The US Economy and Current Financial Crisis

[Hogan Made Wrestling 0]

It's ironic that you refer to Paul Krugman as an "asshat" and then reference something as factually bankrupt as the Laffer curve.

[SuperJerk 0]

I'd put the asshat Krugman's reputation as a professional (and Nobel Prize winning) economist against most of the other asshats that have also been mentioned. And I'm not even remotely interested in discussing Ayn Rand.

 

Common sense like if you tax the wealthy at 38% instead of 32%, somehow the extra money will be spent on creating jobs for the other 90% of society? You mean that kind of common sense?

 

Or the kind of common sense that says you have to have at least some policies that look at the demand-side of the economy, because that's where most of individual economic decisions are made?

 

Hmmmm.

 

I have no idea what you're talking about in your first point. It's certainly not Keynesian economics.

 

That first point was a brief critique of the supply-side economic policies championed by Laffer and most of the Republican Party who argue that tax cuts are the answer to every problem, ever.

 

More taxation is not always the answer as it sometimes brings in less revenue for the state and can encourage people to work less. (see: Communism, for the extreme)

 

I'm familiar with the Laffer Curve, thanks (Arthur Laffer creditted Keynes with the idea, by the way), and only against the concept in the way conservative politicians and oundits have tried to make it into a revenue producing slope that is universally applicable to every economic situation.

 

I'm well-versed enough in economic history to know that lowering a tax rate on the top 10% doesn't usually lead to an increase in productivity or job creation. There's a point where increasing the rate does get a lower return, but that point varies depending on the situation. In short, the guy who wants to start a small business isn't less likely to do so just because he'll be taxed at 40% instead of 30%. Some of the greatest economic growth in our history occurred during an era when tax rates were downright punative. But, following World War II, our spending priorities emphasized helping the people who needed it, not the people who were already wealthy.

 

You always have to look at the demand side of the economy. However, you cannot artificially stimulate that demand by printing money without suffering through inflation.

The money supply has to be able to expand, though. Too little money in circulation will lead to deflation, which can also be a problem.

 

The demand side of the economy is what's tanking it right now because people are waiting for prices to come down to where they're affordable or else they cannot purchase them. They've been taught this by the severe punishment the market has given people who bought at the peak of prices in both the real estate and stock markets, but the government is trying to convince them that what they're seeing is not reality and these things are still good investments. Keynesians would proclaim this problem a liquidity trap, but it's really just common sense.

Homes have value to consumers beyond their appreciating value as investments. People are actually living in these houses, have poored money into them, and don't have the money to start over on a new house.

 

One thing I do not think you are considering is how much interest adds to the monthly payments on a house. Because it is compounding interest and other added expenses, people can have a pretty significant size drop with a lower interest rate.

 

People are waiting for the appropriate levels to buy and the only thing you can do to change that is pump more money into the system, which doesn't really solve the situation in real dollars (though it might in nominal dollars.)

 

If consumers are concerned about losing their jobs because the economy is bad, they pretty much are not going to buy under almost any circumstances. But the economy can't get better unless people start buying products. Recessions are a catch-22 that way.

[Crimson G 0]

I'd put the asshat Krugman's reputation as a professional (and Nobel Prize winning) economist against most of the other asshats that have also been mentioned. And I'm not even remotely interested in discussing Ayn Rand.

 

How about F.A. Hayek, Ludwig von Mises, and Murray Rothbard for some better credentials? Might as well throw in Milton Friedman, as well. Basically anyone who doesn't fall into the Keynes camp, and the majority of the US population for what it's worth, thinks this is a bad idea.

 

I'm familiar with the Laffer Curve, thanks (Arthur Laffer credited Keynes with the idea, by the way), and only against the concept in the way conservative politicians and pundits have tried to make it into a revenue producing slope that is universally applicable to every economic situation.

 

Certainly. I'm in agreement that the Laffer Curve is impossible to apply to any situation because it's unpredictable where the drop off in taxes and where the peak taxing points are. It's all a guessing game. However, the Laffer Curve does make sense and should be a part of any discussion of taxation.

 

 

I'm well-versed enough in economic history to know that lowering a tax rate on the top 10% doesn't usually lead to an increase in productivity or job creation. There's a point where increasing the rate does get a lower return, but that point varies depending on the situation. In short, the guy who wants to start a small business isn't less likely to do so just because he'll be taxed at 40% instead of 30%. Some of the greatest economic growth in our history occurred during an era when tax rates were downright punitive. But, following World War II, our spending priorities emphasized helping the people who needed it, not the people who were already wealthy.

 

Actually, taxation was far higher on the "wealthy" during the Great Depression and World War II than it was after the war, but that's a very minor point to debate. I disagree with your argument that someone is less likely to start a business if he's taxed at a 30% take as compared to a 40% take. If he's taking business capital into consideration, and he might be an entrepeneur who needs venture capitalists to back him, then his business model might be viable under one tax rate and not under another. It all depends on the costs associated with running the business and the business's projected income. The whole idea of recklessly reducing rates to encourage the flow of capital and then raising them is the Federal Reserve's bread and butter. Though that's applied to interest rates on loans rather than rate of taxation, the same principle applies. To encourage business one needs to find the appropriate rate of taxation that will allow them to flourish. Free market capitalists say those rates are determined by the market, whereas Keynesian economists, or other middle-of-the-road to socialist economists, believe the government ought to manipulate the economy to set the best rates.

 

The money supply has to be able to expand, though. Too little money in circulation will lead to deflation, which can also be a problem.

 

Deflation is actually a decrease in the money supply, not a flat-lining of inflation. This flat-lining allows demand to catch up to the supply that has been artificially bolstered through the actions of the Federal Reserve and, lately, the Treasury department as well as Congress.

 

Homes have value to consumers beyond their appreciating value as investments. People are actually living in these houses, have poured money into them, and don't have the money to start over on a new house.

 

I realize that and it's hard lesson to learn, but that's the way things work in the real world. Either some people get punished (the people who made the mistakes) or everyone gets punished when the economy tanks even more than it already has through devaluing the currency.

 

One thing I do not think you are considering is how much interest adds to the monthly payments on a house. Because it is compounding interest and other added expenses, people can have a pretty significant size drop with a lower interest rate.

 

But, they agreed to the interest rates in the terms on their house. They ought to have known better. Decreasing the interest rate means that someone will have to take the hit from the lost capital (current or future): the bank. So, you can either support the bank/lender or the borrower in this case. The government has decided to take a third route and steal money from people not involved with this contractual agreement in order to ensure that the terms are changed so that both parties benefit from the change. The third party is, meanwhile, raped in the process.

 

If consumers are concerned about losing their jobs because the economy is bad, they pretty much are not going to buy under almost any circumstances. But the economy can't get better unless people start buying products. Recessions are a catch-22 that way.

 

People will buy when products reach a level they're comfortable buying them at. Products that are invaluable (gas, food, etc.) will still be purchased, but many companies selling only extravagances will go out of business. That's simply because their business model cannot work during a recession. If their products aren't necessary, then they won't be bought until people feel they have extra money to blow on useless things (i.e. when the recession's over.) You cannot, try as you may, force people to spend on products that do not want and do not believe they can afford. You're asking them to act against common sense and sound judgment.

[Big Ol' Smitty 0]

the majority of the US population for what it's worth, thinks this is a bad idea.

 

Cite? Or is this the "silent majority" of Chicago floor traders?

[MarvinisaLunatic 0]

the majority of the US population for what it's worth, thinks this is a bad idea.

 

Cite? Or is this the "silent majority" of Chicago floor traders?

 

Going to have to disagree with Jr. here..

 

 

Obama's just making sure we dont have to worry about our mortgages! Whats wrong with that?

[Big Ol' Smitty 0]

What exactly do you disagree with? And how does that show that a majority of Americans are opposed to Obama's mortgage plan, Marv?

[MarvinisaLunatic 0]

What exactly do you disagree with? And how does that show that a majority of Americans are opposed to Obama's mortgage plan, Marv?

I read the quote tags wrong. Im disagreeing with Crimson that they oppose it. I think there is a strong number of people who feel the same way that that woman does.

 

 

 

[Dobbs 3K 0]

Latest stories are saying Obama plans to slash the federal deficit in half by the end of his first term. Thank goodness.

[Crimson G 0]

the majority of the US population for what it's worth, thinks this is a bad idea.

 

Cite? Or is this the "silent majority" of Chicago floor traders?

 

I was talking in general about the whole bailout process, not necessarily the housing bill that's been proposed... but, we've heard from Congressmen that the majority of their constituents were against TARP and the Stimulus package. The first thing I looked up using a google search for 2009 polls was this article:

 

Americans say: TARP not working, stop spending

 

which cites (on 1/16/09) that 61% of people polled oppose providing more money for the financial bailouts.

 

The RealClearPolitics polling shows an average of 59.3% of people disapprove of the direction the country is headed.

 

RealClearPolitics Polls

[Big Ol' Smitty 0]

Okay, but just because Congressman got lots of calls about something doesn't mean there was actually a majority against it. For instance, actual polling on the stimulus package shows otherwise. And it's probably too soon to even have any polls out on the mortgage bill.

 

It's kind of intuitive that the public would be less excited about the economic efforts that don't directly benefit them (TARP, bank bailouts) than those that would be more likely to (stimulus, mortgage plan).

[Crimson G 0]

Okay, but just because Congressman got lots of calls about something doesn't mean there was actually a majority against it. For instance, actual polling on the stimulus package shows otherwise. And it's probably too soon to even have any polls out on the mortgage bill.

 

It's kind of intuitive that the public would be less excited about the economic efforts that don't directly benefit them (TARP, bank bailouts) than those that would be more likely to (stimulus, mortgage plan).

 

Very well. I am satisfied with the data you've shown. The people support the stimulus bill.

[Jobber of the Week 0]

Crimson, it would save you a lot of keystrokes if you just wrote this for every post:

 

 

BOOTSTRAPS

 

Because that's really all you have to say.

 

 

The Pit is almost doing the same thing, though at least they're arguing the political ramifications of it: Always starting off from a perspective that "keynesian economics don't work" is some proven fact, and then yelling and moaning about how wrong everything is from that perspective.

 

Last week everyone was complaining about the spending. This coming week there will be much complaining and yelling about taxing.

 

spend spend spend

 

tax tax tax

 

 

It's almost like... *gasp* It's like Obama.... Is a liberal... Who is taxing, and spending!

[EricMM 0]

Jobber, conservatives are not concerned w/ doing things efficently.

[MarvinisaLunatic 0]

Here's one for the wackjob conspiracy theorists!

 

I saw something about NESARA being released and some strange alien stuff happening when the DOW hits 7200 and it just went below 7200 (might even go below 7000!).

 

I fully expect mass chaos within the hour.

 

or not

 

do not click unless you'd like your brain to explode

[The Niggardly King 0]

...

[snuffbox 0]

What is the percentage of Bootstrappers that have ever actually laced up a pair of workboots? I'm guessing 2.

[At Home 0]

I have no idea what you're talking about in your first point. It's certainly not Keynesian economics. It sounds like Obama's graduated tax rates for the rich, which can be shown to be either good or bad through the Laffer curve. More taxation is not always the answer as it sometimes brings in less revenue for the state and can encourage people to work less. (see: Communism, for the extreme)

 

You have to define Communism there. High tax rates on businesses certainly isn't the only factor in motivating where a company is and how it produces. Obviously, wherever a company is, by its very existence, it is an attempt to make as much money as possible with the capital it has. If the United States has a high business tax rate, but is an economic center for the world, a business will see it to be more profitable to locate itself here than in, say, Ireland, where taxes are much less. Obviously, there are loopholes to go around this like outsourcing labor to less developed countries, but the flow of workers is mainly within developed countries, and the numbers really aren't that significant.

 

You always have to look at the demand side of the economy. However, you cannot artificially stimulate that demand by printing money without suffering through inflation. The demand side of the economy is what's tanking it right now because people are waiting for prices to come down to where they're affordable or else they cannot purchase them. They've been taught this by the severe punishment the market has given people who bought at the peak of prices in both the real estate and stock markets, but the government is trying to convince them that what they're seeing is not reality and these things are still good investments. Keynesians would proclaim this problem a liquidity trap, but it's really just common sense. People are waiting for the appropriate levels to buy and the only thing you can do to change that is pump more money into the system, which doesn't really solve the situation in real dollars (though it might in nominal dollars.)

 

The demand curve of the economy is in trouble now because of expectations. If people are afraid that they may lose their jobs, they're going to save. If people are afraid that prices are going to go up, they'll save. If they're afraid that their hours may be cut or their salary may decrease, they're going to save. I'm trying to find any sort of general information for price increases/wage decreases for the last 6 months, but I'm not coming up with anything, and I don't want to argue a point without something to back it up with. If anyone would like to present some, that would be nice.

 

Wait, found some, courtesy of the SF Fed. http://www.frbsf.org/publications/economic...ews/graph_1.pdf

 

So, according to the SF Fed, prices are dropping. Might want to construct your argument again if you're going to trust my source, because it undermines your entire premise. Also, any sort of credence to "the government is trying to convince them that what they're seeing is not reality and these things are still good investments" would be useful too.

 

Furthermore, regarding the stimulus package: (I can't link to the photo, but it's the last graph on the .pdf up there)

Using the fiscal multipliers estimated by Macroeconomic Advisers, a private forecasting firm, we find that the fiscal stimulus package has a sizeable impact on our growth forecast, particularly in 2009. Moreover, we forecast that the unemployment rate would climb to nearly 10% absent the fiscal initiative. However, while the stimulus package will help reduce the slack in the economy, it will not be enough to bring a return to full employment.

 

Also, I don't agree with you saying that it's not a liquidity problem. For instance, (let's look at credit liquidity) my father's business has a line of credit of several hundred thousand dollars. Say the bank that this line of credit belongs to decapitates it, and knocks it down 30% less available money in the off-season of the business cycle. That 30% is devastating. That's enough to bankrupt a company, or at least get a bunch of people fired. (Thankfully, that didn't happen). Have that happen to a series of businesses, employment jumps up, and the whole cycle gets worse. Bank of America and Citi are poised to lose billions over the next few years, and there is zero chance that they're going to have enough capital to cover those losses. The private investors aren't going to be able to restore capital to these banks, and if they are to become any sort of effective again, they need capital and the government is essentially the only source for this capital.

 

In terms of interest rates, I think it's fair to say that we're in a liquidity trap for home loans. Interest rates are basically zero, and they aren't having any sort of effect whatsoever.

 

I do think, however, that what we have now isn't nearly enough. The taxpayer is being forced to bear far too much risk, and the FDIC should just go ahead and temporarily nationalize these shitty banks (which it has been doing).

[Crimson G 0]

You have to define Communism there. High tax rates on businesses certainly isn't the only factor in motivating where a company is and how it produces. Obviously, wherever a company is, by its very existence, it is an attempt to make as much money as possible with the capital it has. If the United States has a high business tax rate, but is an economic center for the world, a business will see it to be more profitable to locate itself here than in, say, Ireland, where taxes are much less. Obviously, there are loopholes to go around this like outsourcing labor to less developed countries, but the flow of workers is mainly within developed countries, and the numbers really aren't that significant.

 

It might still be profitable for a company to locate here, but it's not optimally profitable. That's the point of the Laffer curve---to display that where tax rates are ought to be beneficial to both businesses/individuals and the government.

 

The demand curve of the economy is in trouble now because of expectations. If people are afraid that they may lose their jobs, they're going to save. If people are afraid that prices are going to go up, they'll save. If they're afraid that their hours may be cut or their salary may decrease, they're going to save. I'm trying to find any sort of general information for price increases/wage decreases for the last 6 months, but I'm not coming up with anything, and I don't want to argue a point without something to back it up with. If anyone would like to present some, that would be nice.

 

Wait, found some, courtesy of the SF Fed. http://www.frbsf.org/publications/economic...ews/graph_1.pdf

 

So, according to the SF Fed, prices are dropping. Might want to construct your argument again if you're going to trust my source, because it undermines your entire premise. Also, any sort of credence to "the government is trying to convince them that what they're seeing is not reality and these things are still good investments" would be useful too.

 

You're looking at inflation from a Keynesian/Monetarist perspective, while I'm viewing it from an Austrian perspective.

 

Here's a great article explaining the basic viewpoint of Austrian Capital Theory:

Ignorance of Money and the Rejection of Austrian Economics by William L. Anderson

 

Also, I don't agree with you saying that it's not a liquidity problem. For instance, (let's look at credit liquidity) my father's business has a line of credit of several hundred thousand dollars. Say the bank that this line of credit belongs to decapitates it, and knocks it down 30% less available money in the off-season of the business cycle. That 30% is devastating. That's enough to bankrupt a company, or at least get a bunch of people fired. (Thankfully, that didn't happen). Have that happen to a series of businesses, employment jumps up, and the whole cycle gets worse. Bank of America and Citi are poised to lose billions over the next few years, and there is zero chance that they're going to have enough capital to cover those losses. The private investors aren't going to be able to restore capital to these banks, and if they are to become any sort of effective again, they need capital and the government is essentially the only source for this capital.

 

Here's another article with a graph and explanation that the "credit crunch" was not a contraction of credit, but a stagnation in the growth in the amount of credit available for lending. The problem is not with the supply side of the economy, but with the demand side. The banks were in no position to absorb the shock of the economy not growing, since their business is lending, so they've begged the government for additional funds to support the debt which could not be called in and restore their debt to capital ratios to the point they should have been at in the first place. In the meantime, they've managed to create a crisis of confidence in the stock market and the housing market (by having to pull back to realistic standards in order to actually recoup money from their ventures.) They have tried their utmost to reverse this trend, but it's simply good business to stick to these standards for economic growth. They present less risk because they require less exposure. Unfortunately, we're following the same mistakes that got us into this situation, though people no longer have the credit scores necessary to acquire these loans nor are the banks being encouraged to give these loans out recklessly because they'll be taken to task for it. It's a lose-lose situation for them and it forces the government to keep throwing money at the problem, only to have it be absorbed by the black holes that the banks have become.

 

In terms of interest rates, I think it's fair to say that we're in a liquidity trap for home loans. Interest rates are basically zero, and they aren't having any sort of effect whatsoever.

 

I do think, however, that what we have now isn't nearly enough. The taxpayer is being forced to bear far too much risk, and the FDIC should just go ahead and temporarily nationalize these shitty banks (which it has been doing).

 

The FDIC doesn't have enough money to cover the insolvent banks, we'd need to allocate large amounts of money to do that. BofA and Citi, two of the five largest banks in the world, are on the edge of collapse. WaMu already collapsed and is slowly dragging JPMorgan Chase down with it, but it's nowhere near the level the other two are at yet. We'll see what comes of these "stress tests", but I'd predict we'll probably try nationalization at some point. If not next week, maybe the week after that. Nothing's set in stone anymore.

[Jobber of the Week 0]

It might still be profitable for a company to locate here, but it's not optimally profitable. That's the point of the Laffer curve---to display that where tax rates are ought to be beneficial to both businesses/individuals and the government.

The cost of a company to produce X is not a flat rate plus a certain amount for profit. Many factors go into the price of things and taxes are simply one. Competition is another, cutting costs is another, and so on.

 

What's optimally profitable is to sell a product in a country where no other company can sell that product, but people still do business here anyway.

 

The FDIC doesn't have enough money to cover the insolvent banks, we'd need to allocate large amounts of money to do that.

We'll print more. Helicopter Ben and all of that.

[Big Ol' Smitty 0]

...the majority of the US population for what it's worth, thinks this is a bad idea.

 

Crimson G, there's polling data out on the mortgage plan now:

 

Government Should Help 61

Government Shouldn't 20

Don't Know Enough 14

Some, Not Others 3

DK/NA 2

 

http://graphics8.nytimes.com/packages/pdf/...oll-results.pdf

 

 

Washington Post got similar results.

[Nightwing 0]

For purporting a system based around the psychology of the consumer, you might want to figure out what the people are actually thinking right now.

[SuperJerk 0]

I'm not responding to Crimson G until my headache goes away. I'm glad you're here, because debating Marvin isn't much of a challenge, but your posts can be pretty wordy.

 

 

Also...is this the wrong time to point out that the cost of stimulus plan ($787 billion), compared to the annual GDP of the United States ($14.3 trillion), is pretty tiny? Imagine someone who makes $143,000 a year borrowing almost $8000 to make some home improvements. I don't think anyone would think anything of it.

[snuffbox 0]

I like how Republicans/big-govt-conservatives are so adamently opposed to this bill, when you could fit this expenditure into the Iraq costs about 4 times. I'm not sure why it's so bad to spend on the actual taxpayers but it's cool to blindly ship it to another country.

[At Home 0]

I'm not responding to Crimson G until my headache goes away. I'm glad you're here, because debating Marvin isn't much of a challenge, but your posts can be pretty wordy.

 

 

Also...is this the wrong time to point out that the cost of stimulus plan ($787 billion), compared to the annual GDP of the United States ($14.3 trillion), is pretty tiny? Imagine someone who makes $143,000 a year borrowing almost $8000 to make some home improvements. I don't think anyone would think anything of it.

 

The annual budget is only $3 trillion, though.

[SuperJerk 0]

I think the analogy is valid because that's what the country as a whole makes and is where the government gets its money from.

 

 

[At Home 0]

But the entire country isn't borrowing, only the government is. So it would be like if a guy who made $300,000 a year borrowed $80,000 to fix a house that cost $1.6 million.

[SuperJerk 0]

Or the guy makes $140,000, but supports his nagging wife with a $30,000 allowance and she borrows the $8000...

 

 

....did I already mention my head hurts?

[MarvinisaLunatic 0]

I got a kick out of this.

 

Among requests (and please keep in mind these are requests, not grants, so blame the requestor) made to Ohio Governor Ted Strickland's office for stimulus cash include:

 

* $2.8 million for a demonstration track for the MonoMobile, an electric car that hooks up to a track for long-distance trips. (Robert Heinlein lives!)

* $15,000 for a Stark County man to buy a new pickup and plow to add to his mowing business.

 

also

 

* $200,000 to train the economically challenged as Ultimate Impact Wrestlers. "We would need to obtain a building for training and shows as we have currently been using my garage for training and this [is]unheated."

 

 

 

[SuperJerk 0]

I've got nothing else to say, but hey, look, here's a motherfucker with a Ph. D. and a Nobel Prize in economics talking about the stimulus plan and the Republican opposition to it...

 

(Krugman's credentials don't make him automatically right, of course, and Olberman's show is definitely NOT a program devoted to looking at all sides of an issue, but we should at least listen to what he has to say.)

 

[At Home 0]

http://real-estate-and-urban.blogspot.com/...unterpoint.html

 

Interesting shit!