Modified from the Motley Fool, Industry Discussions/Real Estate Inv. Trusts: REITs Board. Post # 61219 (February 6th, 2010):
John Maynard Keynes gets a bad rap. People accuse him of government deficit spending. It may be true practically that a government will not pay back the debt run up he recommended for bad times, but that is not what Keynes wanted. Keynes said that over a business cycle the budgets should be in balance. It isn't Keynes fault that governments can't discipline themselves. Incidentally, Keynes was a bond trader and did very well.
Our government has run up deficits pretty regularly. Eisenhower had a positive cash flow in 3 of his 8 years. Surprisingly, Johnson had positive cash flow in one year. Clinton had positive cash flow in 4 years out of his eight (one without the Social Security surplus). That is it. Carter came close but no cigar. If Ford had won reelection, he might have because he was a budget balancer, but he lost the election. Perhaps Nixon was trying, but he got upended by Watergate (Though I think that Nixon’s impoundment of funds was more responsible for his resignation.). Reagan and Bush-43 never tried. Bush-41 should get a lot of credit for raising taxes as should Clinton, but it was too late to balance the budget for Bush-41. Contrary to the belief by many, there is little evidence that raising taxes ruins the economy or that lowering taxes helps the economy.* In fact, if Bush-41 and Clinton had not raised taxes, there would probably have been no positive cash flow in the 1990s. Combined they also decreased Federal employment by more than a million.
So with continuous huge deficits in the 1980s and the first decade of this century and some in between, why aren't we having raging inflation right now? Why hasn't it been going on for years? What is it Greenspan liked to say, "That’s a conundrum."
* The reason that lowering personal income taxes have minimal positive benefits to the economy is that the poor do not pay income taxes, the middle class tends to pay off debts with the new money, and the wealthy buy Treasury bonds, chalets in Switzerland, Bombardier personal jets from Canada, and islands in the Bahamas. Though some of these benefit the global economy, they do not aid the American economy. Alan Greenspan, when he was chairman of the Federal Reserve expressed the worry of the wealthy buying too many Treasury bonds with their tax savings. As I said in the post below, there probably is a optimum tax level to maximize Federal revenues, but I do not know what that level is.
Sunday, February 7, 2010
THE ECONOMY: PART 1
Modified from the Motley Fool, Industry Discussions/Real Estate Inv. Trusts: REITs Board. Post # 61218 (February 6th, 2010):
The problem we face currently is deflation in spite of the huge Federal deficits. To get inflation, employment will have to increase, manufacturing will have to increase, and both loan demand and loaning will have to increase. Certainly none of this is in sight yet. The latest figures on employment in January were a loss although somehow the percentage of unemployment dropped.
There is all sorts of talk about the Federal deficits, but no talk about our trade deficits. I don't have the latest figures for 2009, but they still must be around $400 billion, improved compared to the $700 billion in 2008 and $800 billion in 2008, if I remember correctly, but a sizable loss nonetheless. But Wendy on the METAR Board totaled up the cumulative trading deficits since 1977 and got a number of about $30 trillion. For reasons I don't understand, this does not seem to bother anybody but me. As long as we insist on importing so much energy, I can conceive of no way we can run a positive trade balance of even $1.
We have a very serious problem in this country in that we hear lots of appeals to reduce taxes but nothing about what services we will drop to pay for the tax loss (The charade that cutting taxes will increase revenue is nutty. If it is true, let's reduce taxes to zero so the government will roll in money. I agree there is probably some level of taxes that will maximize revenues, but I have no idea what it is.). We can't even get rid of the subsidy on something like corn based ethanol. You have to do a lot of calculation to show there is any carbon dioxide benefit, and, if you cut down a forest to plant corn, you go negative. We can't get rid of anything so stupid (I don't use this word much) as Medicare Advantage which is considerably more costly than regular Medicare. Maybe we can cut out some benefits to the poor because they don't vote (I take no comfort in this.), but that is about the size of it. It has been suggested that we terminate manned missions to the Moon, and even that has received a lot of flack from the same people who want to cut taxes.
If you cut out the ENTIRE discretionary spending of the Federal government (i.e. the budget goes to ZERO), which by the way includes the DOD, you cut out $1.4 trillion from the budget, but the forecasted deficit is $1.55 trillion, so you wouldn't even balance the budget then. And, of course, you put maybe 2 million Civil Servants out on the street which will swell unemployment plus all sorts of Federal contracts are kaput which are the life blood of many industries.
Short term, I agree that deflation is a likely probability for the next couple of years, and may be beyond that too for a long, long time. Perhaps inflation is the answer, but I think that Ben Bernanke, head of the Federal Reserve, would like to see some inflation. I have never fully understood why we haven't had raging inflation since 2001. The Federal government may be pushing on the end of a string.
The problem we face currently is deflation in spite of the huge Federal deficits. To get inflation, employment will have to increase, manufacturing will have to increase, and both loan demand and loaning will have to increase. Certainly none of this is in sight yet. The latest figures on employment in January were a loss although somehow the percentage of unemployment dropped.
There is all sorts of talk about the Federal deficits, but no talk about our trade deficits. I don't have the latest figures for 2009, but they still must be around $400 billion, improved compared to the $700 billion in 2008 and $800 billion in 2008, if I remember correctly, but a sizable loss nonetheless. But Wendy on the METAR Board totaled up the cumulative trading deficits since 1977 and got a number of about $30 trillion. For reasons I don't understand, this does not seem to bother anybody but me. As long as we insist on importing so much energy, I can conceive of no way we can run a positive trade balance of even $1.
We have a very serious problem in this country in that we hear lots of appeals to reduce taxes but nothing about what services we will drop to pay for the tax loss (The charade that cutting taxes will increase revenue is nutty. If it is true, let's reduce taxes to zero so the government will roll in money. I agree there is probably some level of taxes that will maximize revenues, but I have no idea what it is.). We can't even get rid of the subsidy on something like corn based ethanol. You have to do a lot of calculation to show there is any carbon dioxide benefit, and, if you cut down a forest to plant corn, you go negative. We can't get rid of anything so stupid (I don't use this word much) as Medicare Advantage which is considerably more costly than regular Medicare. Maybe we can cut out some benefits to the poor because they don't vote (I take no comfort in this.), but that is about the size of it. It has been suggested that we terminate manned missions to the Moon, and even that has received a lot of flack from the same people who want to cut taxes.
If you cut out the ENTIRE discretionary spending of the Federal government (i.e. the budget goes to ZERO), which by the way includes the DOD, you cut out $1.4 trillion from the budget, but the forecasted deficit is $1.55 trillion, so you wouldn't even balance the budget then. And, of course, you put maybe 2 million Civil Servants out on the street which will swell unemployment plus all sorts of Federal contracts are kaput which are the life blood of many industries.
Short term, I agree that deflation is a likely probability for the next couple of years, and may be beyond that too for a long, long time. Perhaps inflation is the answer, but I think that Ben Bernanke, head of the Federal Reserve, would like to see some inflation. I have never fully understood why we haven't had raging inflation since 2001. The Federal government may be pushing on the end of a string.
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