It is not clear to me that anyone is doing anything about that (except, of course, in the negative sense.)
The Federal Reserve has the knobs and levers to create asset bubbles, but not to stoke consumer demand.
Only Congress can do that with legislation increasing the minimum wage, changing corporate taxes so it behooves companies to pay employees more, or legislation increasing entitlements such as social security. Those in lower and middle classes are the ones who govern the velocity of money through the economy, not the most wealthy.
"Corporate" is perhaps too restrictive, but shifting the relative tax burden from labor to capital, without changing the overall share of the economy represented by taxes or government spending, would probably be pretty powerful here.
There are, to say the least, political difficulties involved.
Be careful what you wish for: http://marginalrevolution.com/marginalrevolution/2015/03/how...
legislation increasing entitlements such as social security
Expected to run structural deficits by a certain point. Theoretically speaking, an endogenously determined fiat money system doesn't really have "government debt" what with it being the sovereign issuer of debt to begin with, but in reality politics and the economy don't exist in frictionless vacuums and there are political costs to pork barreling, logrolling, unsound investments and so forth.
tl;dr if you raise the minimum wage imperceptibly, poverty reduction is affected imperceptibly and prices are affected imperceptibly.
In general if something will have a negative effect on corporate profits (minimum wage hikes have an outsized effect on corporate profits) you will be able to find a legion of economists who will lie to you about what it really does.
For instance, here's a case for the minimum wage presented by an (otherwise very knowledgeable, I'll grant) Post-Keynesian economist: http://socialdemocracy21stcentury.blogspot.com/2013/02/the-e...
It's pretty weak. The first two are very flimsy normative/moral arguments that, even if true, do not at all imply minimum wage is the solution over say, basic income, unionization, community-based mutual credit or a variety of other initiatives.
The third one is a can opener assumption. "Oh, minimum wage might work, but only in the case of Post-Keynesian full employment with buffer stocks of labor." You might as well speak of spherical cows in a vacuum. Followed by an unsourced claim about post-WWII prosperity being strictly due to Keynesian policies, when there's no consensus what factors exactly caused it.
All policy arguments are moral. Economics (to the extent it is a useful, predictive, empirical science) can tell you what outcomes to expect from what actions, but not tell which actions should be preferred, without first assuming some moral values.
(OTOH, some of what passes for economics is itself not a predictive, empirical science but a form of moral advocacy in itself; but in that sense, you can't distinguish "moral" from "economic".)
People who agree about objectives can still have (non-moral) policy arguments. That may be due to a misunderstanding or a lack of knowledge by some of the parties, or simply because society (and hence the economy as part of it) is an extremely complex dynamic system that we only understand in broad strokes. That's when the good kind of economics happens. (Unfortunately, most economics that you see in public is the bad kind perpetuated by "think tanks".)
Insofar as they can be called arguments at all, they rest on moral -- or at least, "subjective value", which some would see "moral" as a subset of, with other subsets including "aesthetic" and probably some others; these distinctions are not well-defined and, ultimately, I don't think actually meaningful -- bases.
> To the extent morality can be reduced to cause-effect propositions, it can also be subject to analysis
To the extent something can be reduced to cause-effect proposition, it is a fact question, not a value question. Morality consists of the space of value questions. It may be necessary to answer a fact question to address a value question in a particular value framework, but ultimately a question that can be reduced to cause-effect propositions is not a moral question, but a fact question (which may also have utility in addressing a moral question.)
It's the economists who poorly design studies with the intent of demonstrating that it either causes prices to rise uncontrollably (which it doesn't), causes unemployment to rise (which it also doesn't) and who pointedly never, ever, ever look at the effect it has on profits (it is savage towards profits, which is why the marketing budgets for stuff like this gets approved: http://kron4.com/2014/07/18/new-sf-billboard-says-workers-wi...).
They all know where the money is in their profession: it's at ideological corporate think tanks. If you can tread the fine line between not lying and saying things which they really like you've got a good career ahead of you.
As it happens, 'moral' arguments that say that you shouldn't raise the minimum wage work better when you can claim that it will hurt the people it is designed to help. Those arguments fall flat on their face when it becomes apparent that raising the minimum wage just transfers profits into workers' pockets directly.
You claim raising the minimum wage would never raise prices nor cause unemployment to rise. Ok, let's set it to $1000 a hr. Do you really think that would have no effect on either of those? Maybe there's some range on increase where the effects are offset by other effects but it's not lying to believe those effects will become real at some point.
Realistically speaking, though, most arguments are over minimum wage hikes that only affect profits and won't even have a minimal effect on prices. $10 -> $12 isn't even going to cause prices to rise, let alone have an effect on employment. It'll go straight from profits to paychecks.
I can think of only one instance where raising the minimum wage actually affected employment, actually, and that was because it was set at first world levels in a third world environment.
I think you're wrong in thinking that businesses will just give up, and take lower profits. No. They're going to cut hours, fire anyone they can, etc. to maintain their existing profit levels.
But no, they don't just sit there and take it. They pile money into think tanks and advertising campaigns in order to try to sway public opinion (see above).
One of my favorite tactics is when they pretend that robots that do minimum wage jobs all cost $minimum wage + $1 and raising wages is simply going to make them all go out and buy those magical robots.
Raising the minimum wage WILL increase unemployment. That's Economics 101. Companies are going to find ways to fire people, or give them fewer hours. Raising the minimum wage to something like $15 would be ludicrous.
Reality disagrees :) Germany introduced minimum wage recently and the opposite of your prediction happened.
The argument didn't match reality because it completely ignores the growth of purchasing power that is a consequence of higer wages.
Actually this is pretty much a model for what would happen to McDonalds in the US:
http://uk.businessinsider.com/mcdonalds-in-australia-vs-amer...
And if Econ 101 states it's true, then Econ 101 is wrong too.
Here's a more fact-based explanation, with links to studies and comments by economists:
I don't wonder about the sincerity of most economists
I do wonder if there are selection pressures to becoming an economist that prevent a diversity of viewpoints on certain issues
sometimes those neatly line up with the bourgeoisie capitalists (who just coincidentally disproportionately have their names on university building and have levers on which university departments get generous funding)
I do. And I spend time and money on the political process.
> Why shouldn't some people be able to afford luxuries like names on buildings?
Let's talk about everyone being fed, clothed, and sheltered before you bring your straw man out.
You also cannot ignore that when the social safety net exceeds the value of working wages, particularly for women, there's a strong incentive to not work. Given the unavailability or high cost of health insurance, Medicaid makes that a no brainier for any woman with one or more children.
Which is why basic income, single-payer health insurance, and free college are such compelling ideas.
The alternatives to the minimum wage that you listed are pretty much variations on the mimimum wage in that they seek to achieve the same goals and also have attendant costs. They are, essentially, no more or less moral vs. economic in nature than is the minimum wage, though their invocation may be less charged at present.
The latter point is evidenced by your juxtaposition of the "moral" minimum wage with its presumably amoral (and thus economics-based) alternatives. But, in truth, if any of these have valid economic arguments, then so does the minimum wage.
> allocates benefits as higher earnings nearly evenly across the income distribution
OK by me. Note that it doesn't allocate benefit to idle owners f investment income.
> Even after taxes, 27.6 percent of increased earnings go to families in the top 40 percent of the income distribution.
"top 40%" is rather silly bucket. That includes basically the median family, all the way to billionaires.
> Over 25 percent of the increased earnings are collected back as income and payroll taxes
(aka effectively a tax on businesses that pay the minimum wage)
It takes massive concern trolling to argue that this effect is worst than not raising the minimum wage
Pardon me if I overlooked the anti-minimum-wage camp yelling "lower taxes on the working poor!"
No, top 40% does not include "basically the median", by any remotely reasonable standard.
Be careful what you wish for: http://marginalrevolution.com/marginalrevolution/2015/03/how... "
Let's look at what is being said:
"Unlike most public income support programs, increased earnings from the minimum wage are taxable. Over 25 percent of the increased earnings are collected back as income and payroll taxes"
Is that a problem? The minimum wage should be the minimum needed to live on, that includes taking taxes into consideration.
" Adopting this empirical scenario, the analysis demonstrates that an increase in the national minimum wage produces a value-added tax effect on consumer prices that is more regressive than a typical state sales tax and allocates benefits as higher earnings nearly evenly across the income distribution."
So the argument is that raising the minimum wage increases prices, thereby negating the potential benefits. Here's the thing, competition drives prices down, but if low wage earners have limited options to shop around (because they look towards the big chains to get low prices), then competition can't fulfil this function. This quote would seem to support this view:
"Even after taxes, 27.6 percent of increased earnings go to families in the top 40 percent of the income distribution."
Tell that to Google and Facebook bidding on programmers.. Or people trying to buy real estate in London.
I'm not aware of the real estate situation in London to make a comment.
Japan's been running structural deficits for decades, and still has a very high quality of life.
> but in reality politics and the economy don't exist in frictionless vacuums and there are political costs to pork barreling, logrolling, unsound investments and so forth.
As basic minimum income solves this without the messy politics surrounding it.
Given that the AI community's prediction making skills have been just slightly better than those of Nostradamus, that's a very tough gambit to rely on.
Japan's been running structural deficits for decades, and still has a very high quality of life.
Except for the aftermath of the whole Lost Decade thing and aging population taking tolls on aggregate productivity. I'm not qualified enough to say whether causes were monetary, fiscal, sociological or some combination thereof, but listing Japan as a positive example here doesn't strike me as wise.
As basic minimum income solves this without the messy politics surrounding it.
UBI would theoretically handle a minimum transfer of purchasing power for every individual. We're talking about public programs and initiatives unrelated to that.
Though, if you're idealistic enough to think the UBI is a prospect soon realizable, I wonder why you're advocating minimum wage increases over say, stronger collective bargaining? Denmark for instance has never had a minimum wage law.
> Given that the AI community's prediction making skills have been just slightly better than those of Nostradamus, that's a very tough gambit to rely on.
That's a weird comment; "technology" is a lot broader than "AI".
I can't imagine what else could the GP have been referring to other than mass automatized labor for most sectors, hence either AGI or lots of narrow AI.
* Renewables generating the majority of power consumed world wide
* Self driving electric vehicles
* Universal basic income
Nothing outlandish like transhumanism.
Even assuming all three come in place soon, I don't understand how they'll fix public choice. If anything, at least autonomous electric vehicles will be a boon on private enterprise, which I don't think is what you had in mind.
However, not sure if Japan will survive "Abenomics" (just as sensible as Reaganomics, but with a dash added corruption ;-) ).
Why not both? Seriously I am very much in favour of e.g. working time restrictions, but "union" is a dirty word in the US (indeed you carefully avoided saying it), so I don't think advocating stronger collective bargaining rights would help me achieve my policy goals.
Singapore doesn't have a minimum, and wages there are not zero. (Neither did Germany until recently.)
Also, having lived in Singapore for years, it's a wonderful city and I love it, but the wage story isn't necessarily one to mimic. It might look grand as a foreigner, but your cleaning lady is probably sharing a 3 bedroom apartment with 16+ other women and doesn't see her family more than a few times a year.
It's about 3x the size of San Francisco and clearly has aspirations of becoming a similar center for startups but with the prevailing wages for the people who do all the actual work so low the quality of what is produced is usually shitty.
It's not a place you'd want to emulate.
>In technology's "invisible" world, inventors continually increase the quantity and quality of performed work per each volume or pound of material, erg of energy, and unit of worker and "overhead" time invested in each given increment of attained functional performance. This complex process we call progressive ephemeralization. In 1970, the sum total of increases in overall technological know-how and their comprehensive integration took humanity across the epochal but invisible threshold into a state of technically realizable and economically feasible universal success for all humanity.
-Buckminster Fuller
To buy something, first you have to produce something worthy of exchange. Everyone has to start from this point.
I have never stated that 'if you build it they will come', because that is patently false. This is a common straw man erected by the true 'aggregate demand is all' believer (I don't know if this is your position or not). If you build it, they will come is as absurd as 'if we just gave everyone a bit more money, the economy would grow'.
Look at the labor market. The US unemployment rate went from ~4.5% in 2007 to 10% in 2010: a big labor glut. The "malinvestment" theory predicts unfulfilled demand comparable in size to the unemployment. Large sectors of the economy should have had millions of unfilled job listings, spiraling wages, etc. But this did not happen.
The right explanation is simply that total labor supply exceeded demand.
If a person produces hot pink sweaters and finds nobody wants them, that doesn't mean there is a shortage of blue sweaters, or even sweaters in general. Additionally, it might mean that people might want hot pink sweaters, but not at the price being asked.
Taking this back to labor markets, surplus labor (unemployment) is indeed oversupply, that much we are agreed. But you must break this down further - it is an oversupply of specific types of labor at specific rates. You could clear that labor oversupply by switching the supply by changing the type of labor being offered, and also by changing the price. For example I'd happily pay someone to do work for me at lower rates than currently offered, but that market doesn't usually clear. Changing the price doesn't happen often for regulatory reasons or stickiness, but changing the nature of labor supply often does. It's just that the timescales involved involve a lot of problems.
The solution to that is to identify reason why mal investment occurs and to avoid anything that contributes to it. I don't think it can be totally avoided due to human nature - hubris, mistakes and misfortune - but you can certainly avoid some of the obvious ones, like rigging credit markets and trying to centrally plan economies.
For example, we Americans demand less oil today than we did 10 years ago. This contributes to the oil glut, which has turned many drill sites into malinvestments and caused layoffs in the petroleum industry. How can you say that that consumer demand is irrelevant here? Isn't it obvious that if there was a nationwide ad campaign to buy gas guzzlers and take them on road trips, it would increase oil prices and improve the state of the petroleum industry?
And if it can happen in the petroleum sector, why not at the scale of the entire economy?
Going back to a general glut - and I hate the term - of course it is possible to have an economy-wide contraction where production overwhelms demand temporarily. This is possible from external shocks (eg war, disaster) or persistent interference (eg Venezuela). Such a scenario is generally best resolved by solving the cause of the shock and doing everything to let the market clear. Most of the time this will be temporary and conditions will resolve, if not at the speed at which makes everything happy. I think the key thing here is that while there will be demand for other production at some point, it's necessarily a case of timing and there is likely to be a lag before new preferences are developed. The key here for future prosperity is not to borrow and spend on what is already not wanted, or to borrow and spend on pointless spending just for the sake of making money move.
The alternative is if an economy dropped to a new, lower level of production by choice, such as if everyone decided to lower their production and consumption and consciously not increase it again. You'd then get reversing economic growth, but then that would be the intention as results from people choosing less.
Maybe waiting would work, but that's no reason not to intervene if we think that intervention can bring us faster growth (even if this will only be temporarily faster growth until we "catch up" to currently unused production capacity). If consumption stimulus will help recovery (and I think it will, on Keynesian grounds) we should do it.
But so many people from the Marxist-leaning schools just don't and refuse to, because at its core this belief destroys pretty much every argument they make about moving from a market-based system to a collective one.
Eventually, beliefs will have to change - anything that can't go on, won't - but I don't expect it in my lifetime. Human nature is unchanging and economics is simply the study of human choice when it comes to limited resources. At some point understanding must come back to this simple point - you've got to produce something to trade for something - but magical thinking and hoping has a way of persisting for a long, long time.
Edit: you'll see that most of my comments in this topic are being systematically down voted. This is because it is contrary thinking to what gets fed in higher education in the past few decades. I know, because I consumed the same content, and had to continue my own further education to realise why the concepts never sat right with what I observed going on. And that results in a lot of a-ha moments when you start reading pre-Marxian and pre-Keynesian thought. I hold no ill-will or malice to the down voters, perhaps one day they'll come to realise the dry, barren road current macro thinking finds itself.
Actually the Marxist school of thought is one of economic self-determination.
That ideal went badly wrong with the concept of the dictatorship of the proletariat.
Even so. Economic freedom - specifically the moral right of the working classes to benefit from the economic value of their labour - is the bedrock concept of both Marxism and Socialism.
And the bedrock moral value of American corporate capitalism is the elimination of that right in favour of distribution of value exclusively to a social conceit called "capital".
Now - in fact both are oversimplified and wrong-headed, and both lead to disaster in different ways.
A useful synthesis may be possible, perhaps. But it's going to take a much more insightful analysis than anything that appeared in previous centuries.
I've never, ever seen a credible argument that saya capitalism is based on the elimination of a persons right to their labour value. That sounds terribly like some undergraduate student publication or occupy chant.
Capitalism is about the freedom to control and own capital - it's not a 'social conceit', capital refers to assets, whether physical in the for,s of factories and farms, or others, such as inventions and savings. The ability to freely allocate capital and follow ones free economic agency is the greatest engine for eliminating poverty the world has ever known, despite its obvious and some,times major flaws.
After much reading from Smith to Marx to Keynes, it's my personal beliefs that the classical economists had it right and much of the 20th century thinking was wrong. To my mind, the experiences of the 20th century pretty much lay out that case, particularly with the twin a/b test of East/west Germany.
If you want a complete history of economic thought according to he Austrian school, then 'An Austrian Perspective on the History of Economic Thought' gives a thorough background from Ancient times to now on the evolution of economic thought and how people came up with the answers to puzzles like why is water essentially valueless as compared to gold when one is life and death and the other essentially useless. Going back deep into the original philosophers and coming forward helps to understand why thinking is the way it is.
The other book I recommend for people is 'The road to serfdom' by F.A. Hayek. This gives a thorough and as-yet unanswered critique as to why socialism in all its forms fails, and why it is an inherently unstable system that always leads to dictatorships and loss of wealth (hint: feature not bug) But these speak to my own beliefs which are decidedly no longer mainstream. Like many I studied this in undergraduate and masters courses but the explanations never really settled with me so I kept on reading. If you want to understand what the mainstream economic thinking is, just pick up a Krugmsn article and keep reading because most mainstream publications are wedded to the idea that governments can plan and manipulate economies into prosperity.
Do you agree that the goal of a business is profit?
Ergo, is the prediction of profits what create production. This is the core of the capitalist system, isn't it?
If a business don't see profit in its future, the rational thing to do is decrease production and, more important, stop new investments. That means lay offs, no new hires, etc..
Less people with jobs, less people with money, less demand, less future estimation of profits. Feedback loop.
Then come the creative destruction, that is supposedly a good thing. People is more desperate, accept worse conditions, business not 'efficient' enough close, this create less competence in the market and people ready to work for less. The survivors can accumulate more claims in the economy, what means concentration of capital in less hands. Rise and repeat.
I'll reiterate: 'To buy something, first you have to produce something worthy of exchange'.
To understand this, don't immediately jump to the business level, think of it at the individual level. If I want to buy something, first I have to produce something worthwhile, so I can exchange that thing for the other. It's unlikely that the exchange is going to be direct (barter) and it will take place using the medium of currency.
I think your understanding of demand is slightly askew from the economic definition of demand.
Entrepreneurism is precisely what you have described - the creation of new products where future consumption is uncertain. It is vitally important as an agent of change in any economy - and incidentally is the first victim to central planning.
But that is incidental to the issue of requiring production before consumption. If I want something, first I have to make/do something which has value for someone else, then they can trade the thing that they made/did and that I value. We are both better off, wealth has grown. The issue here is that people think that just giving currency to one of us so we buy the thing off the other is the key to growth. When it is patently obvious that 'stimulating demand' by giving someone money can't possibly grow wealth (and the economy in the same way).
But this is not the claim. The claim is somebody trying to buy something with money create demand. We all agree that money is different of real wealth.
Even in an alleged two persons barter economy I could buy from you with a promise of something in the future. If the promise is good enough you could even start producing more.
And this is not even the correct framework, because what we are talking are systemic problems in modern economies that don't map well to hypothetical two persons barter economies.
I don't think that's a valid statement. There is only so much 'stuff' that you can use. Beyond a certain level more money does not translate into a better quality of life or more 'stuff' for most people, there are a few outliers but lots of very wealthy people are actually quite modest. They're so modest you won't read about them in the newspapers.
Although demand in the economic sense sort-of-sounds like want - certainly I'd like a new Lamborghini - I have zero effect on the demand for lamborghinis.
The level of spending (poverty vs wealth) is mostly irrelevant because that's a value line someone draws on a graph somewhere. Poverty in the Midwest is not the same as poverty in Sub-Saharan Africa. Absolute Poverty (in which a person has insufficient resources to survive) has a wide variety of causes but essentially reduces down to the inability of an individual or family to produce enough to exchange for what they need.
Savings are just postponed consumption in the same way as debt is the promise to hand over your future production.
Savings are just postponed consumption, but if the consumptions of multiple people never align (you could save until you're dead) the aggregate demand will never rise to a high level.
Keynes had to kill the idea that production is the foundation of growth in an economy. He did this by implanting the idea that production is irrelevant, all you needed as spending (the fantasy of aggregate demand). This was further pushed by the universal declaration that savings were a problem because it was postponed - rather than transferred. Once this foundation was laid, the idea that throwing more money at people would increase wealth was created, and enthusiastically adopted by politicians who could use it as an excuse to throw money around in good times and bad.
Savings are the foundation of future production, and future production is the foundation of future wealth. This is so self evident it takes a high level of internal contradictions to believe it not to be so.
What you are saying sounds so easy, but if it were, there wouldn't be recessions or liquidity traps. You're right that production is key, but if the monetary system becomes friction in between producers and consumers, then problems can arise even if production is okay. I don't really see a contradiction here. Savings are the foundation of future wealth, but if nobody spends any money, businesses crumble, and capacity is lost. When people decide to spend again, it takes time for the economy to recover.
The issue is you'd have to - and get everyone else to - understand that periods of high interest rates and periods of low wages would periodically happen. But people expect wages to never fall and are conditioned to fixed interest rates. As lowering wages is unacceptable the solution is to cut positions, which arguably makes things worse as no job is worse than a lower payment on an existing job. So we are doomed to business cycles for the foreseeable future.
The key thing I believe most people miss is that they believe that 'economic stimulus' in terms of under priced interest rates, government borrowing and foolish spending and other tricks comes at no cost. But there is a very real cost, and that is misallocated production - building value-destroying 'bridges to nowhere' and burdening of future income with excess taxation to repay debt.
There are those who say that a sclerotic economy - such as most countries have had for going on 7 years now - is better than a short, sharp contraction. You can compare the experiences of Japan - flat growth for two decades - or countries like Estonia and Latvia which had massive contractions but bounced back to strong growth relatively quickly. How much that impacts the safety and stability of society may be related to social cohesion and personal savings.
Probably the best answer is that governments keep a rainy-day-fund, and when credit contracts due to external shocks, the government gives a temporary tax receipts holiday and spends the savings. Such a strategy would allow people to have confidence going into an economic contraction but wouldn't indebt the government to the future. But it is fantasy-land to expect any politician to design such a scheme and resist the temptation to raid it for votes.
Precisely - monetary policy in the English-speaking world has, since the 80s, been focused on avoiding inflationary pressures via avoiding "too much" growth. Anything that would lead to upward income pressure outside the executive suite is "too much".
How do you get 535 people (congress) to spend $3 trillion smarter? It's an impossible task. A fools errand. Even if we elected the 500 smartest people to congress, the results wouldn't be much better.
We need less of the economy flowing thru the federal government, not more.
The truly sad part is they could balance the budget and operate with a surplus by doing two simple things, getting rid of baseline budgeting and keeping spending increases under inflation. Some projections put doing those two items as righting the budget in less than 10 years
Look up the term dead weight losses to get an idea of how bad government spending is for the economy versus private spending.
Look up the term Fiscal Multiplier to get an idea how good government spending is for the economy vs private spending.
$9+ trillion in new public debt added in eight years, to go with ~$11 trillion in additional government spending, boosting federal spending by nearly 1/2, to achieve the slowest average growth in non-recessionary times in US history, and the slowest employment recovery in US history.
More typically you get examples like the governments of Japan and China, which over-spent by the trillions of dollars and misallocated resources on purpose to fake economic prosperity that doesn't really exist so their citizens don't get upset. To say nothing of the favor and bribe based system large governments always operate by - so eloquently demonstrated by the entirely worthless American Recovery and Reinvest Act - in which they choose to allocate resources to their favorite causes (or to build things that aren't even needed) instead of to the most productive outcomes.
China is providing an amazing example of how incompetent command spending always is in an economy. Inevitably when the tide goes out, the fraud begins to reek. In the case of China, they've been busy arresting people to make it look like they're doing something about the vast corruption they've caused through distorting the economy to a truly massive degree. They caused the problems, and then arrest people for their own incompetence. The big difference with the US, is the US doesn't arrest its executives based on the mistakes the Fed made in intentionally creating asset bubbles that inevitably collapsed.
While I agree with the general outlines of your point, this really doesn't make the case. It's impossible to know what would have happened in the absence of whatever policy you want to discuss. You can say "We spent X and as a result our recession was the longest ever." But you could also say "We spent X, and despite that our recession was the longest ever." It's impossible to prove one way or another.
China is a once heavily communist country that has been transitioning its economy for awhile now, and it has been quite successful at it. The idea that it is a fake prosperity ignores the changes in quality of life that have happened.
The problems it faces now are not insurmountable. It is easy to list off everything China should do and point out the corruption, but it doesn't really prove anything about fiscal stimulus in the USA.
Dismissing the government stimulus/intervention without considering what would have alternatively happened, a long and deep depression, is disingenuous. That would have been a horrific result, and we would all be worse off.
Individuals. Regular people. When billionaires spend money, who do you think earns it? And who taxes those earnings?
They're not in charge of deciding how each individual dollar is spent, and they shouldn't be.
The deficit is driven by social security, medicare, and medicaid. If you want to balance the budget, you have to reform those.
Two fiscal years in the past decade (2010 and 2011) had deficit exceeding discretionary spending. That's not "much of the past decade". (The highest deficit was in 2009, but discretionary spending was actually higher.)
> The deficit is driven by social security, medicare, and medicaid. If you want to balance the budget, you have to reform those.
The deficit is driven by a shortfall of revenue vs. spending. Even if your portrayal of the spending side was accurate, ignoring the revenue side is not. If you want to balance the budget [0], you probably shouldn't ignore one side of the balance.
[0] The question of whether you should want to is one which is rarely addressed directly, merely assumed.
Or increase taxes? Social security taxation is limited to the first ~$120K of someone's income. Why?
The theory, I believe, is that this is tied to the maximum amount of income that is counted in the benefits formula for SS. OTOH, there's no reason you couldn't count more income toward benefits (there's already at least one bend point where the amount of benefits for each additional dollar of lifetime qualifying income/contributions is reduced, so if you are concerned with the distribution of benefits if more income is counted, you could also add additional bend points.)
If you wanted to go further, you could include personal capital income (perhaps with some limit, or perhaps open ended, with additional bend points, as necessary, as discussed above for increasing/removing the limit on labor income) as SS taxable (and in SS benefit calculations). Given that at least some capital returns are a result of active personal management that can become less practical with age or disability for the same reason that labor can, it makes as much sense to preserve a safety-net retirement for those retiring from such active management as for those retiring from wage labor.
120k may seem like a lot, but it isn't in several parts of the US now (e.g SF Bay Area, New York).
Taxing capital income like other income is another possible solution.
The reason stocks are sold is due to cost of capital. A company can make money in a few ways. First is they make a product or service and receive money from customers. Second, they can IPO or some other form of shareholder investments. Third they could finance their needs either with a direct loan or through bond issuance.
Now, most bonds are considered junk if they are from a small company, especially one where people are working out of their garage. This means the debt has a rather high rate (because people think you're going to default). So now you've got to find a buyer (requires middlemen and their costs) that's will to bet on you. Good luck (no seriously I'd prefer this over opening my company to an IPO).
Bank financing is hard to get for pretty much the same reason that bonds are junk. Unless you can show positive cash flow for a few years (you know with your just formed startup and a dream), you probably not going to get a loan. It is due to this that often people, including Elon Musk, self-debt finance via credit cards. Again, ridiculously expensive lending terms.
Let's say you are making money. That's great, you're in the top 40% of startups. You are now constrained by the amount of money you make. If you make 100k a year, but need 1mil to bring a new product to market, we'll see you in 10 years (probably more like 13 with taxes removed over those years).
This brings us to stocks. Find people that are a) suckers, b) chumps or, and good luck o' bearer of dreams, c) actual believers in your product/service. They buy at the IPO price. Your company gets a percentage because the financial house that offered your stock takes a chunk. VCs might cash out after their sale moratorium ends. But after all of this you have a pile of money. That 1mil product is probably doable now. So is an office complex with open floors, and a coffee machine and free lunches and a dog kennel for when your employees just need to feel something that proves they're alive.
You also have an asset to back bonds. So you can, after a small period of time, issue bonds.
At no point did the shareholders add a penny in value to your product directly. They are just there hoping to the FSM that they can leave your stock at some point with a gain. They DO GET TO BITCH. They can have you legally removed from your own company because you have a long view that says in 10 years doing X, Y, Z will increase this companies value 100 fold, but it won't help (probably will hurt) the next 3 quarters.
As a stock holder I can say this about other stock holders. Fuck'em. They get 10-50% return for literally parking their money. As they have more capital related income, they should be taxed as income (outside of reasonably tax-protected vehicles like retirement plans).
Word. As a TSLA stockholder with >10K shares, I couldn't care less if it went to 0. It was a gamble, and only because I believed in what Elon was trying to do.
And national tax policy shouldn't be dictated by ~2 major urban metros.
I agree that tax policy needs to encompass more than just the salary of the working class, but let's not joke ourselves. Medicare already taxes your entire wage base, there's no reason Social Security shouldn't.
We keep kicking the can down the road, and its time to own up to the liabilities we've created.
I'm afraid it's quite impossible to 'own up' to those liabilities. Look at the debt clock: http://www.usdebtclock.org/
The GAAP liabilities of USG amount to $100 trillion, yet the net assets of the entire US are only $116 trillion. Nearly all of the assets in the entire country would need to be sold to pay for the liability to be incurred.
I'm afraid the only solution is to reduce benefits, primarily reducing social security payments (particularly when most of the boomers are drawing on them) and cutting medical spending - probably by instituting controls on what the government will pay for in terms of end-of-life care.
Disagree. Removing the payroll cap for social security taxation causes Social Security to become solvent permanently [1].
> and cutting medical spending - probably by instituting controls on what the government will pay for in terms of end-of-life care.
Sort of agree. The US needs to go single payer, and institute price controls on health services.
[1] http://www.pbs.org/newshour/making-sense/what-impact-would-e...
Because social security is billed as a retirement scheme, not a wealth transfer scheme. The idea being that you get back out approximately what you get in.
Since benefits are capped, payments necessarily are. If you want to change social security into an explicit wealth transfer scheme, expect heavy resistance.
You eat an elephant one bite at a time.
Money redistributed isn't hurting anything, and a future govt can inflate away that debt
Markets respectfully disagree, see the uptick across all indices since the announcement.
As you point out, there is only so much Fed can do and they are taking a measured, responsible stance, well within expectations. The fact that Fed's actions are fully aligned with expectations is kind of the point - the last thing they want to do is spook the markets, so messaging and signaling is key.
Simply put by distributing cash to the people directly. Why do only rich people on Wall St. get subsidies and bailouts where the Fed purchase their worthless papers with hefty sum of money and push on their balance sheet on the taxpayer's dime?
Not only this but they are also engaged with them in destroying the labor market by bankrolling Wall St greed and their endless chase of efficiency at the expense of people's jobs as they get more aggressive with M&A activity evading taxes and expanding robotics & automation to eliminate labor costs.
This can't be going this way forever and something has to be done to stop this madness.
Wall St: "Invest in pitchforks!"
Isn't it highly unlikely that tax dollars will be spent or invested more wisely than the original owners of those dollars would have spent or invested them, since no-one would have known the owners' preferences as well as the owners themselves?
Keynesian pump-priming ends up thinking it makes economic sense to tax people for money to fill up jars, tax people to pay for workers to fill jars with cash, tax people to pay for workers to bury the jars, and tax people to pay for workers to dig the jars up. Although I think there is a very valuable insight about velocities and derivatives rather than simply values-at-times, I think that government spending in general is essentially a drag on the economy: a necessary and inevitable malinvestment, but one to be avoided where possible.
Government spending on research results in new drugs and medications which improve peoples qualities of life.
Government investment in clean energy promises to reduce the tens of thousands of people adversely affected by pollution in our nation annually and also provide us with a hugely viable export technology.
Government spending on bureaus like the FDA, EPA, and BBB give consumers and citizens access to outlets for complaints against dirty businesses and give us a decent amount of protection against those who would harm us to gain more of those dollars you think they'd rather have in their own pocket.
Meanwhile, the original owner might buy a boat while thousands of people have shoddy products and no recourse. Or they might buy a nice car while people deal with the pollution from their industry.
In the end, I believe it to be about balance but lets not pretend that a lot of the research that goes into the vast majority of the technologically advanced products doesn't come from tax dollars and lets start ensuring that we as citizens benefit just as much as the owner of these big businesses which can (and should) capitalize on these investments made by society for the good of society.
Then we can all go back to our enjoyable lives of digging up and reburying jars of money.
Some evidence to the contrary: http://www.brookings.edu/~/media/research/files/papers/2015/...
There's always costs of utility forgone to putting upper bounds on heterogeneous consumer preferences, and as it turns out, they can be rather severe.
Well, that's clearly not the case for the BBB (which is a private nonprofit), unless you are counting granting tax exempt status to an organization as a form of "government spending". I tend to agree with regard to the FDA and EPA, most of the time, but its not exactly a non-controversial claim and regulatory capture is always a concern.
For example, funding a bunch of national infrastructure projects would have horrible returns, being a 100% loss to the person who spent the money. But that money circulates in the economy, creating demand, and we get the infrastructure afterwards as well.
That's speculation, of course, but we can look back to the New Deal to see that it's worked at least once before, and look at current-day corporate balance sheets and their underwhelming investment in demand-creating ventures to see that what we're doing now is not working. If the goal was to generate novel tax-avoidance schemes like the double-irish, though, we'd be a rousing success, so there's that.
Also, beware of the broken window fallacy. Unproductive make-work is of no net benefit to society, and if foregone productive work is the opportunity cost, it's a net loss. Obviously, infrastructure investment is ideally productive, but the government has a pretty terrible track record for effectively spending money.
Maybe nobody who is all of honest, aware of the relevant documented facts, and sufficiently intelligent does. Maybe.
But there are certainly people who are smart, people who are honest, and even people who are smart and honest that believe that the New Deal exacerbated the Depression in the way described.
(Note that I very much do not endorse the idea that these beliefs are correct.)
If only more legislation was evidence-based..
Depends on how you define "better". Who is to say that "better for society" trumps "better for the individual". There's no particular objective reason to take that position over the one favoring individual choice.
https://en.wikipedia.org/wiki/Tragedy_of_the_commons*
If everybody owns something, then nobody owns it. We should probably rethink our notion of what "the commons" means, vis-a-vis property rights.
Good point. Of course, that rethink might go in either way, moving more things from public to private or from private to public. It's a good idea to periodically review what we consider public property and try to make it more consistent with the idea of privatizing externalities.
Society of course, thus democracy.
> There's no particular objective reason to take that position over the one favoring individual choice.
Yes there is, the will of the majority.
It depends. If the original owners were a handful of wealthy oligarchs, that's likely to be worse (ie. more centralized) than as spent by a large, distributed bureaucracy. If the original owners were a large population of mostly middle-income and poor, that's likely to be better (ie. more decentralized) than government spending/investment.
> government spending in general is essentially a drag
If government is a centralizing force, then yes. If government is a decentralizing force -- improving the mechanism of the free market -- then it's increasing efficiency.
Politicians spend money on vain projects to get themselves popular and re-elected- how is that not worse than a wealthy oligarch spending money on a gold plated fountain? At least the gold plated fountain would not be built on promises that the future (unborn) taxpayers will make up the tab.
The point here is that people tend to see the government as a relatively benign spender who sometimes gives money to others, while they automatically see a rich person spending money as terribly misdirected. When you impugn a government with perfect morals and individuals with terrible morals the thinking that results simply has to be wrong.
I couldn't find data on average maturity, but if it's slanted toward shor-term debt, then that average could go to more like ~3.5%, which would be a ~40% increase in interest spending, and (assuming no increase in revenues) a 3-4% cut from the federal budget, when pretty much anything is hard to cut.
Debt at these low interest rates makes spending very vulnerable to even small (point-wise) increases.
[1] http://www.cbpp.org/research/policy-basics-where-do-our-fede....
[2] http://www.pewresearch.org/files/2013/10/debt_interest1.png http://www.pewresearch.org/files/2013/10/debt_interest1.png
The people who build iPhones (Apple employees) produce something valuable (iPhones). Everyone else has to produce something to trade for an iPhone - a bushel of wheat, a written work, a clean window, a haircut, a night of entertainment.
The act of production and trade is what creates wealth and economic growth.
People get lost and separated from this basic understanding because if you create and give everyone money, then everyone can go and trade the money with Apple employees for an iPhone. But this is not long term sustainable, and you actually cheated the Apple employees because the money they are getting is worth slightly less than when they set out to build phones. And it's clear that the extra money has not made the world as rich as it would have been from people actually producing something else to trade. This is patently true even though the mythical gdp number went up, giving the illusion of an increase in wealth.
What are you describing is called Say's Law. There's various ways it can be false, and the US economy experienced lots of them.
An example of how production does not create demand: people can save money for the future. A person who wants to save more will produce more (work harder) and reduce their spending. If everyone does this simultaneously, we get a glut: supply exceeds demand, and real production will fall.
Note the simple remedy: give everyone money, everyone can increase their savings, and resume their old level of demand. Here money did increase real output. And (even in your example) everyone got money, so the Apple employees were not cheated. Lost real income from iPhone sales is compensated by the additional money they received.
Giving everyone money does not work. You can only increase the size of the economy and wealth of the people within by producing more. That much is self evident, yet people have been bamboozled by muddied thinking that aggregate demand is all. I don't try and convince the hardened Keynesian thinker with Krugman in their favourites, but merely to explain to people who instinctively know that current macro thinking is broken, but haven't worked out why.
If you tug on that rope, you find that supply is connected to demand, and demand is connected to things like the money supply. So choosing the correct money supply can increase real output.
I think you're arguing against a strawman, something like "if you give everyone money then we'll all be richer because we have more money." But nobody's saying that.
Elderly consume more than they produce. The young produce more than they consume to save for retirement.
A lowering of interest temporarily induces additional borrowings which will be invested in capital in the short run. Inefficient companies that were going to go bankrupt and release their physical capital for more efficient use, will be kept alive, staving off job losses.
In the long run, low interest reduce elderly's income on their savings. Reducing elder's income reduces demand for the goods the young produce. Since the young cannot produce at a loss, they produce less and have less income to save with. The causes reduced savings, which in turn means reduced investment, and thus even less spending, less income, which means deflation. This deflation is further enhanced from the increased supply caused by the increased investment in capital when interest was first lowered. And if you keep lending to companies at near zero interest rate with money from nowhere, increasing inefficiency in capital means lower yields in stock markets general, also lowering income in the long run, and lower job growth.
The Fisher equation[1]: Nominal interest rate = Real interest rate + Inflation.
The initial thrust of lowering interest will boost the economy temporarily. Keep down nominal interest rate long enough, and the economists will get the deflation they so dread.
Now you know why the EU and the U.S. has trouble with lack of inflation "even though" interest rate is so low for the past so many years.
You could make the argument that buying worthwhile things - like dams or power stations - makes this true. But for two things : if it's worth building a dam for positive return, you should do it at any time, as soon as you can. The second is that governments do not spend money on buying good things. In 2008/9 they spent money buying and crushing old cars, which is about as close to paying people to dig holes and fill them in as you can get.
The believers in 'aggregate demand is all' absolutely do believe that giving people money makes us all richer. They may not say it like that, but that's what they mean.
Government stimulates demand by investing in sectors that have huge up-front costs but large positive social externalities over time because the lifespan of a gov is much greater than that of an individual or corporation. It invests in infrastructure - the national grid, highways, roads, prisons, the post office, mortgage lending, insurance - most importantly though, wars, education, and healthcare. Many of these industries have become increasingly privatized over the past 30 years. This is not inherently bad, but it changes the profit time horizon and shifts incentives away from long-term investment towards short-term profit maximization.
iPhone would not exist without the development of the internet during the cold war on gov grants, the affordability and draw of public UC Berkley where Jobs and Wozniaki met, people alive and well-fed enough to buy it, etc. You can't point to a single innovation without looking at the entire fabric of the society that produced it. Gov spending has huge impact on social fabric. iPhone is also only one half of equation. If no one has the disposable income to buy one, it doesn't matter how good it is.
Isn't that a bit of a broken-window fallacy, though? We can see that the iPhone exists, and we can see that it exists in part as a result of the State grants which funded the development of the Internet, but we can't see what that money might have funded had it not been spent on those grants. We have no way of knowing what the original earners of those dollars might have chosen to invest them in, and what the world would now look like had they been free to do so.
We do know from history that while socialist economies like the USSR and its satellites did indeed tend to improve their economies measurably over their pre-socialist levels, freer governments tended to improve their economies to an even greater degree, leading to exponential quality-of-life differences over the decades. The average Russian was better off in 1989 than he would have been in 1913, as was the average American, but that average American was so much better off than the very best-off Russians that Boris Yeltsin was converted simply by seeing a Houston grocery store[1].
I love the Internet deeply, and I'm glad that government grants financed the research which led to it, but I wonder what else I might have had if those grants had been spent otherwise, just as a Russian in 1989 was no doubt glad for what he had — and amazed when he saw what he could have had.
[1] http://blog.chron.com/thetexican/2014/04/when-boris-yeltsin-...
> Bonds are government debt ...
Could be referring to corporate bonds.
Didn't Jobs quit college because it was too expensive?
People who actually believe that wouldn't say "politicians", they'd use some other euphemism, because they believe in some abstract trustworthy organization that's always being hampered by those damn politicians.
Statists love their euphemisms: “investment” instead of “government spending” “shared sacrifices” instead of "wealth redistribution" "government officials" instead of "un-elected bureaucrat" and lastly, "public sector" instead of "The State".
My irony detector has just exploded. Can you direct me to a completely-unregulated minarchist free-for-all market where I can buy one that merely poisons me and everyone in a hundred-mile radius? Because at least it would actually work.
"Investment" automatically biases you to think that said spending must have a net-good result. Calling it "Government spending" predisposes you to think about the price of said action.
Biased language is always annoying to the other side. When I hear the liberal euphemisms I groan as strongly as I suspect most liberals groan to my dysphemisms.
If you said libertarians love their dysphemisms I wouldn't hold it against you.
Building things (roads, spaceships, bridges, etc), funding things (medical research, education, etc) and other obvious things. Low interest rates make longer term projects much more viable.
https://en.wikipedia.org/wiki/Financial_cost_of_the_Iraq_War
This is really the broken window fallacy.
This means the end of 70% of the unicorns.
The second part is true, but doesn't support the first. The fact that move was expected and priced in doesn't make it meaningless, since if it didn't occur as expected, the fact that it was priced in would mean that the market would then have to adjust to the inaccurate expectation that had been priced in.
I'm pretty sure it doesn't mean nothing and that it actually is more than just symbolic.
Unless I've seriously misinterpreted your comment, this really shouldn't be the top comment, because it's wrong.
And "markets pricing in" the move isn't the same as "the move had no effect". It just means the effect already started prior to the announcement.
Everyone - and I do mean everyone - would be better off if the fed government (and state and local) invested those tax dollars smarter by leaving the majority of them in the hands of those that earnt them.
"There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money. Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost. Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch! Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government. And that’s close to 40% of our national income.” - Milton Friedman
While I'm sure we all support the notion that there is social good in reducing income inequality in the U.S. and improving quality of life for all, consumers in lower tax brackets will tend to spend additional income on staples, marginal quality-of-life improvements and servicing past debt. While this spending (increased aggregate demand) can't be bad, it doesn't necessarily distribute the capital _efficiently_.
Meanwhile, as you put, the high earners who "save" (read: invest) their excess income are precisely those who stimulate the economy effectively, as they are typically more able to efficiently allocate investments. I make this broad-brush assumption based on personal experience and some research I read years ago I don't have the time to look up right now. But basically think about this: if you had $100 to invest, would you rather ask a hobo on the street or Bill Gates (let alone Ray Dalio)? This "sophistication factor" is relevant, I believe. Add in the fact that lower-income consumers are almost certain to spend the excess capital in a predictable but not necessarily efficient way, and it's fairly easy to make the argument that aggregate demand would best be created by a.) efficiently distributing capital to b.) create new and profitable enterprises that c.) create demand both domestically and internationally, and d.) purchases are made (demand is created) for those innovative new products/services using e.) the money earned by workers paid by the companies that just created them. (f. what a mouthful.)
Now we've not only increased demand but added to the whole pie via foreign trade. And gets us back to the point mentioned above that the quality of what we create directly impacts demand for it -- and you can't really get around that fact either.
Gates and the Hobo have the same ability to spend (ie demand) with the money you give them, but Bill Gates and the Hobo do not have the same ability to produce. That is why Gates is Gates and the Hobo is the Hobo. It is the fact that Gates has a propensity and skill to take the $100 and create value (production) from it that gives Gates the ability to grow the pie for everyone.
There's plenty of money around. Oceans of it. The problem is a lack of demand.
Fed can continue to push on the supply side of money at the bank/institutional level all it wants. We need the Federal government to stimulate aggregate demand at the consumer level. How? Investing tax dollars in a smarter manner. Not raising the interest paid out on short term bonds so that institutions are incentivized to keep even more money in bonds rather than putting them to work in the economy.
Monetary policy needs to work hand in hand w/ fiscal policy. I feel bad for the Fed...its decisions are largely restricted and inconsequential when gov spending is broken, yet it receives all the attention and the blame.