Fiscal Policy

[Lassiter 506]

Per Ganalon's request, let's discuss Fiscal Policy, and the effect on economic health.

Among the things the Bush administration wanted to abolish: the estate tax, the dividend tax, the capital gains tax, and the corporate income tax. On a neopyhyte's level, this would seem to allow for greater savings and investment, as based on a Reagan policy model.

A panel of ten nobel laureates all signed an add denouncing this tax cut plan as disengenous, stating the following "Regardless of how one views the specifics of the Bush plan, there is wide agreement that its purpose is a permanent change in the tax structure and not the creation of jobs and growth in the near term."

Why did Bush herald the plan as a short term stimulus package, "to put people's money back into their pocket's?"

The economists in that article, as well as numerous other fiscal policy experts recognized that the policy was not to promote short term growth, but long term growth. Pushing personal savings to such a limit, effectively worsens the deficit (as we have seen), and increases inequality (another social byproduct, as evident in education loans, research grants, and etc.). Pushing savings to such a limit is extremely risky. We've seen this happen already in Japan (whose country is almost completely devoid of capital in natural resources), and savings pushes have caused recessions and deflations for several years.

Tell me then. If the intention of the elimination of the divident tax was meant to encourage investment over the short term as Bush said, why not utilize accelerated depreciation of capital costs or an investment tax credit ? Also, why not use a revenue-neutral reform proposal instead of abolishing the dividend tax ?

The development of long term economic growth was very, very risky. And unfortunately, the effort to increase the production possibility frontier for the US for the long term, is not coming to fruition. The plan was contingent on a number of things, with the largest being the lack of externalities influencing the economy - as you can imagine, a few very large events occurred to disrupt this. This plan failed, and it failed miserably.

To illustrate, never before in the history of this republic has the United States ever borrowed money to finance conflicts abroad. Through bonds, the US is effectively borrowing from foreign markets to finance our conflicts, and in part, our tax cuts. Countries such as China have wisely invested a superfluous amount of money in low interest, low risk bonds, that will never default. Like it or not, they have a huge stake in our economy (and the drop in housing costs two years prior had more to do with China than the US.) Overall, the value of their currency steadily increases as the value of our currency depreciates, decreasing the purchase power of a dollar. Our exports become cheaper, and imports become relatively more expensive. Our relative purchasing power parity is not tilting in our favor.

For all you hear of job growth on the news, there are far more events playing that are not addressed. Feel free to refute Ganalon. I'll wait.

[Daniel]

I'll wait.

Good luck with that.

[Ignot]

ZZzzzzz

[Kranar]

To illustrate, never before in the history of this republic has the United States ever borrowed money to finance conflicts abroad. Through bonds, the US is effectively borrowing from foreign markets to finance our conflicts, and in part, our tax cuts. Countries such as China have wisely invested a superfluous amount of money in low interest, low risk bonds, that will never default. Like it or not, they have a huge stake in our economy (and the drop in housing costs two years prior had more to do with China than the US.) Overall, the value of their currency steadily increases as the value of our currency depreciates, decreasing the purchase power of a dollar. Our exports become cheaper, and imports become relatively more expensive. Our relative purchasing power parity is not tilting in our favor.


I thought I would comment on this point.

The U.S. has, in fact, always borrowed money to finance conflicts. There is not a single war the U.S. has engaged in that it didn't borrow money for. In fact, in general, there are very few years in which the U.S. hasn't borrowed money period.

As for China, if the U.S. dollar drops, then that's pretty bad news for China. Both China and Japan combined own about 1 trillion dollars worth of U.S. debt. If the dollar crashes, then they basically lose out on that money, not to mention it makes doing trade with the U.S. a lot more volatile.

In recent years, China has actually been quietly and slowly moving its money away from U.S. bonds to European bonds.

What makes things interesting is that everyone knows that the U.S. dollar will crash, even the Federal Reserve is aware of this and it's no secret. The question is whether it will be a hard or a soft landing and whether it's something that can be recovered from. While most analysts feel it will be a softer landing, how to recover from it is anyones guess at this point since it doesn't look like government spending will be reduced.

[Ignot]

Whats your defininition of the US dollar crashing and what makes you think the Fed can't keep it from happening? I sure haven't heard anything about a currency crash in the US.

[Lassiter 506]

I thought I would comment on this point.

The U.S. has, in fact, always borrowed money to finance conflicts. There is not a single war the U.S. has engaged in that it didn't borrow money for. In fact, in general, there are very few years in which the U.S. hasn't borrowed money period.

As for China, if the U.S. dollar drops, then that's pretty bad news for China. Both China and Japan combined own about 1 trillion dollars worth of U.S. debt. If the dollar crashes, then they basically lose out on that money, not to mention it makes doing trade with the U.S. a lot more volatile.

In recent years, China has actually been quietly and slowly moving its money away from U.S. bonds to European bonds.

What makes things interesting is that everyone knows that the U.S. dollar will crash, even the Federal Reserve is aware of this and it's no secret. The question is whether it will be a hard or a soft landing and whether it's something that can be recovered from. While most analysts feel it will be a softer landing, how to recover from it is anyones guess at this point since it doesn't look like government spending will be reduced.
Reply With Quote

The reliance of bond sales in accrual of a mounting deficit, was more my point. War has long been viewed as supplying a necessary short term stimulus to cyclic economic recessions. The danger of this war lies in the continuing increase of the deficit, with any short term effect of a mobilized production frontier long gone.

In previous wars, no, I do not recall reading that the reliance upon foreign world markets to achieve requisite funds was not necessary to maintain funding for conflicts abroad. it is hard to quantify whether any monetary unit gained from foreign investment superceded domestic investment via bonds. This point, I'll cede to you until get more information.

But one last issue. The crashing of the dollar in value, and the US defaulting on it's bonds are two very distinct entities. If you are referring to the latter, that will never happen unless the US decided to declare President Bush an advisor of monetary policy.

As of this past February, the Treasury began quarterly reissues of the 30 year note to ameliorate certain liabilitiies as well as the flattening of the yield curve, which has reduced the in "hand cost" of selling older notes. This does not fit in well with your contention of the dollar value dropping to the point of default, or fall in confidence within the bond market of the US. Beyond the safe investment of low interest-low risk US bonds, China can use such investment as a high point of leverage and trade in negotations.

http://www.treas.gov/tic/mfh.txt

This link above will detail the T-bill and note holdings of various major foreign holders. You'll find that China's holdings have actually increased in the past few cycles and not decreased as you noted. I'm not sure where you found your information from, but if you provide a reference, I'll gladly read it.


Whats your defininition of the US dollar crashing and what makes you think the Fed can't keep it from happening? I sure haven't heard anything about a currency crash in the US.

Go back to ZZzzzzz.

[Sean of the Thread]

Did you learn anything besides popping your collar in college? You know.. like something useful.

[Kranar]

Whats your defininition of the US dollar crashing and what makes you think the Fed can't keep it from happening? I sure haven't heard anything about a currency crash in the US.


While definitely not indicative of a crash, you can look at the value of the U.S. dollar over the years using something like Yahoo Exchange Rate:

http://finance.yahoo.com/currency/convert?amt=1&from=USD&to=EUR&submit=Convert

Compare the dollar to currencies such as the Canadian dollar, the Euro, the Chinese Yuan etc... and you notice that over the past 5 years its been declining.

If the dollar crashes, this decline would be a lot more severe. The thing is, no country wants the U.S. dollar to crash and so many countries continue to buy Treasury instruments, such as bonds. Countries do this so that the U.S. continues to have plenty of money available to buy products from these countries. The U.S. is a HUGE importer of so many products that if the U.S. dollar did crash it would actually also hurt the economies of these countries.

But you definitely can't expect that China/Japan will continue buying U.S. debt forever, and when they stop doing it, then everyone else will be trying to get rid of their holdings of U.S. debt as cheaply as possible.

[Kranar]

You'll find that China's holdings have actually increased in the past few cycles and not decreased as you noted. I'm not sure where you found your information from, but if you provide a reference, I'll gladly read it.


Actually a lot of what I know about this comes from a friend who works for the Federal Reserve. She basically analyzes TIPS (Treasury Inflation-Protected Securities), and she told me how the Federal Reserve actually uses TIPS as a way of measuring inflation in the U.S.

I will try and find a reliable source for you to read, and indeed I will search for such resources to read for myself. I find the issue of fiscal policy to be one of great interest.

[Lassiter 506]

She basically analyzes TIPS (Treasury Inflation-Protected Securities), and she told me how the Federal Reserve actually uses TIPS as a way of measuring inflation in the U.S.

The divide between traditional T-bonds and TIPS are used to determine market inflation expectations. It's just another forecasting tool, and one among others- that's one problem with your contention. If your friend told you that about China's holdings and analyzes TIPS, she's looking exclusively at one type of treasury security - there are others (T-bills, T-bonds, and notes of varying duration) that all must enter the picture. All of my finance readings within the previous year contradict what your friend has told you.

The US dollar is depreciating in value, but your prediction of hard fall collapse is predicated on continued insatiable spending by the government. The scenario you have detailed is a worse case scenario, and I doubt it will ever come to that. A default of US Bonds is not a likely occurence.

[Lassiter 506]

Did you learn anything besides popping your collar in college? You know.. like something useful.

I don't pop my collar, but do own more than a few polo shirts. As far as anything useful? Come on. College professors are harbingers of asinine information. Everything I needed to know to survive, I learned while outside of class. All of the current didactics I'm learning now are icing on the cake. Far from applicable at this point in my schooling, but nonetheless necessary for my career goals.

[Sean of the Thread]

I don't pop my collar, but do own more than a few polo shirts. As far as anything useful? Come on. College professors are harbingers of asinine information. Everything I needed to know to survive, I learned while outside of class. All of the current didactics I'm learning now are icing on the cake. Far from applicable at this point in my schooling, but nonetheless necessary for my career goals.

Holy shit I agree with you.

[Gan]

Among the things the Bush administration wanted to abolish: the estate tax, the dividend tax, the capital gains tax, and the corporate income tax. On a neopyhyte's level, this would seem to allow for greater savings and investment, as based on a Reagan policy model.

I probably would not have used the term abolish, as you stated above, because abolish represents complete elimination whereas the tax cut proposal of 2003 was not an across the board abolishment of such taxes but a phased reduction over time of said taxes, still not concluding in a state of zero presence in the US tax structure.

Dividend tax and Capital Gains Tax:
In 2003, when the tax cut was enacted it reduced the top tax rate on long term capital gains and corporate dividents to 15%. Prior to the Bush cut recommendations, dividend taxes were subject to a 35% corp. income tax in addition to individual income tax up to and including 38.6%. For those of you doing the math, that's 73.6% taxes on your investment. Because of this high rate, most corporations chose not to pay out dividends. Economically this only discouraged savings and investment, encouraging corporations to incur more debt. The Bush tax cuts lowered the tax penalty on dividend payments, thus encouraging corporations to raise money through the sale of dividends rather than borrowing. Furthermore 46% who reported dividend income earn less than $50,000.00 annually. So you cant say this tax cut was for the 'rich'.
Studies also show that it will take three years for just 1/4 of the long run effects on dividend payoffs to be realized. As it should be understood, dividend tax cuts are one of many stimuli available to pull an economy out of a recession.

Estate tax:
Any tax penalizing those who are in receipt of their family's own property upon the death of a related benefactor is an unjust tax period. The property being inherited was already purchased through income already taxed, and since no taxable attrition on property outside of interest earned or capital gains is the primary characteristic of said property, it therefore should not be taxed period. Currently there are federal estate taxes as well as state estate taxes, double taxation in other words. Outlines for the current estate taxes on the federal level can be found at 26 U.S.C. (http://en.wikipedia.org/wiki/Internal_Revenue_Code)§ 2031 (http://www.law.cornell.edu/uscode/26/2031.html) and 26 U.S.C. (http://en.wikipedia.org/wiki/Internal_Revenue_Code)§ 2033 (http://www.law.cornell.edu/uscode/26/2033.html). Fundamentally the idea of double taxation and the concept that the estate tax are nothing but a robin hood tax against not only the wealthy but also the middle income make this tax an undue burden upon society, especially when society already pays federal income, state income, and sales/luxury taxes to support our government as it currently stands.

Corporate Income Tax:
The whole aim of Bush's corporate tax revisions were to revise and eliminate the double taxation of corporate income. While most would agree that the concept of double taxes (see effects in estate, dividend, and capital gains taxes) is a bad thing, there are even more compelling reasons as to why revision needs to take place. One such loophole intending to be revised is the fact that corporations are unfairly taxed whereas sole proprietorships and partnerships are only taxed on a singular rate. This type of tax is a flat tax overlay on a progressive individual income tax system thus overtaxing shareholders in lower brackets while undertaxing shareholders in higher brackets. Unfair? You bet. Furthermore, this double taxation creates inefficiencies in investor decision making. This tax, as tied into what was earlier stated about dividend taxes, pushes corporations to avoid dividends thus pushing profitability and investment through debt rather than through equity. All in all, Bush's 2003 tax plan was one striving for tax neutrality, which is inherently what a tax system should be.

To this end, I agreed in 2003 and still today support Bush's tax cut proposals; however, in light of his military spending with the war in Iraq, perhaps this tax plan would have been better postponed until such time when the country were not faced with eminent expenditures of a major military campaign.



A panel of ten nobel laureates all signed an add denouncing this tax cut plan as disengenous, stating the following "Regardless of how one views the specifics of the Bush plan, there is wide agreement that its purpose is a permanent change in the tax structure and not the creation of jobs and growth in the near term."

You forgot to mention the focus of the panel of 10 and additional signers of the add pertained to economic growth, specifically relating to unemployment and jobs as an indicator of economic health. That being said, and the fact that I'm definitely not a nobel laureate nor a professional economist, I feel a duty to say that after reading the report (add) by the laureates it must be pointed out that unemployment rates have steadily fallen from the 5.9/6.0 mark at the time of the add writing to a current level of 4.6% as of Sept. 2006. Odd that according to their predictions, the near term effects of such a tax package would have the opposite effect.



Why did Bush herald the plan as a short term stimulus package, "to put people's money back into their pocket's?"
Because almost everyone got a refund check back from the government. Ten guesses as to where that money went when it was cashed by the recipients. (Answer: M1) The ironic thing is that those who got a refund check also had to report it as income on the next year's taxes.



The economists in that article, as well as numerous other fiscal policy experts recognized that the policy was not to promote short term growth, but long term growth. Pushing personal savings to such a limit, effectively worsens the deficit (as we have seen), and increases inequality (another social byproduct, as evident in education loans, research grants, and etc.). Pushing savings to such a limit is extremely risky. We've seen this happen already in Japan (whose country is almost completely devoid of capital in natural resources), and savings pushes have caused recessions and deflations for several years.

In hindsight, the policy demonstrated effects in short term and long term growth, only to be stymied by the current administration's egregious spending of the war effort in Iraq also coupled with the economic impacts of Hurricanes Katrina and Rita and the subsequent skyrocket in gasoline prices felt throughout the US economy (through perceived shortages and price speculators in the market). Furthermore, using Japan as a natural resource comparison to the US is kind of shaky considering the vast geographical differences between the two countries. Furthermore there is mainstream agreement that Japan's economic outlook, while threatened by an overburdensom aging population propped up by a smaller younger generation (similar to the US social security problem), still has a strong industrial base and (contradictorily to your statement) vast capital reserves. But the principal ideal of the fiscal policy experts you referenced above indicate that the tax policy would be overall bad on growth, short term and long term. Yet GDP still advanced from 10.9b to 12.4b and GNP also showing similar advances from 2003 to 2005. Looking further PPI also advanced during the same time period. Imagine that.



Tell me then. If the intention of the elimination of the dividend tax was meant to encourage investment over the short term as Bush said, why not utilize accelerated depreciation of capital costs or an investment tax credit ? Also, why not use a revenue-neutral reform proposal instead of abolishing the dividend tax ?

Accelerated depreciation of capital costs and investment tax credits are temporary fixes at best and yet still encourage the mis-concept of john q public that tax incentives only benefit the rich (individuals and corporations). Where you seem to be stuck is mentioning that the tax was abolished, it wasn't. It was reduced to a more tax-neutral type level.



The development of long term economic growth was very, very risky. And unfortunately, the effort to increase the production possibility frontier for the US for the long term, is not coming to fruition. The plan was contingent on a number of things, with the largest being the lack of externalities influencing the economy - as you can imagine, a few very large events occurred to disrupt this. This plan failed, and it failed miserably.
Any long term growth plan is risky, no matter who's sponsoring it. That's a captain obvious statement. So is your follow-up with mentioning the externalities (Katrina, Rita, Iraq War). And while I disagree that it has failed miserably (see current economic indicators) it has had significant impact on deficit levels as well as new long term outlooks of the economy.



To illustrate, never before in the history of this republic has the United States ever borrowed money to finance conflicts abroad. Through bonds, the US is effectively borrowing from foreign markets to finance our conflicts, and in part, our tax cuts. Countries such as China have wisely invested a superfluous amount of money in low interest, low risk bonds, that will never default. Like it or not, they have a huge stake in our economy (and the drop in housing costs two years prior had more to do with China than the US.) Overall, the value of their currency steadily increases as the value of our currency depreciates, decreasing the purchase power of a dollar. Our exports become cheaper, and imports become relatively more expensive. Our relative purchasing power parity is not tilting in our favor.

Through the sale of Treasury notes, America finances many endeavors through investors foreign and domestic. Why would it not be a surprise that in a non-protectionist government that foreign investment would be present? The reason why China invests heavily in the US markets is because we are one of the most stable and because they continue to peg their currency against ours, much to our protest. This peg is in effort to keep the RMB from appreciating on its normal track. Furthermore the drop in housing costs we are now seeing are more of a market correction in inflated markets along the east and west coast. Housing markets in other areas of the country, including where I sell mortgages, remain consistently flat with little or no correction seen other than normal seasonal slumps in purchasing. Not to mention that mortgage rates have fallen back down to the low 6/high 5 for residential mortgages, which is a primary indicator of how the housing market is doing.

The one beef I do have with the Bush administration is that they ignored the historical fact that the Vietnam war was started immediately after a huge tax cut. The ensuing economic hardships were felt in part because of the tax cut combined with increased military spending as well as poor management by the Fed. This cycle did not reverse itself for over 10 years until Regan appointed Volker to the Fed to start a strong monetary policy path towards greater economic stability, as was seen in the 1980's during Regan's (neocon) tenure as president.

So in closing, I would say that I agree that there are much more indicators that give light to how our economy is doing now and how it could do in the future. Only, as those who have studied economics know, it is a dismal science. And much like predicting the weather, it can and frequently goes its own path regardless of our efforts to intercede. Where I disagree is that you give less credit to the externalities (including the war), which in my opinion play a larger role in how our economy is doing than the 2003 tax cuts.

[Kranar]

The US dollar is depreciating in value, but your prediction of hard fall collapse is predicated on continued insatiable spending by the government. The scenario you have detailed is a worse case scenario, and I doubt it will ever come to that. A default of US Bonds is not a likely occurence.


I actually never said anything of the sort.

I never made any kind of prediction that there would be a hardfall, and actually said that most analysts, including those at the Federal Reserve expect that it will be a softfall.



If your friend told you that about China's holdings and analyzes TIPS, she's looking exclusively at one type of treasury security - there are others (T-bills, T-bonds, and notes of varying duration) that all must enter the picture. All of my finance readings within the previous year contradict what your friend has told you.


I'm not sure what you're getting at with this statement. The fact that I know a friend who works analyzing TIPS for the Federal Reserve wasn't really part of the argument, nor was TIPS. It was only meant as conversation and as insight into how I became interested in this issue.

As to China moving away from the U.S. dollar, there's tons of literature. The following was a quick search on CNN on the issue:

http://websearch.cnn.com/websearch/search?source=cnn&eref=homesearch&invocationType=search%2Ftop&sites=web&query=china+moving+away+from+the+dollar


Obviously any such move by China or Japan isn't going to be overnight as that would have devastating consequences. On the contrary, it's in both of these countries best interest to slowly diversify.

[Gan]

All of my readings of late indicate a soft landing as well.

[Lassiter 506]

And using Japan as a natural resource comparison to the US is kind of shaky considering the vast geographical differences between the two countries. Furthermore there is mainstream agreement that Japan's economic outlook, while threatened by an overburdensom aging population propped up by a smaller younger generation (similar to the US social security problem), still has a strong industrial base and (contradictorily to your statement) vast capital reserves.

Read it again. It reads devoid of "capital in natural resources." This falls under the following: coal, lumber, oil, and etc. Natural capital resources are independent of industrial and physical capital (were you paying attention to macro and micro econ classes?) The N.S capital, all of which Japan has incredibly limited amounts of, and far less than other industrial competitors. What it lacks in this sector, it makes up for in intellectual capital, which is at the very core of their industrial base.


I probably would not have used the term abolish, as you stated above, because abolish represents complete elimination whereas the tax cut proposal of 2003 was not an across the board abolishment of such taxes but a phased reduction over time of said taxes, still not concluding in a state of zero presence in the US tax structure.

Proposal of, and the enacted forms, differ drastically in contect. Over the short term, the administration claimed to stimulate short term growth. A revamped tax code is overkill for such an intended purpose.


But the principal ideal of the fiscal policy experts you referenced above indicate that the tax policy would be overall bad on growth, short term and long term. Yet GDP still advanced from 10.9b to 12.4b and GNP also showing similar advances from 2003 to 2005. Looking further PPI also advanced during the same time period. Imagine that.

Incorrect, the policies were slated to provide long term growth, not short term growth. What the policy was intended to do and what it was marketed as were two divergent paths. A war provides a mild stimulus to the economy, in the form of a mobilized production frontier. However, this must be viewed in the light of the Federal deficit. Domestic vs. foreign investment, depreciating value of the dollar, bulging federal deficits, and increased spending are factors you seemed to have omitted.

Your point on GDP is irrelevant, because of the following "rough" equation.

GDP = consumption + investment + government spending + (exports − imports)

Government spending has been supported by gaining massive federal debt in the process. This is why the GDP/GNP are only two among several measures to provide a "size of the economy." There exist better measures for providing the "state and health" of the economy. A economy as large as Japan's, is not healthy, though it is vast. These are not equivalent values.


Any long term growth plan is risky, no matter who's sponsoring it. That's a captain obvious statement. So is your follow-up with mentioning the externalities (Katrina, Rita, Iraq War). And while I disagree that it has failed miserably (see current economic indicators) it has had significant impact on deficit levels as well as new long term outlooks of the economy.

You still don't get it. Why were tax cuts and long term economic expansion necessary during a term when Bush enterred office with a substantial surplus of Federal Funds ? Why risk it, if as you state, expansion is so incredibly risky ?

Do you know why this surplus was created ? Do you know how Greenspan foresaw a need for this surplus many years prior ? Why did this reason suddently dissipate shortly after Bush took office, and how did it fit in with proposed social security accounts in the open market ?

[Lassiter 506]

Obviously any such move by China or Japan isn't going to be overnight as that would have devastating consequences. On the contrary, it's in both of these countries best interest to slowly diversify.

Not my intention to misquote, but to address a "worse situation scenario" that was brought forth. My apologies if you felt offended.

Just stating, this does not provide any bearing on perceived health of the bond market in the US. An eschatological view of the US currency is a bit off the deep end, and is why I disagreed vigorously with any such assertion, despite you not asserting it. Despite divergence of international investment, the continued investment in US bonds is a testament to it's stability. Government spending cannot sustain this level indefinitely, or at least I hope not.

[Gan]

(were you paying attention to macro and micro econ classes?)
Wow, you got me, they just gave me a BS Degree in Economics honorarium... and any idiot knows with trade, capital reserves can substitute for a lack of natural resources in the short run. Furthermore, my statement still stands as you were initially comparing the US to Japan with regards to natural resources, to wit I deemed a faulty and shaky premise since they are two vastly different geographical areas. (Hint: one is an island.... or were you paying attention in your world geography classes?)


Proposal of, and the enacted forms, differ drastically in contect. Over the short term, the administration claimed to stimulate short term growth. A revamped tax code is overkill for such an intended purpose.
And yet you missed the main premise that the taxes are not ABOLISHED. Ding Ding Ding. Set aside the rhetoric and give it an accurate description. Furthermore your concept of overkill for such a purpose, is merely your opinion... unless you happend to be a dissenting argument of a major econonomic think tank or on the Fed's economic advisory comittee.


Incorrect, the policies were slated to provide long term growth, not short term growth. What the policy was intended to do and what it was marketed as were two divergent paths. A war provides a mild stimulus to the economy, in the form of a mobilized production frontier. However, this must be viewed in the light of the Federal deficit. Domestic vs. foreign investment, depreciating value of the dollar, bulging federal deficits, and increased spending are factors you seemed to have omitted.
Wrong, the policies were slated for both short term stimulation and long term growth... otherwise there would have been no refund checks printed and distributed. You do know the effects of a stimulus to the M1 dont you??? Or were you not paying attention in that part of your Macroeconomics 101 class? And yes war does provide a short run stimulus... because of..... Government Spending (G in terms of GDP). Yet the federal defecit was not the primary aim of the Nobel 10 nor the reason for the add. Now if this is an add-on to your first thesis then state so accurately. Where I think your're mistaken is in how the policy was advertised by the government and how the public interpreted it. Obviously you were one of the ones who did not see it for what it really was. Perhaps thats because you were still in highschool at the time?


Your point on GDP is irrelevant, because of the following "rough" equation.

GDP = consumption + investment + government spending + (exports − imports)

Government spending has been supported by gaining massive federal debt in the process. This is why the GDP/GNP are only two among several measures to provide a "size of the economy." There exist better measures for providing the "state and health" of the economy. A economy as large as Japan's, is not healthy, though it is vast. These are not equivalent values.
To state it more accurately, GDP/GNP is ONE OF MANY measures on how the ecnonomy is moving. We call them economic indicators (http://www.gpoaccess.gov/indicators/06janbro.html). There is usually more to it I agree, for synopisis sake, I chose to list just one so you would get the point. My mistake, since you missed it. The government spending you mention, while being supported with federal debt is a typical Keynesian model that has been seen in government fiscal policy since the 1950's. What balances that is the activity of The Federal Reserve and their control of interest rates to M2/M3 which happen to provide enough guideance to the business cycle as to negate the natural by-products of the expansion, recession, and trough phases. With regards to Japan's economy, their investment alone in the US will help stabilize their short-run fluctuations while allowing them time to plan for greater long term issues, such as the one I previously mentioned.



You still don't get it. Why were tax cuts and long term economic expansion necessary during a term when Bush enterred office with a substantial surplus of Federal Funds ? Why risk it, if as you state, expansion is so incredibly risky ?
Dont you mean you still do not get it??? Its called a business cycle, and it was pretty evident that we were about to start feeling the effects (hangover) of a boom economy (its called a recessionary period) where market price corrections are seen (dot.com correction, housing market corrections, etc.). [Not to mention that its a tenet of the Republican party to give money back to the people through tax cuts/incentives] If one knows a train is coming down the tracks, its best to prepare for it instead of waiting until its upon you to act. Where Bush failed is combining the tax cuts with egregeous military spending for the Iraq war. History has proven that tax cuts and a military campaign (short or protracted, and I believe he thought the former initially) are a bad combination.



Do you know why this surplus was created ? Do you know how Greenspan foresaw a need for this surplus many years prior ? Why did this reason suddently dissipate shortly after Bush took office, and how did it fit in with proposed social security accounts in the open market ?
Obviously you dont since you believe Greenspan created the surplus. I think you need to revisit the role of the Federal Reserve and Executive Fiscal Policy to understand who exactly created Clinton's gov't surplus.... (hint included in that last sentence). :lol:

[Gan]

PS. Travelling to Austin for a couple of days, so dont misinterpret my lack of response as an indicator that your arguments have quelled my thoughts.

[Lassiter 506]

Wow, you got me, they just gave me a BS Degree in Economics honorarium


good for you.



and any idiot knows with trade, capital reserves can substitute for a lack of natural resources in the short run.

Japan's situation and lack of some natural resources is not a short run situation.


Furthermore, my statement still stands as you were initially comparing the US to Japan with regards to natural resources, to wit I deemed a faulty and shaky premise since they are two vastly different geographical areas.

Once again, the issue of Japan's limited natural resources was more pointed to their limited options in combating the deflation and recession brought upon my a savings glut. If at last you realized what natural capital finally means, you've partially earned your degree.


And yet you missed the main premise that the taxes are not ABOLISHED. Ding Ding Ding. Set aside the rhetoric and give it an accurate description. Furthermore your concept of overkill for such a purpose, is merely your opinion... unless you happend to be a dissenting argument of a major econonomic think tank or on the Fed's economic advisory comittee.

Amending a longstanding tax code, for the purpose of creating a short term stimulus, was unnecessary. And it's not just my opinion. Amending the dividend tax was uncessary, as other more impactful options were available.


To state it more accurately, GDP/GNP is ONE OF MANY measures on how the ecnonomy is moving. We call them economic indicators . There is usually more to it I agree, for synopisis sake, I chose to list just one so you would get the point. My mistake, since you missed it. The government spending you mention, while being supported with federal debt is a typical Keynesian model that has been seen in government fiscal policy since the 1950's. What balances that is the activity of The Federal Reserve and their control of interest rates to M2/M3 which happen to provide enough guideance to the business cycle as to negate the natural by-products of the expansion, recession, and trough phases. With regards to Japan's economy, their investment alone in the US will help stabilize their short-run fluctuations while allowing them time to plan for greater long term issues, such as the one I previously mentioned.


Again, your usage of terminology is off. GDP is a relative size indicator . Government spending has become such a large contributor, without any lasting development to physical capital, as the majority portion not being spend to fuel tax cuts is being used to fight a foreign conflict. This is not sustainable growth.

Deficit spending has the potential to mobilize production, however, this extreme case of deficit spending breaks the mold. This stimulation can, and has hit more than a few walls. One, gov't deficit increases the stock of treasury bonds, whereby reducing price and increasing interest rates, making it relatively more pricy to pursue fixed investment. Second, it increases the demand in labor, and hurts profits via wage raise. It's a doomed and self defeating methodology, and is utlimately why classical Keynesian triumphalism of the 60's hasn't bounced back into action until Bush took office. Since then, wages and labor costs are up 5.2 % (the largest increase since '82), decreased dollar value in foreign markets (read Kranar's posts), trade deficits and a looming federal deficit (I lost count) has evolved. Resounding failure or not ? For all of the pictures you can draw, not even a Phillips's curve can exonerate Bush's policies. We're being driven towards a service dominated settlement in the world economy, and that is not where we should be.


Obviously you dont since you believe Greenspan created the surplus. I think you need to revisit the role of the Federal Reserve and Executive Fiscal Policy to understand who exactly created Clinton's gov't surplus.... (hint included in that last sentence).

You can claim it's Volker. I'll go with Greenspan. Greenspan maintained it under one administration, and he supported it's demise under another. He had more to do with influencing it's fate than anyone other single man, save the president.


Dont you mean you still do not get it??? Its called a business cycle, and it was pretty evident that we were about to start feeling the effects (hangover) of a boom economy (its called a recessionary period) where market price corrections are seen (dot.com correction, housing market corrections, etc.). [Not to mention that its a tenet of the Republican party to give money back to the people through tax cuts/incentives] If one knows a train is coming down the tracks, its best to prepare for it instead of waiting until its upon you to act. Where Bush failed is combining the tax cuts with egregeous military spending for the Iraq war. History has proven that tax cuts and a military campaign (short or protracted, and I believe he thought the former initially) are a bad combination.

A long term economic expansion is NOT the answer to a recession. Economic cycles progress through expansion and recession with frequency. Monetary policy has provided the necessary balance to weather periods of recession while still maintaining upward growth of the cycle in the post Great Depression era. Major alterations to fiscal policy and the tax code were not necessary for cyclical recession cycles.

You still also have yet to answer the question. Why was such a risky long term economic expansion set in motion when one was sitting on such a large surplus?

[Lassiter 506]

Had a pretty good conversation over dinner with a friend of mine, who is currently a PhD student in Finance. Overall, we hashed our ideas, with him summarily refuting some of my admitted anti-Keynesian deficit spending rhetoric, and it came to down to two main issues.

1) The prudence of deficit spending, and the need for government reform
2) The social cost of a continued wartime scenario

Of the first, was deficit spending. Legitimately, the US can continue to continue deficit spending up until the point of anarcy, when citizens either fail to pay taxes, or pay an amount of taxes equivalent to their income. The government can operate with the deficit, and attain record real growth in industry... but at the cost of growth during the spurt of government spending and quarterly bond releases, is a mounting national debt, that will likely not be paid off in my progeny's lifetime. The upper class will always drive the economy through innovation, and through their own investment dictate how the middle class reach their potential. Though I'm not fond of Reaganomics, the logic does exist to some point. Somewhat inequitable, but that is the nature of the world. This point, I cede.

Another issue that was brought to my attention, and rather surprisedly, was the nature of government reform and employment. He spoke of more efficiency in government employment and working with less, with regard to the US postal service (which is among the top 10 employers worldwide in numer of employees) ,and the inefficiency in the 30 million employees supported by the government. To my surprise, as a Republican, this was his biggest peave.

And from all the arguments that I posed, it always came back to one issue - reallocation of funds from tax cuts away from education and research. Among the greatest things I have experienced in my lifetime was the opportunity to attend college, graduate with two degrees, and continue my education in medicine at the same institution. Having researched at the second ranked researched based medical school in the country, I can say that the cuts to research are tangible.

One of the greatest tragedies is that many, many others will not have this opportunity to receive an education, and broaden it. Many of the generation will have unrealized intellectual and human capital, and that to me is a bigger waste than any fiat value designated paper bill. For the 7 million dollar a day deficit spending, there is a profound social cost. We've invested too much in Iraq to leave, but the longer we are there, the larger the social cost will be.

[HarmNone]

That is, indeed, a sobering thought, Lassiter. If we cannot give to each citizen the opportunity to reach his/her potential what, then, have we worth giving? A country is nourished by its people. If those people cannot, with effort, grow to the fullness of their ability the country will, ultimately, wither and die.

[Sean of the Thread]

That is, indeed, a sobering thought, Lassiter. If we cannot give to each citizen the opportunity to reach his/her potential what, then, have we worth giving? A country is nourished by its people. If those people cannot, with effort, grow to the fullness of their ability the country will, ultimately, wither and die.

If you cannot reach your potential you'll get stuck in Iraq. Duh.

[HarmNone]

That was a stupid comment. There's no doubt about it, and there's no excuse for it. If one can't learn to think before one opens one's mouth, one needs duct tape for one of those many reasons duct tape is a Very Good Thing. That's shown on these boards on a daily basis. Kerry just happens to be more well known than these boards, and showed his inability to think before yapping to the entire world.

[Ignot]

the World needs rich and poor, educated and uneducated.

[HarmNone]

the World needs rich and poor, educated and uneducated.

I don't think anyone is intimating other than that, Ignot. Yet, every individual should still have the opportunity to reach their full potential. Should their full potential not be rocket science, that's cool. Should they choose not to work toward reaching their full potential, that's cool, too, I suppose. It's an individual choice. The point is, the ability to reach for the stars needs to be available.

[Sean of the Thread]

Tell that to the Hindus and most Muslim women.

[HarmNone]

I have. Have you?

[Sean of the Thread]

I have. Have you?

Of course not.. it's not my place to trot around on a white horse and pretend that I know better than their religion. Is it your place to?

[HarmNone]

Heh. I was raised in Islamic countries. I'm pretty familiar with their beliefs, as they were happy to share them with me throughout my childhood and teen years. We discussed the difference between our ways of living quite often.

[ElanthianSiren]

Having researched at the second ranked researched based medical school in the country, I can say that the cuts to research are tangible.

One of the greatest tragedies is that many, many others will not have this opportunity to receive an education, and broaden it. Many of the generation will have unrealized intellectual and human capital, and that to me is a bigger waste than any fiat value designated paper bill. For the 7 million dollar a day deficit spending, there is a profound social cost. We've invested too much in Iraq to leave, but the longer we are there, the larger the social cost will be.

Seconded. You need not even look to research to see it. When you look at what's going on in California with regard to tuition or the increase in prime rates (which include student loans), it's showing a real support for your original premise (on potential for all), which is disturbing. The fact that pell grants have been cut to 1972 levels after a promise of huge credits for college participants (from Bush) is further staggering.

The fact that he attempts to tout himself as a friend to science is reprehensible. Part of the insanity with the neocons at the helm is that, in areas of (especially medical) research, we hang behind other developed countries with regard to techniques and training (for instance, one of the first successful sustained islet cell transplants was done in Japan late last year); this has long been my argument on stem cell research, but it seems feasible that the idea extends to other areas of science with the cuts to support the war.

-M
who only took micro/macro/accounting but is finding this debate interesting.

[Gan]

You still also have yet to answer the question. Why was such a risky long term economic expansion set in motion when one was sitting on such a large surplus?


I already answered your question. Please reread my post from the other day.

PS. It wasnt Volcker who created the budget surplus in the Clinton presidency... Because:
1. Volcker left the Fed in 1987
2. The Federal Reserve does not control fiscal policy of the Legislative/Executive branch of government. Congress and the President control fiscal policy; ergo they were responsible for the budget, spending, and saving of the US tax account. The Fed controls monetary policy.

[Lassiter 506]

I already answered your question. Please reread my post from the other day.

No, you did not. What you stated was a fundamental of basic economics, and a condition of ideality that is blurred once fiscal policy and monetary policy become intertwined and very much involved.

Monetary and fiscal policy are not independent of one another, as one impacts the other. The Federal Reserve has never been immune to the president's linfluence. For reference, see Greenspan vs. Bush.

-------------------------------------


Let's get back to the basics and deficit spending, shall we ? I'll repost a snippet from my previous post, and let you respond to it again.


Deficit spending has the potential to mobilize production, however, this extreme case of deficit spending breaks the mold. This stimulation can, and has hit more than a few walls. One, gov't deficit increases the stock of treasury bonds, whereby reducing price and increasing interest rates, making it relatively more pricy to pursue fixed investment. Second, it increases the demand in labor, and hurts profits via wage raise. It's a doomed and self defeating methodology, and is utlimately why classical Keynesian triumphalism of the 60's hasn't bounced back into action until Bush took office.



Since then, wages and labor costs are up 5.2 % (the largest increase since '82), decreased dollar value in foreign markets (read Kranar's posts), trade deficits and a looming federal deficit (I lost count) has evolved. Resounding failure or not ?

What you are approaching is the tail end of one of the greatest criticisms of classical Keynesian economics. Please comment regarding the Phillip's curve as well. Once again, resounding failure, or not ?

[Drew2]

I can't believe I used to think Lassiter was hot.

[Parkbandit]

I can't believe I used to think Lassiter was hot.


You mean the guy he uses in his avatar?

[Drew2]

You mean the guy he uses in his avatar?

Right sorry

[Lassiter 506]

Let the grown ups talk finance. PB, go play with your chewbone. Tayre... go play with yourself.

[Gan]

No, you did not. What you stated was a fundamental of basic economics, and a condition of ideality that is blurred once fiscal policy and monetary policy become intertwined and very much involved.
Basic economics which you seem to be lacking in, and yes, I did answer it. I cant help it if you're too dense to understand it.



Monetary and fiscal policy are not independent of one another, as one impacts the other. The Federal Reserve has never been immune to the president's linfluence. For reference, see Greenspan vs. Bush.
Independant, your words, not mine.

1. Fiscal policy is the economic (http://en.wikipedia.org/wiki/Economics) term which describes the actions of a government in setting the level of public expenditure (http://en.wikipedia.org/wiki/Public_expenditure) and how that expenditure is funded. (coutesy of wikipedia, since you dont seem to understand my words)

2. Monetary policy is the government (http://en.wikipedia.org/wiki/Government) or central bank (http://en.wikipedia.org/wiki/Central_bank) process of managing money supply (http://en.wikipedia.org/wiki/Money_supply) to achieve specific goals—such as constraining inflation (http://en.wikipedia.org/wiki/Inflation), maintaining an exchange rate (http://en.wikipedia.org/wiki/Exchange_rate), achieving full employment (http://en.wikipedia.org/wiki/Full_employment) or economic growth (http://en.wikipedia.org/wiki/Economic_growth).

3. Yes, the federal reserve is immune to the presidents influence since the president can not hire nor fire federal reserve chairmen. If you wish, you can provide further evidence or conspiracy as to how Bush influenced Greenspan... good luck. :lol:

[Lassiter 506]

Deficit spending has the potential to mobilize production, however, this extreme case of deficit spending breaks the mold. This stimulation can, and has hit more than a few walls. One, gov't deficit increases the stock of treasury bonds, whereby reducing price and increasing interest rates, making it relatively more pricy to pursue fixed investment. Second, it increases the demand in labor, and hurts profits via wage raise. It's a doomed and self defeating methodology, and is utlimately why classical Keynesian triumphalism of the 60's hasn't bounced back into action until Bush took office.



Since then, wages and labor costs are up 5.2 % (the largest increase since '82), decreased dollar value in foreign markets (read Kranar's posts), trade deficits and a looming federal deficit (I lost count) has evolved. Resounding failure or not ?


What they are approaching is the tail end of one of the greatest criticisms of classical Keynesian economics. Please comment regarding the Phillip's curve as well. Once again, resounding failure, or not ?


You still have yet to address any of the above.

----------------------------------------------------------------------

Ganalon, you can continue to use base level definitions to augment your contention, or you can use some measure of advanced knowledge beyond dictionary entries that earned you your degree.

Governments have explored, and have used tandem fiscal and monetary policy before. They are far from independent of one another. For instance, the CATO institute has published in the past regarding usage of tandem fiscal and monetary policy regarding the maintenance of full eployment in economies that have substantial labor units.

----------------------------------------------------------------------


Basic economics which you seem to be lacking in, and yes, I did answer it. I cant help it if you're too dense to understand it.


I am that dense then. Please elucidate my confusion.

[Gan]

No, you did not. What you stated was a fundamental of basic economics, and a condition of ideality that is blurred once fiscal policy and monetary policy become intertwined and very much involved.

Monetary and fiscal policy are not independent of one another, as one impacts the other. The Federal Reserve has never been immune to the president's linfluence. For reference, see Greenspan vs. Bush.

-------------------------------------


Let's get back to the basics and deficit spending, shall we ? I'll repost a snippet from my previous post, and let you respond to it again.





What you are approaching is the tail end of one of the greatest criticisms of classical Keynesian economics. Please comment regarding the Phillip's curve as well. Once again, resounding failure, or not ?

Actually, I also responded to your principal question of failure or not earlier as well. I'll repeat for the last time. If you feel the need to exercise some Phillip's curve graphs or just to you can impress youself with more elaborate posts while ignoring the simplistic evidence as already given to you, feel free to do so.

For clarity's sake, I think the Bush tax cuts accomplished what was intended. However, as I stated earlier, I think he should have chosen one or the other with regards to tax cuts or the Iraqi engagement, but not both. As historyhas shown, combining tax cuts with a military engagement, such as war, is a mistake.

Feel free to move along to other topics you mentioned earlier, such as foreign relations policy, domestic policy, and the like, please do. With regards to fiscal policy you might consider following your own advice as given to PB.

Edited to add:
For further reading I suggest you research the Laffer Curve. Understanding Monetarist strategy instead of blindly following a Keynesian approach as you have illustrated, will help you understand more of the thinking behind the 2003 Bush Tax cuts as well as suply-side economics and some of the successes that Regan achieved.

Beyond that, you are not providing any monetary benefit for further tutorial or allocation of my time by your insistant disgreement with the answers to your initial questions I've attempted to provide (to which I readily admitted I'm not a professional economist nor a nobel laureate).

That added to the fact that you have also demonstrated a lack of understanding of some of the fundamental concepts I've given you in lieu of 'more advanced' theories which are based on your disagreeable fundamental beliefs, convinces me that arguing the point further with you is a waste of time. Especially since I dont have the 2 degrees which you've handily mentioned nor do I converse with any fellows who have PhD's in finance over hot frappy mocca at the local late hut while wearing cute black berets and discussing the further wrongdoings of the Burgoise of the current administration as you ellude to. Not to mention the fact that arguing deep economic theory, which notoriously and inherently has opponents and proponents in equal amounts in any scholastic or economic setting, with someone over the internet is not only boorish, but foolish and can lead to a waste of valuable real world time...

Now, I can provide you with my paypal account if you wish to purchase more of my time. Otherwise, feel free to move to the next topic.

[Lassiter 506]

converse with any fellows who have PhD's in finance over hot frappy mocca at the local late hut while wearing cute black berets and discussing the further wrongdoings of the Burgoise of the current administration

That's quite petty of you Ganalon. If it makes you feel better, we had dinner at a pizzeria not too far off campus, and my friend is quite fond of Bush, describing him as a typical blue chip stock. Your post leads me to believe that you are taking this quite personally. Anyhow Ganalon, very poor way to end a debate. if you wanted to stop, just state it.

So you know Ganalon, I used the Phillip's curve as method of stimulating debate. You wouldn't have to wait for the adjusted CPI for October, which is due in two weeks. You would have found a correlation between inflation and unemployment rates that could have bolstered your platform. We'll probably see the Whitehouse using this avenue to help with public support in the coming weeks.

You're right about one thing Ganalon. Debating you, is really a waste of time.

[Rathain]

Too bad, it was a interesting debate. And poor escape move by you there Ganalon. Should have posted pictures instead of making points. It works for Parkbandit.

[Gan]

That's quite petty of you Ganalon. If it makes you feel better, we had dinner at a pizzeria not too far off campus, and my friend is quite fond of Bush, describing him as a typical blue chip stock. Your post leads me to believe that you are taking this quite personally. Anyhow Ganalon, very poor way to end a debate. if you wanted to stop, just state it.
After your failing to demonstrate or understand some basic principals of what was being discussed, there really was not much left to debate. Just more posts of posturing, to which I found a waste of time to read much less respond with any serious time allocation on my part. And since your first rebuttal started up with petty insults, it kind of turned me off from thinking you would even be open to a dissenting opinion. The self-flattery also got tiring. Nobody (at least I dont) really wants to know about your 2 degreees, your PhD friends, your medical school qualifications, nor the fact that you attended the 2nd ranked research school in the nation.... really. Nor does that automatically mean that everyone (me especially) should agree with you.



So you know Ganalon, I used the Phillip's curve as method of stimulating debate. You wouldn't have to wait for the adjusted CPI for October, which is due in two weeks. You would have found a correlation between inflation and unemployment rates that could have bolstered your platform. We'll probably see the Whitehouse using this avenue to help with public support in the coming weeks.
So you know Lass, the Phillips curve is not the authority in correlating unemployment to inflation. Hence my mention of the Laffer curve. And since I really dont want to give a dissertation or a tutorial on it, I left it up to you or any other interested thread reader to do some research on their own. Furthermore, those economists who are more aligned with Friedman tend to find the Phillips curve disingenuous in accurately describing the relationship between unemployment, inflation, price elasticity, and fiscal policy - specifically relating to taxes. So while I had no intention of bolstering any platform, because I'm confident in my knowledge of economics, taxes, and monetary/fiscal policy, and in light of your refusal to acknowledge any ideas contrary to your own, I chose not to protract the futility any longer of this 'debate'.



You're right about one thing Ganalon. Debating you, is really a waste of time.
I'm glad we have some feeling of mutuality on something then. As for taking it personal, please, that would mean I actually cared.

Have a great weekend. :)

[Rathain]

I was kinda curious. How would you have responded to what he typed out earlier ?



Deficit spending has the potential to mobilize production, however, this extreme case of deficit spending breaks the mold. This stimulation can, and has hit more than a few walls. One, gov't deficit increases the stock of treasury bonds, whereby reducing price and increasing interest rates, making it relatively more pricy to pursue fixed investment. Second, it increases the demand in labor, and hurts profits via wage raise. It's a doomed and self defeating methodology, and is utlimately why classical Keynesian triumphalism of the 60's hasn't bounced back into action until Bush took office.

Since then, wages and labor costs are up 5.2 % (the largest increase since '82), decreased dollar value in foreign markets (read Kranar's posts), trade deficits and a looming federal deficit (I lost count) has evolved. Resounding failure or not ?

[Gan]

U2U me for my paypal address and I'll go into detail once funds are confirmed. Otherwise you'll have to be happy with whats already been said. Nice try though. :)

[Parkbandit]

Let the grown ups talk finance. PB, go play with your chewbone. Tayre... go play with yourself.


You should go into politics as this will be the 2nd thread you've neither confirmed nor denied.

Oh.. and I grew bored with this thread on page 1, first post. Once you grow up and get out of school.. run a multi-million dollar company.. then quit and start your own business.. then perhaps 'you grownups' can give me some information I really give two shits about.

Until then boy.. be silent or I"ll call your mommy and have her ground you.

[Parkbandit]

Too bad, it was a interesting debate. And poor escape move by you there Ganalon. Should have posted pictures instead of making points. It works for Parkbandit.


http://i36.photobucket.com/albums/e6/belike53/Rathain.jpg

[Gan]

A picture is really worth 1,000 words. 10x that if you cant read...

[Lassiter 506]

So you know Lass, the Phillips curve is not the authority in correlating unemployment to inflation. Hence my mention of the Laffer curve. And since I really dont want to give a dissertation or a tutorial on it, I left it up to you or any other interested thread reader to do some research on their own. Furthermore, those economists who are more aligned with Friedman tend to find the Phillips curve disingenuous in accurately describing the relationship between unemployment, inflation, price elasticity, and fiscal policy - specifically relating to taxes. So while I had no intention of bolstering any platform, because I'm confident in my knowledge of economics, taxes, and monetary/fiscal policy, and in light of your refusal to acknowledge any ideas contrary to your own, I chose not to protract the futility any longer of this 'debate'.


Your refusal to argue with specifics is hilarious. Asking someone to pay you to explain yourself ? Your time isn't worth that much, and neither is mine. You don't want to explain why I'm wrong ? I’m more than happy to take a study break and explain to those who have asked why my concerns are valid.

1) Unemployment is at 4.4%, the lowest it has been in half a decade
2) the bad news, US productivity has come to a standstill, with labor costs rising 5.3 % since last year and a 0% growth rate (http://news.bbc.co.uk/2/hi/business/6110470.stm)

How does productivity influence anything ? In practice, it has come to mean a rise in the standard of life for everyone, and has grown to also become a strong indicator of long-run economic welfare. When productivity falls, this does not bode well for the standard of life for the average citizen.

When productivity decreases and wage increases, laborers reap benefits of higher wages for maintaining the same output of work per hour. However, companies lose profit, and are compelled to raise the price of their goods. The net effect - no gain for anyone, and a risk of inflation.

The federal reserve is in a bind - in order to combat a rise in price level, they may resort to increasing interest rates. The truly confounding variable here is that a rise in interest rates from the fed corresponds with a time of excessive government borrowing. The rise in interest rates will lower the return from private sector investors and cause a weakening of fixed investment from the private sector, who with lower profit expectations, will not be inclined to invest.

This weakening of fixed investment will ironically be felt even harder because the economy is at full employment. (Full employment is when unemployment percentages lie between values of 4-6%.) Expansionary fiscal policy (as you support Ganalon), will increase a demand for money. This in turn will lead to higher interest rates, and will further decrease interest-sensitive investments. When we are at full employment status, government spending and purchases will shift away from the private sector.

The government has been fighting off inflation in the past few years, in part by relying upon a accelerator (multiplier) effect off fixed investments. With the rise in GDP, businesses were experiencing relatively higher profit volumes. However, with the fall of unemployment levels, the accelerator effect is rapidly diminishing. With aggregate demand from the sheer volume of Americans that have jobs, they are met by the constraints of the labor force and a finite number of goods. The accelerator effect just cannot keep up.

Americans having jobs is great. The lack of productivity is bad. The increase in labor costs make it even worse. High government spending in a period such as this exacerbates it all. I'm nowhere near to calling this staglflation, but expansionistic fiscal policy is not helping the situation at current time. .

[Lassiter 506]

You should go into politics as this will be the 2nd thread you've neither confirmed nor denied.

Oh.. and I grew bored with this thread on page 1, first post. Once you grow up and get out of school.. run a multi-million dollar company.. then quit and start your own business.. then perhaps 'you grownups' can give me some information I really give two shits about.

Until then boy.. be silent or I"ll call your mommy and have her ground you.

PB, you may or may not have even understood the first post. If you think I was wrong, please feel to respond. Till then:

1) College education (check)
2) Doctoral degree (in the works)
3) Great career on the horizon (pending)

I win.

[Gan]

PB, you may or may not have even understood the first post. If you think I was wrong, please feel to respond. Till then:

1) College education (check)
2) Doctoral degree (in the works)
3) Great career on the horizon (pending)

I win.

I called it first PB.

:lol:

[ElanthianSiren]

The government has been fighting off inflation in the past few years, in part by relying upon a accelerator (multiplier) effect off fixed investments. With the rise in GDP, businesses were experiencing relatively higher profit volumes. However, with the fall of unemployment levels, the accelerator effect is rapidly diminishing. With aggregate demand from the sheer volume of Americans that have jobs, they are met by the constraints of the labor force and a finite number of goods. The accelerator effect just cannot keep up.

Americans having jobs is great. The lack of productivity is bad. The increase in labor costs make it even worse. High government spending in a period such as this exacerbates it all. I'm nowhere near to calling this staglflation, but expansionistic fiscal policy is not helping the situation at current time. .

I've been waiting for this throughout the thread. Why would you not categorize as stagflation?

-M

[Gan]

Remarks by [Federal Reserve] Governor Susan S. Bies
At the Drake-FEI Lecture, Des Moines, Iowa
November 2, 2006

The Economic Outlook

Thank you for inviting me to speak with you today. I am pleased to have the opportunity to address both leading financial professionals--the members of Financial Executives International--as well as future leaders--the students here at Drake University. In my remarks today, I will discuss the near-term outlook for the U.S. economy and some of the longer-run issues that economic policy makers should consider. I want to emphasize that these views are my own and not necessarily those of my colleagues on the Federal Open Market Committee (FOMC).

Economic activity slowed in the middle part of this year. Real gross domestic product increased at a 2.6 percent annual rate in the second quarter of this year, and last week the Commerce Department announced that output rose at only a 1.6 percent rate in the third quarter. These figures are down notably from the nearly 3-1/2 percent average pace of the preceding two years. Despite the recent slowing in output, however, resource utilization remains relatively high by historical standards and thus continues to be a potential source of upward pressure on inflation.

In the aftermath of the 2001 recession, the FOMC eased monetary policy substantially. However, the degree of easing in place in 2003 and 2004 was clearly unsustainable and risked overheating the economy. Since mid-2004, the FOMC has gradually moved monetary policy from an accommodative stance to a more neutral position. As a consequence, the elements now appear to be in place for some easing of resource utilization rates over the next year or so and a reduction in inflationary pressures. However, substantial uncertainty surrounds the near-term outlook. In determining the future path of interest rates, the FOMC will be guided by the incoming data on both output and prices, so let’s begin by reviewing recent developments.

Economic Activity
The slowdown in the growth of real GDP since the spring largely reflects a cooling of the housing market: The number of single-family and multifamily housing starts has fallen nearly 25 percent since the beginning of the year; sales of both new and existing homes have dropped sharply since their peak of last summer, and the inventory of unsold homes has soared. At the same time, homes are appreciating more slowly and in some markets prices are even declining.

While much of the downshift in the housing market appears to have occurred already, some further softening may yet lie ahead. Nonetheless a variety of factors should help limit any remaining contraction in housing demand. For example, despite the 4-1/4 percentage point increase in short-term interest rates over the past two years, the interest rate on a thirty-year fixed-rate mortgage has increased only about 1/2 percentage point, and borrowing costs continue to be relatively low. The ongoing growth in real incomes and the recent increase in the stock market wealth of households should also support the demand for housing.

It is encouraging also that the recent weakness in residential construction does not appear to have spilled over to other sectors. For instance, employment has been growing smartly in nonresidential construction, even as it has shrunk in the residential sector. In addition, consumer confidence currently stands a bit above its long-run average and consumption is still being fueled by past house-price gains, which raised household wealth. This contrasts with previous slowdowns in the housing market, which have typically coincided with widespread economic weakness.

Although the slowdown in the housing market has so far done little to reduce consumer outlays, other factors do appear to have had a damping effect. In particular, consumption likely was restrained earlier this year by the rise in energy prices, which took a large bite out of household budgets. The rise in energy prices over the past few years has also affected the auto sector--reducing the demand for sport utility vehicles and other gas-guzzling automobiles. As a result, inventories of these vehicles have risen, and domestic automakers have been cutting production in response.

In the business sector, spending on nonresidential construction has been particularly robust. In the third quarter, nonresidential investment grew at an annual rate of 14 percent, down from the sizzling 20 percent pace in the previous quarter but still very substantial. Expenditures on drilling and mining structures have increased particularly rapidly in response to high prices for natural gas and crude oil. Investment in other types of structures, such as offices and commercial buildings, has also been strong over the past year or so.

Spending on equipment and software, which grew quite rapidly from mid-2004 to early 2006, has advanced at a more moderate pace lately. The recent slowdown in the growth of business sales would be expected, all else equal, to have a damping influence on capital spending, and in fact business confidence has moved down since the start of the year. However, order books for capital goods such as industrial machinery and other types of heavy equipment appear to be full and should support near-term investment gains. Moreover, the demand for information technology equipment is also likely to be well maintained, in part because of the recent introduction of a new generation of microprocessing chips and more-efficient large servers.

Current financial conditions also are supportive of business spending. Corporate balance sheets are strong and flush with cash, and broad stock price indexes are up more than 10 percent so far this year. At the same time, yield spreads on corporate bonds across the ratings spectrum have been low, supported by the strong balance sheets and robust profit growth.

Inflation
The picture painted here is one of an economy that has been growing solidly, albeit at a rate below its potential. What are the implications of this picture for inflation prospects? Consumer prices excluding food and energy have accelerated over the past year, and this clearly is a concern. The core inflation rate rose 2.4 percent over the most recent four quarters, up from 2.0 percent for the same period a year ago. In thinking about the macroeconomic consequences of inflation, it makes sense to abstract from the prices of energy and food when the focus is on the short run. Temporary shocks to food and energy prices typically don’t translate into changes in inflationary pressure. However, if these shocks persist, they may have an effect on core inflation and, more generally, on the economic behavior of households and businesses. Core inflation can be affected when the price changes are propagated along the production chain--say from oil prices to the prices of chemicals and ultimately to the prices of goods made with those chemicals. In addition, the shocks to food and energy prices may affect inflation expectations. Thus, we also pay attention to broader measures of inflation.

Nonetheless, the scene appears to be set for a deceleration in prices over time. One contributing factor is likely to be the slowing in activity I already discussed, which should ease the overall pressure on resources. Another important factor affecting the inflation outlook is household and business expectations for inflation. As best we can judge, inflation expectations appear to be well contained: Measures of longer-term inflation expectations, based on surveys and on a comparison of yields on nominal and inflation-indexed government debt, have remained within the ranges in which they have fluctuated in recent years. Finally, the recent decline in energy prices, if it is sustained, should reduce cost pressures along the production chain.

One upside risk to the inflation outlook comes from the labor market. The unemployment rate declined steadily between the second half of 2003 and the beginning of 2006 and has stood at a relatively low 4.7 percent for the past six months. With labor markets comparatively tight by historical standards, unit labor costs have begun to accelerate, especially since the end of last year, and firms may pass on some of these higher costs to consumers. However, the large markup of prices over costs--the margin is currently well above its historical average--could act as a shock absorber if cost strains were to intensify. Thus, in my judgment, inflation appears poised to decelerate in coming months as energy prices stabilize and resource pressures ease. But the risks to that outlook seem tilted toward the upside.

Aggregate Supply
In considering the appropriate setting for monetary policy, the level of the economy’s underlying productive capacity--its potential output--is the benchmark against which we assess actual output. Accordingly, whether the recent slowdown in economic activity eases resource constraints enough to reduce inflationary pressure depends importantly on how fast potential output is growing. If the key determinants of potential output--the workforce, economic efficiency, and the capital stock--grow quickly, as they did in the second half of the 1990s, then GDP can also rise quickly without increasing the pressure on the economy’s resources. Conversely, a reduced rate of growth of potential output would require slower growth of actual GDP to keep resource pressures from increasing.

I’d like to spend a little time examining in greater depth the outlook for some of the factors that determine potential output, starting with the labor force. The size of the labor force depends on a combination of two factors: the size of the working-age population and the likelihood that members of this population join the labor force--a likelihood that economists refer to as the labor force participation rate.

The labor force participation rate tends to vary over the business cycle as potential workers become more or less encouraged about job prospects. However, the influence of labor force participation on potential output does not depend on short-run conditions in the labor market but rather on long-run changes due to demographic and social factors. For instance, in the 1950s and 1960s the labor force participation rate stood at just under 60 percent. In subsequent years, women entered the labor force in large numbers and thus dramatically pushed up the participation rate. Indeed, by some estimates, the increase in the labor force participation of women aged sixteen years and older added a little more than 1/2 percentage point per year to the growth rate of potential output between the late 1960s and the early 1990s.

Now, the United States is facing another change in the trend of labor force participation. The baby boomers, the large population born between 1946 and 1964, are getting older, and the oldest are turning sixty this year. Older individuals tend to have relatively low participation rates, with many people starting to retire in their fifties and more still when they reach sixty and then sixty-five. Thus, with the aging of the boomers, a large share of the population is entering the low-participation years, which will tend to pull down the aggregate labor force participation rate.
Recent work by economists at the Federal Reserve Board has explored how changes in the age distribution of the population affect the participation rate. For instance, between 1995 and 2005 the participation rate declined on net from 66.4 percent to 66.0 percent. The study suggests that changes in the age distribution of the population--the movement of a large portion of the population from their high-participation-rate years to their later, low-participation-rate years--can explain the bulk of the decline.1 (http://www.federalreserve.gov/BoardDocs/Speeches/2006/20061102/default.htm#fn1) The changing age distribution--primarily the aging of the baby boomers--is expected to lower the participation rate by about 0.2 percentage point next year and continue to lower it over the next several years.

However, this decomposition assumes that the participation rate for each age group is constant at its average between 1995 and 2005. But the propensity of individuals of a given age to participate in the labor force changes over time. Already, individuals aged fifty-five and older are working more than they did ten years ago, perhaps because of better health; higher levels of education; and a reduction, over time, in the share of workers employed in physically strenuous occupations. Unfortunately, there is still much we do not understand about the increase in the participation rates of older workers, so it is difficult to predict how much their participation will rise in the future. However, given the magnitude of the predicted age-related decline, it is unlikely that changes in behavior could completely offset it.

As I noted earlier, the reduction in the growth of the labor force and, thus, of potential output has important implications for how we interpret incoming economic data. For example, to the extent that the aging of the baby boomers reduces the growth in labor force participation and hence potential output, the benchmark we use for assessing the macroeconomic implications of actual GDP growth will need to be lower. Similarly, changes in the expected growth rate of the labor force affect our interpretation of the monthly employment data. If the labor force participation rate remains at its current level, then what might be thought of as the “equilibrium” growth rate of payroll employment--that is, the increase consistent with a stable unemployment rate--would be about 140,000 per month. However, if the labor force participation rate instead declines 0.2 percentage point over the next year, as suggested by the Fed’s staff research, then the comparable equilibrium payroll employment growth would be closer to 110,000 per month.

While reductions in the labor force participation rate will apparently damp the growth rate of potential output in coming years, productivity growth, another important factor in determining the capacity of the economy, likely will remain supportive. Although productivity growth has stepped down from the scorching pace seen early in the recovery, factors remain in place for continued solid growth over the next few years. One element is capital deepening, that is, the rate at which the stock of equipment, software, and so forth is expanding relative to the number of workers, or--to put it even more simply, how fast workers are getting more of the tools they need. As I mentioned earlier, business investment spending has been strong in recent years and seems likely to remain at a high level for some time. Another element is improvements in the efficiency of how businesses do business. Here it appears that the flexibility of business processes and product, financial, and labor markets in the United States will continue to allow for the quick adoption of new technologies and the efficient reallocation of resources.

On balance, despite the outlook for continued solid longer-run productivity growth, the slowing in trend labor force growth will likely yield a modest deceleration the growth of potential output. However, the considerable uncertainty that, as I noted earlier, surrounds the prospect for all of these elements makes it extremely difficult in real time to discern changes in potential output. Ferreting out the changing trends in these elements is an important part of making monetary policy. For example, the early identification of the resurgence of productivity growth, and hence of potential output growth, that began in the mid-1990s allowed the Federal Reserve to put in place a monetary policy that accommodated both strong economic growth and low inflation during the second half of that decade.2 (http://www.federalreserve.gov/BoardDocs/Speeches/2006/20061102/default.htm#fn2) Similarly, it is important now to try to understand the new forces determining potential output growth so that monetary policy can respond accordingly.


Footnotes:
1. Stephanie Aaronson, Bruce Fallick, Andrew Figura, Jonathan Pingle, and William Wascher (2006), “The Recent Decline in the Labor Force Participation Rate and Its Implications for Potential Labor Supply,” Brookings Papers on Economic Activity, 1:2006, pp. 69-154. Return to text (http://www.federalreserve.gov/BoardDocs/Speeches/2006/20061102/default.htm#f1)
2. One of the papers used by many observers inside and outside the Federal Reserve to suggest the possibility of a mid-1990s inflection point in productivity growth was Carol Corrado and Lawrence Slifman (1999), "Decomposition of Productivity and Unit Costs," American Economic Review, vol. 89 (May), pp. 328-32. Return to text (http://www.federalreserve.gov/BoardDocs/Speeches/2006/20061102/default.htm#f2)

http://www.federalreserve.gov/BoardDocs/Speeches/2006/20061102/default.htm

[Tisket]

This thread has just proven why economic reform is such a hard sell to the American people. No sexy sound bite opportunities. There's nothing sexy about it. Doesn't make a great political platform for aspiring politicians at all.

[HarmNone]

Let's keep it to politics and off the personal jabs, folks. If you wanna fight, do it in U2Us.

[Tisket]

Let's keep it to politics and off the personal jabs, folks. If you wanna fight, do it in U2Us.

Eh? I'm guessing this was in general and not regarding my post in particular since I wasn't (oddly enough) taking a jab at anyone but instead commenting on the difficulty of making the average Joe understand our economic woes. Let alone proffering easily understood solutions to said woes.

[Parkbandit]

PB, you may or may not have even understood the first post. If you think I was wrong, please feel to respond. Till then:

1) College education (check)
2) Doctoral degree (in the works)
3) Great career on the horizon (pending)

I win.


Still haven't answered the question. I'll wait.

[Warriorbird]

Gave up arguing with him and said "I'm old!"

Yep!

[Parkbandit]

Gave up arguing with him and said "I'm old!"

Yep!

?

Someone clearly hasn't read the posts I've made here.. otherwise he would edit his above post and just go away.

[Ignot]

I notice alot of you like to inform us of your accomplishments, ie. school, doctoral degree, owning a business, etc, and use that against others for some reason. It makes you sound very conceaded and disrespectful.

Other then that I have liked this thread so far.....

[Gan]

I've been waiting for this throughout the thread. Why would you not categorize as stagflation?

-M

I believe he is not calling it Stagflation becuase of the absense of several indicators that are attributed to this event. These indicators would be the existing presence of high inflation, slow output growth, and high unemployment.

First off there must be a presence of high inflation. Currently, for the month of September 2006 we are at the lowest rate since March 2004 (currently at 2.06 for Sept 2006). Secondly there must also be high unemployment rates. That being said unemployment rates are at their lowest level since May 2001 (currently at 4.4%). Lastly there must be low production rates (real GDP) to go along with the previously mentioned two. Of the qualifying indicators, this is the only one coming in below expectations, a full 1% below previous quarters reporting, primarily due to the slowdown (cooling) in the housing market.

Since only one factor of several required for the consideration of stagflation exist. Its not being considered as an accurate descriptor of our current state of the economy.

[HarmNone]

Eh? I'm guessing this was in general and not regarding my post in particular since I wasn't (oddly enough) taking a jab at anyone but instead commenting on the difficulty of making the average Joe understand our economic woes. Let alone proffering easily understood solutions to said woes.


It was, indeed, a general comment, Tisket. If I mean something for someone in particular, I'll U2U. ;)