686]

"Sitting on profits". While its true that they are, that does not mean that the money is not being used usefully. It means that the oil companies have given their profits to banks. Companies "sitting on profits" is exactly what will help banks to recapitalise in the short term. In the long terms, that money will be invested by the banks. That is what the financial industry does. While it is true that the financial industry has to keep a fraction back to pay out should someone want to withdraw, nearly all money given to banks as savings ends up invested somewhere, often given out in small loans to business. If rich people give their money to banks, then it *is* invested, whether they bother to do so intentionally or not.

Re overseas investment, that is true, but overseas investment is good in the long run, because it creates consumers for your goods etc.

[mgoetze]

phil_20686, on 2010-November-09, 04:30, said:

"Sitting on profits". While its true that they are, that does not mean that the money is not being used usefully. It means that the oil companies have given their profits to banks. Companies "sitting on profits" is exactly what will help banks to recapitalise in the short term.

Uhm, no. Recapitalising banks does not mean giving them more of other peoples' money to play with. It means giving them more money that actually belongs to them so that they are better placed if they play with other peoples' money in the wrong way.

[phil_20686]

mgoetze, on 2010-November-09, 04:38, said:

Uhm, no. Recapitalising banks does not mean giving them more of other peoples' money to play with. It means giving them more money that actually belongs to them so that they are better placed if they play with other peoples' money in the wrong way.

there are not two separate pots of money, there is only money. Banks can wait for loan repayments without lending, that will recapitalise them slowly, or if people deposit money that will also recapitalise them. When you deposit money you agree to allow them to invest it on your behalf, that is why they pay interest.

[PassedOut]

phil_20686, on 2010-November-09, 09:25, said:

there are not two separate pots of money, there is only money. Banks can wait for loan repayments without lending, that will recapitalise them slowly, or if people deposit money that will also recapitalise them.

Remember that money itself is not the economy. Money is used to facilitate the transfer of goods and services. The faster that a given sum of money circulates (its velocity), the greater the impact that sum has on the growth of the economy. A big problem now is the large amount of money that is not available for fast circulation.

[mgoetze]

phil_20686, on 2010-November-09, 09:25, said:

there are not two separate pots of money, there is only money.

LOL. Sorry, you have fundamentally misunderstood something. But since you don't seem to be interested in getting a correct explanation I won't bother.

[kenberg]

I suppose data rules here. But as always, I have opinions.


I have some money in the bank. I don't really think of it as an investment, simply a place to put it. Of course the bank may do something with it but they seem to be quite cautious these days. Here is an amusing (not to the letter writer) example from the Post:
http://www.washingto...nav=hcmoduletmv


I also have been reading, in various sources not hard to find, that the total credit card debt has been shrinking over the past year. It's relevant, I think. I believe the total cc debt comes close to $3,000 per person, man woman and child. In these tough times, people are cutting back and if they get some cash they are, very sensibly imo, paying down their debt. This may mean that even getting money into the hands of the average Joe may not boost spending all that much. This is different from the past. There was a time when I had a car with a good engine and a bad body, I bought a similar model for 35 bucks with a good body and a bad engine, and did a transplant. Later, when my finances improved, I bought a new Dodge Dart. If it needed work (seldom, it was a good car) it went to a mechanic. I got more money, I spent more money. Now, people are in hock up to their eyebrows, and they are scared. They get more money, they pay off some debt. I remain in favor of them getting the money, but it may not have the same impact as it once did.

So what I see is that the banks get money but they are very cautions. Joe Six-Pack gets more money, he pays off his credit card. I get more money, I stuff it in the bank.

Boosting consumer demand will not be so easy.

Incidentally If the Republicans want to insist that the tax cuts expire for everyone or for no one, I say let them expire for everyone. I have played chicken for real, I'm fine with a financial version. I recall one of these High Noon things they played with Clinton. It didn't work out so well for them.

[phil_20686]

kenberg, on 2010-November-09, 18:00, said:

I suppose data rules here. But as always, I have opinions.

I have some money in the bank. I don't really think of it as an investment, simply a place to put it. Of course the bank may do something with it but they seem to be quite cautious these days.

In these tough times, people are cutting back and if they get some cash they are, very sensibly imo, paying down their debt. This may mean that even getting money into the hands of the average Joe may not boost spending all that much.

So what I see is that the banks get money but they are very cautions. Joe Six-Pack gets more money, he pays off his credit card. I get more money, I stuff it in the bank.

Individuals and banks have both been burned by excessive debt. We could see this another way though - its easy to see how debt can artificially inflate gdp, perhaps this recession is just returning consumer spending to a sustainable path, and a retail sector that expanded based on "overspending" by will be forced to shrink during the "underspend". Afterall, if no one had borrowed any money on their credit cards the retail sector would be considerably smaller than it is now - $3000 per person is a significant overspend.

[mike777]

I think this is a misperception.

Most indv and banks were burned by the recession, a severe recession.

At the very least banks did not have "excessive debt".

The concern was that their assets were worthless or close to worthless.

Note even today the complaint is banks dont lend(create assets) more, alot more.

Note that inflation will make these assets(loans) worth even less.


No one really understands what causes a recession.

[phil_20686]

kenberg, on 2010-November-09, 18:00, said:

I don't really think of it as an investment, simply a place to put it.

Many people think this, but nothing could be further from the truth. At its heart, the financial industry is all about putting other peoples money to work. You deposit your savings, and the bank loans it out to a company who buys a new tractor so they can farm more efficiently, and everyone makes money. That, at least, is the idea. The reason the financial industry makes money is that it can allocate capital more efficiently than an individual saver, and it pays you a % of the profits for the use of your capital. At any given time a bank typically has between 4-10% of its balance sheet in "ready money" to pay out to people who want to withdraw and to make use of new investment opportunities. The other 90 odd % is "at work" one way or the other.

[phil_20686]

mike777, on 2010-November-09, 19:21, said:

At the very least banks did not have "excessive debt".

Note even today the complaint is banks dont lend more, alot more.

By excessive debt, I really mean "excessive leverage" in the case of banks - but perhaps that does not even adequately express the problem. Banks allowed their capital cushions to shrink by lending too much, some were as low as 4%. Mostly because they felt that some of the items they were trading in could easily be converted into "ready money". At the moment, no one wants to buy complex financial instruments, and it is not (necessarily) very easy for a bank to turn its (other) investments back into ready cash. E.g. A lot of banking investments are in the forms of loans which are paid in instalments. As the instalments come in the investment reverts in stages back into ready cash. However, the bank cannot covert the full value into cash instantly - if it calls in its loans (which it may not be able to do legally anyway) often the firm cannot pay as they already used it to buy something. Banks seem to be aiming to have about 10% of their balance sheets in ready cash, since they are trying to increase their capital cushions, that necessarily means that they have to lend less (as that would shrink their capital cushions).

Government want the banks to be "safe" (ie have more capital) but also to lend more (which would mean lending out the capital) and there is a clear tension between these goals.

Its unclear how much personal debt is to blame for this recession, clearly a lot of people are paying down their debt, which will clearly make a recession worse, but how much? In generally its good policy to save up in good times in preparation for bad times - and if people in generally had done this then they would be in a much better position to weather the downturn, and it would likely have had a smaller effect on consumer spending.

[mike777]

Speaking of foreclosures, fwiw regarding munis:

If, if the risk of a default spike at the low-quality end of the spectrum is very real there are several ways to short munis.

1) short etf's and closed-end muni funds.

2) muni credit default swaps...yes these are the things hedge funds made a killing on, see the Markit MCDX index.

3) short the stock of bond insurers,, mbia, ambac assured guaranty and berkshire hathaway.

4) short rating agencies stock....moody's, standard and poors, fitch

5) short stock owners and underwriters of munis; citigroup, state street, us bancorp, bofa, barclays,,,insurance companies such as aig or travelers insurance...


Of course all of this means you must be willing to accept some risk.

[kenberg]

As I am sure you would expect, I won't be investing in any of that stuff. I don't understand it and I am more than content with my ignorance.